See Opportunity In Consumer Discretionary Stocks, Financials: Nilesh Shah, Envision Capital
Impact of lower interest rates could help earnings in the second half of the FY17
Consumer discretionary stocks along with financials and specialized engineering firms are some of the investment opportunities that Nilesh Shah of Envision Capital is eyeing.
In a conversation with BloombergQuint, Shah said that as per capita GDP in India rises, consumer discretionary firms could benefit significantly. At the same time, a push towards financial inclusion could help lenders like IDFC Bank which are attempting to target that segment.
Shah also thinks that real estate stocks may yield better returns than investing directly in property.
What is your outlook on the Indian economy this Samvat?
I think India is on an upward trajectory. The next 12 months are likely to see India witnessing and sustaining GDP growth in excess of 7 percent, significantly toned down inflation and perhaps more interest rate cuts. So, I think macros for India are good and are likely to get even better over the next year or so.
In a recent conversation, you said things are looking up in discretionary consumer sectors like auto, paints and consumer durables. What is your reading of festive demand? Do you retain your positive call on the sector?
We like the sector for the structural opportunity that it presents given that the per capita (GDP) of India is about $1600-1700 and we think that anywhere about $1800-2000 per capita is a very strong inflection point. From there onwards, I think the demand for a lot of products in the consumer space can get into a hyper-growth mode. Having said that, I think festive demand has not shaped up precisely in the manner that it should have. We will get to know more about that when the December quarter numbers are out, but I don’t think the September quarter numbers are anything to cheer about. We still think that the December numbers would be a better proxy and I think the long-term outlook remains unchanged as far as the discretionary consumer space is concerned.
What is your early read on the earnings season?
The good news is that we have seen some margin expansion and that has clearly contributed to earnings growth. I think in the second half we will continue to see the impact of lower interest rates. Interest rates have come off significantly over the last 12 months and I think that will start contributing positively to a lot of sectors. Also there is enhanced liquidity coming in because of the 7th pay commission, OROP (One Rank One Pension), a favorable monsoon and some pick up in rural demand. I think all these factors together will start contributing to top line growth. So, we are sensing that the second half of this financial year is likely to be better compared to the first half of the financial year.
We have seen a correction in real estate prices. What would you pick - investing in property or real estate stocks?
Undoubtedly real estate stocks. There is no doubt about it. I would be surprised if real estate property prices appreciate meaningfully over the next 3-5 years given that prices in some pockets are still at elevated levels and that prices have been held up. So, I would be surprised if actual real estate prices go up from here. But I think some of the well managed property developers are in a position, over the next 3-5 years, to execute well, deleverage balance sheets and bring about delta in their earnings. Given that the sector has been tremendously beaten down, we think there is room for a contrarian play through investment in real estate stocks.
IT stocks have corrected post earnings? Is this an opportunity to buy?
I think the large-caps are still in a void, unless you are an institutional investor and you have an institutional imperative to make allocations to the technology sector and therefore need to be in the mega-caps. I think you will probably be content with 8-10 percent topline growth in that space. But I think you should dig a little deeper and then get into the mid-caps and tier 2 names. I think they are growing at a far faster pace compared to the big boys and I think their valuations are relatively attractive. So, I think if you have to take a view on technology, we like the long-term prospects of the technology sector. But in terms of relative positioning, I think we would clearly be in favor of the tier-2 and the mid-cap names versus the larger names.
Can you share some sectoral or thematic ideas this Samvat?
There are three opportunities we like and we think there are excellent names within those segments. Clearly, the discretionary consumer space is one and within that we hold Mahindra Holidays in our portfolio. We like that. We think there is a lot of headroom for growth. They have been executing very well and I think over the medium to long term that could be an important wealth creator.
Specialized engineering is also something that we like. Within that we own a name called Engineers India. We believe there is likely to be a revival of capex in the hydrocarbon and refining sector. So, that is the second area that we like.
Third is the banking and financial space. We are big believers of financial inclusion and therefore we like the newly set up IDFC Bank, which has an aspiration to become a mass retail bank. We believe valuations are attractive and if they execute well over the medium to long term, I think that stock could be a strong candidate for potential wealth creation.