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Business News›Markets›Expert Views›Market fairly valued, another 5% fall and it
would be in undervalued zone: Nilesh Shah, Envision Capital




MARKET FAIRLY VALUED, ANOTHER 5% FALL AND IT WOULD BE IN UNDERVALUED ZONE:
NILESH SHAH, ENVISION CAPITAL

SECTIONS
Market fairly valued, another 5% fall and it would be in undervalued zone:
Nilesh Shah, Envision Capital
Last Updated: May 12, 2022, 12:45 PM IST
Synopsis


“COULD EQUITY MARKETS FALL FURTHER? THEY MAY FALL FURTHER WITH THE DIFFERENT
KIND OF STUFF WHICH IS HAPPENING AROUND US IN THE GLOBAL MARKETS BUT THEN WE
WOULD BASICALLY BE VERY CLEAR THAT IF WE HAVE ANOTHER 5% FALL FROM HERE, THE
MARKETS WILL BE IN A SIGNIFICANTLY UNDERVALUED ZONE. ”

ETMarkets.com


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"IT has essentially now got into a buy-on-dips kind of territory and to own them
in a meaningful manner, a further correction of 10-20% from here is needed,"
says Nilesh Shah, MD & CEO, Envision Capital

People are asking whether a bear market has started? How can we convince them
that this is still a bull market and it is a bull market correction? What
investors accumulated in last 18 months evaporated in three weeks?
Well, the final proof of anything that you own or any investment that you make
essentially is the underlying business. If I were to start with India, clearly
we are facing challenging times. There is no doubt about it but the bottom line
is that India as an economy is still growing and is expected to grow at 6-7% –
maybe 50 bps here and there – but it is still a very healthy number while the
world seems to essentially be in a solid slowdown.

Inflation is elevated by our own tolerance levels but nevertheless it is still
way below what it is that we see in the western markets, in the developed world.
I believe that inflation is low.

Interest rates of course are expected to inch up but it is still in a way
relatively affordable interest rate. It has been a while since we have seen
interest rates remaining in the single digit band which is very healthy. On the
whole, the economy continues to be sound and stable and on top of that, many
reforms have been undertaken over the last few years which are likely to endure
and manifest themselves through a further booster dose to the economy.



Overall, I believe that India is still in a relatively sweet spot and to me that
is the biggest source of comfort and consolation. Markets will keep going up and
down; there is volatility and all of that but the bottom line is that what we
own or the place we are in is essentially continuing to grow and is adding value
on a year-on-year basis and that is the best thing to happen for an investor.


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long-term investors: Pradeep Gupta, Anand Rathi Group


« Back to recommendation stories
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They are not relevant to meThey disrupt the reading flowOthers
SUBMIT
Globally, crude is up, inflation is high, US stocks are melting, investors are
taking money out and start-ups are getting re-priced. What is good about this
scenario? Every assumption which we had about FY23 being better than FY22 and
FY24 will be better than FY23 gets challenged. It is hard to admit that markets
and economy are bad but that is the reality. We must accept it!
We undoubtedly face headwinds and there are challenges for markets and for
investors and there are going to be some challenges for the economy but it is
not like say the US economy which has been growing at 2-3% and suddenly de-grows
at 1.5%. That is not the kind of fall which we are seeing in either the economy
or the business activity.

Number two, keep in mind that India is also a producer of many things. The
reality is that the world seems to be shifting away towards de-globalisation.
The reality is that a lot of businesses in India are suddenly facing a lot of
enquiries from global customers who earlier were just looking at either China or
any other place to buy the stuff. They are now coming over to India and asking
for products. That is getting reflected in the pace at which our exports are
growing.

I do not remember when our exports actually grew at 20-25% for a longer period
of time and that is something which has happened and I believe that journey has
just begun. So while yes, there are challenges in the world, there are
challenges in the global economy, we always tend to look for those bright spots
we can gravitate towards and that is essentially what our focus should be.

Market always moves from undervalue to fair value to overvalue. Where are
markets right now?
I probably think that the markets are fairly valued. I would probably say that
markets are fairly valued to a bit undervalued as well and that is because I
still expect the earnings growth to be there for FY23 as well as FY24. So even
if one were to take a one-year, two-year horizon, it looks like earnings will
grow in double digits on an aggregate basis and if I were to look at that, we
have had roughly about a 15% odd shave off in the frontline indices. We have a
situation where there is a shave off of 15% and even if earnings grow at 15-20%
over the next two years, we are talking of the markets getting into a bit of
that undervalued zone.

Could markets fall further? They may fall further with the kind of stuff which
is happening around us in the world markets but then we would basically be very
clear that if we have another 5% fall from here, the markets will be in a
significantly undervalued zone.

You said the market is looking fairly valued. I want to talk about the IT
sector. What happens to IT next? Does one start buying the dip? Should one buy
it at all or are there better opportunities in the market?
There would always be relatively better opportunities but on a standalone basis,
there continues to be a very strong case for the Indian IT sector. Just three
-four months back, the valuations were very high for IT as a pack and
essentially that kind of came off quite significantly. So the excesses which
were there have come off.

Now it does not mean that stock prices cannot fall another 10-20%. They could
still fall from here but if they were to fall to that kind of level, I would
probably think that once again they have become great long-term investment bets.
But in the short term, two or three things are happening.

One is that there is some correlation to Nasdaq and global technology stocks.

Two, a lot of these FAANG stocks, some of these other kind of companies as well
as the US based companies are customers for our Indian IT companies and if there
is a slowdown there, obviously they might be a pull back in terms of their
spending on technology and therefore to that extent there is going to be pricing
related pressure on Indian IT companies.

The third thing we have to keep in mind is that going forward, essentially the
tier II space would be more rewarding versus the tier I space. That is because
if you look at the tier I companies, Infosys is among the most respected
companies in this space. Last year its earnings grew at probably just about
15-16% the EPS growth and if you look at it over a longer period of time. the
growth rates have been about 10% to 15%. We have to keep that in mind.

This is essentially a 10% to 15% earnings growth story and not something which
is growing at 25-30%. Obviously the hyper growth or what we normally call as
hyperscalers will be amongst the tier II, tier III kind of space and their stock
prices also fell but my view is that in the next few weeks or months, we are
going to see amazing opportunity out there to buy and own these stocks for the
next three to five years.

So broadly IT has essentially now got into a buy-on-dips kind of territory and
to own them in a meaningful manner, a further correction of 10-20% from here is
needed.

Since we just talked about the IT sector, does it even make sense to be market
cap or sector specific or would you say the strategy from now on should be stock
specific and market cap and sector agnostic?
Absolutely. It needs to be sector agnostic. It needs to be bottom up. Try and
find businesses which are still growing despite the challenging environment and
companies which essentially remain capital efficient and where valuation is
reasonable, keeping in mind the medium to long term growth prospects. Bull
market or bear market, that is the only mantra which works for all times.
However, one can try and keep identifying those sectors or businesses where the
growth momentum could be a lot higher on a relative basis versus the market.






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