Market fairly valued, another 5% fall and it would be in undervalued zone: Nilesh Shah, Envision Capital
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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. ”
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.
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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.
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.
Stocks Recommendations
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.
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.