stock market news: Fairly valued market, another 5% drop and would be in undervalued zone: Nilesh Shah, Envision Capital

“Essentially, IT has now entered a kind of falling buy territory and to own them meaningfully, you need an additional 10-20% correction from here,” he says. nilesh shahmanaging director and executive director, imagine capital


People ask if a bear market has started. How can we convince them that this is still a bull market and is a bull market correction? What investors accumulated in the last 18 months evaporated in three weeks?
Well, the ultimate test of anything you own or any investment you make is essentially the underlying business. If I were to start with India, we are clearly facing difficult times. No question about it but the bottom line is India as an economy is still growing and is expected to grow 6-7% maybe 50 bps here and there but it’s still a very healthy number while the world seems be essentially be in a solid deceleration.

Inflation is high by our own tolerance levels, but still well below what we see in Western markets, in the developed world. I think inflation is low.

Of course, interest rates are expected to go up, but it is still a relatively affordable interest rate. It’s been a while since we’ve seen interest rates stay in the single digit band, which is very healthy. In general, the economy remains strong and stable, and in addition, many reforms have been undertaken in recent years that are likely to last and manifest themselves through a new dose of reinforcement for the economy.

Overall I think India is still in a relatively good spot and for me that is the biggest source of comfort and consolation. The markets will continue to go up and down; there’s volatility and all that, but the bottom line is that what we own or where we’re at essentially continues to grow and add value year after year and that’s the best thing that can happen to an investor.

Globally, crude is up, inflation is high, US stocks are melting, investors are pulling money out, and startups are repricing. What’s so good about this scenario? Every assumption we had about FY23 being better than FY22 and FY24 being better than FY23 is challenged. It is difficult to admit that the markets and the economy are wrong, but that is the reality. We must accept it!
Sure, we’re facing headwinds and there are challenges for the markets and for investors and there are going to be some challenges for the economy, but it’s not like, say, the US economy. That’s not the kind of downturn we’re seeing in either the economy or business.

Number two, keep in mind that India is also a producer of a lot of things. The reality is that the world seems to be moving away towards deglobalization. The reality is that many businesses in India are suddenly facing many inquiries from global customers who previously only looked to China or anywhere else to buy the stuff. Now they come to India and ask for products. That is being reflected in the rate at which our exports are growing.

I don’t remember when our exports actually grew at 20-25% for a longer period of time and that’s something that has happened and I think that journey is just beginning. So while there are challenges in the world, there are challenges in the global economy, we always tend to look for those bright spots that we can gravitate towards and that’s essentially our focus.

The market always moves from undervalued to fair value to overvalued. Where are the markets now?
I probably think the markets are fairly valued. I would probably say that the markets are also pretty overvalued or a little bit undervalued and that’s because I still expect earnings growth to be there for FY23 and FY24. So even if you had a horizon of a year, two years, it looks like earnings are going to grow in double digits on an aggregate basis and if you were to look at that, we’ve had about an odd 15% cut. in the first line indices. We have a situation where there is a 15% drawdown and even if earnings grow 15-20% over the next two years, we are talking about the markets going into that undervalued area a little bit.

Could markets fall further? It is possible that they will fall further with the type of things that are happening around us in the world markets, but basically we would be very clear that if we have another 5% drop from here, the markets will be in a significantly undervalued zone.

You said that the market looks quite valued. I want to talk about the IT sector. What happens to YOU ​​next? Does one start buying the dip? Should one buy it or are there better opportunities on the market?
There would always be relatively better opportunities, but independently there remains a very strong case for India’s IT sector. Just three or four months ago, valuations were very high for TI as a package and essentially that dropped quite significantly. So the excesses that were there have been shed.

Now, that doesn’t mean stock prices can’t drop another 10-20%. They could still drop from here, but if they did drop to that kind of level, I would probably think that they have once again become great long-term investment bets. But in the short term two or three things are happening.

One is that there is some correlation with the Nasdaq and global tech stocks.

Two, a lot of these FAANG stocks, some of these other types of companies, as well as US-based companies, are customers of our Indian IT companies and if there’s a slowdown there, obviously they could be a pullback. in terms of your spending. in technology and so to that extent there is going to be price pressure on Indian IT companies.

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

This is essentially a story of 10% to 15% earnings growth and not something that is growing at 25-30%. Obviously hypergrowth or what we normally call hyperscalers will be in between the tier II, tier III type of space and their stock prices also fell, but my view is that in the next few weeks or months, we’re going to see an incredible opportunity. there to buy and own these shares for the next three to five years.

So, generally speaking, IT has now gotten into a kind of falling buy territory and to own them meaningfully, you need an additional 10-20% correction from here.

Given that we just talked about the IT sector, does it 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 has to be industry independent. It has to be from the bottom up. Try and find companies that continue to grow despite the challenging environment and companies that remain essentially capital efficient and where the valuation is reasonable, taking into account medium- and long-term growth prospects. Bull market or bear market, that is the only mantra that works for all time. However, one can still try to identify those sectors or businesses where the growth momentum could be much higher in relative terms compared to the market.

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