Brace For Churn In Indian Stock Markets, Says Envision Capital’s Nilesh Shah

That’s according to Nilesh Shah, managing director and chief executive officer of Envision Capital, who thinks corporate earnings growth will be much better than in the last few years. The combination of low-interest rates, low taxes, low commodity prices and pent-up demand will lead to better capacity utilisation and operating leverage to kick in, he told BloombergQuint’s Niraj Shah in an interview. In addition to this, he sees a narrative of expansion developing within corporate India. Together, this will uphold the valuations of Indian equities.

Still, investors will see a “churn” in the market where liquidity will move from the expensive, low growth pockets such as consumer staples to those where growth is showing signs of coming back and the valuations are way more reasonable, he said.

“The way I look at the markets is in two buckets, the consumption bucket and the investment bucket.”

Companies which are driven by capital expenditure cycles will tend to do better in terms of growth, according to Shah. “Expect a lot of incremental liquidity to flow into the investment bucket versus the consumption bucket.”

Here’s what Nilesh Shah had to say about various sectors:

Banks

• Apprehensive about banks because their growth depends on their balance sheet which is risky.
• Valuations have gone up very quickly and are much higher than they were in October.
• “Sometime in 2021, you will see a lot of the true asset quality come up and I’m not entirely sure that the provision they have made so far will be enough for the actual stress they face.”

Other Financials

• Very positive on mutual fund companies, life and general insurers.
• They don’t require continuous expansion of the balance sheets to grow.
• They are more capital efficient.
• There is a more structural growth opportunity because of large under penetration.

IT

• Growth will sustain because of the ever changing technology always creates for India IT services companies.
• Growth will remain intact but a significant upside depends on how the dollar-rupee equation behaves.
• If in 2021 we see inflation going up and dollar strengthening, that bodes well for technology services company.
• On a standalone business, they will grow in mid to high single digits in dollar terms.

Pharmaceuticals

• Nilesh Shah’s favourite bet of the lot.
• “That to me is a multi-billion-dollar opportunity where India proved its strength during the Covid crisis.”
• Bellwether pharma names to do well.
• They have made significant investments over the last fives years. Now it’s time to reap the rewards.
• Over the next five years, there’s significant opportunity for India to be the pharmacy of the world.

Contract Research

• Contract research is an interesting pocket and India has a massive competitive advantage there.
• But opportunity not as large as what IT has because there are no regulatory challenges and walls in the latter.
• Very few firms into this.
• Optimistic on it, but wouldn't equate the opportunity to IT.

API

• Active pharmaceutical ingredient makers are expanding facilities and gaining cost competitiveness.
• Challenge is the price of API or realisations.
• Have to be careful while making investments if the company is making is expansions based on current realisations.
• Should stick to players who have demonstrated scale and cost competitiveness.

Watch the full conversation here: