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    Markets now more focussed on H2 of FY21 and FY22: Envision Capital

    Synopsis

    ‘Markets more focussed on how things will unfold over the next 4-6 quarters.’

    Nilesh Shah-Envision Cap-1200ETMarkets.com
    There are going to be pockets which will do well over the next two to three quarters, says Nilesh Shah, Founder & CEO, Envision Capital.

    Q1 numbers have started coming out. The market seems to be driven purely on hope, reading more into commentary on the recovery. The SBI chairman as well has been saying that it is sharper than expected. While parts of the country are returning to lockdown, some positive commentary is coming in on the pace of the recovery. What is your view?
    This market has been all about recovery, resurgence, rebooting. We have been helped by very strong global liquidity and a very strong participation from retail investors. But clearly the market is shrugging off the initial Q1 results. At this stage, the market is probably thinking this to be exceptional items in a way that when a company goes through an adversity, it is basically a mark of something exceptional. The market, after a point of time, tends to overlook it or move on.

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    While the Q1 results are not so good, they were not expected to be so good and clearly the market is looking beyond the Q1 or the H1 of this financial year and hoping for a recovery in H2. The expectations are that the H2 will essentially be with the big bang. The markets, at this stage is focussed more on H2 of this financial year and maybe even the financial year FY22.

    We have to keep in mind that the huge fall in March was around the virus and more around the lockdown. Clearly, there seems to be a consensus that the virus is going to stay with us for some time. But a few months later, there is going to be some kind of remedy which is going to come in and there is not going to be a nation-wide lockdown. There are going to be pockets of lockdown and maybe these lockdowns are going to extend into months but will probably last for a few days or few weeks and that too in some pockets.

    On the whole, what it looks like is that both from the point of view of the economy as well as from markets point of view, maybe the worst is behind us. The markets are more focussed on how things will unfold over the next maybe four to six quarters.

    We have seen a huge rush towards fundraising to perhaps address potential bad loans and have an increase in provisions. We have heard the RBI governor talking about how banks are well positioned and all the vulnerabilities remain. What is the extent of the risk you see there?
    There are two parts to this. Essentially, there is a risk and when this risk comes to the fore. So yes, there is risk in terms of credit portfolios -- be it banks or NBFCs or any other segment. Various rating agencies as well as the Reserve Bank of India have already indicated that there is going to be stress on asset quality and NPAs are going to spike up.

    However, all this is probably likely to come to the fore towards the end of this calendar year or the start of the next calendar year. In between, there is going to be this period when the asset quality is going to look fine and some of the well managed private banks essentially are going to come in with great numbers as well. We have seen some of the private banks already come out and share their quarterly updates for the March quarter. I would think that maybe the banking space is going to be fine for a few more months or maybe even for a couple of quarters and it is only when we see the actual NPAs or the stress on asset quality come, which is again towards the end of this year or maybe start of next calendar year, that is when some correction could be seen.

    This will happen, especially if there are negative surprises but otherwise the narrative is already building up. Within overall financials, one has to look beyond just well run private banks and look out for some of the other plays in financials -- be it general insurance or life insurance.

    Where are you looking at migrating flows? Are you looking to buy beaten down PSU names or construction companies where the margin of safety is now the highest because they have been beaten down black and blue? Or are you still following an approach of buy good companies with a two-three-year timeframe? Some of these stocks will give rewards.
    We continue to be focussed on buying good companies with the two- to three-year horizon that essentially continues to be the core of our investment philosophy and our strategy. We believe that there are going to be pockets which will do well over the next two to three quarters.

    The next two-three quarters are going to be stressed for most companies and for most businesses. but clearly from a two-three-year perspective, there are going to be several industries and companies which are going to basically get back their growth mojo and will essentially do well and are available at valuations which are way more reasonable than what they have been in the past. That continues to be our strategy.

    One area that we are beginning to like quite substantially is the fallout on the rural economy. The rural economy is likely to do well, the farm outlook is great and a lot of that surplus will start flowing into several areas especially on the consumption side. So rural housing and discretionary spend by rural consumers is going to be a strong opportunity and therefore rural housing and associated with that, cement companies, home developers, home appliances companies, building construction and building materials companies -- that pack might do substantially better. Plus. this pack will benefit from lower input costs.

    So to that extent what we see beyond the next two-three quarters is uptick in terms of their volume growth, revenue growth as well as an uptick in terms of their margins which essentially will drive earnings growth. That seems to be a very interesting space that we are focussed on.

    A classic long term investor has now got the option to buy HDFC Bank which is now available 30-35% cheaper, an HDFC Ltd which is beaten down. Which is the one stock you would like to own if you have to choose between HDFC Bank and HDFC Ltd? Would you choose both of them, none of them or one of them?
    Both are outstanding, frontline names. Both have an excellent track record. What we are saying at this stage is that probably there is more value in individual companies. When I say value, it means there are better growth prospects. When you own a conglomerate or when you hold a holding company with multiple businesses, then at that point of time, there will always be something which will set off the strong areas within that. Versus that, we have been owning two pieces of the HDFC Group; one is HDFC Bank and the other HDFC AMC,. We like these for essentially their business leadership and the way they have been able to run their business in a risk adjusted capital efficient manner.

    We would essentially be owning both these names within the HDFC pack. HDFC Ltd is kind of good but we still do not own it and maybe going forward, some day we even choose to own that as well but for now, we own HDFC Bank and HDFC AMC.



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    (What's moving Sensex and Nifty Track latest market news, stock tips and expert advice, on ETMarkets. Also, ETMarkets.com is now on Telegram. For fastest news alerts on financial markets, investment strategies and stocks alerts, subscribe to our Telegram feeds .)

    Download The Economic Times News App to get Daily Market Updates & Live Business News.

    Subscribe to The Economic Times Prime and read the Economic Times ePaper Online.and Sensex Today.

    Top Trending Stocks: SBI Share Price, Axis Bank Share Price, HDFC Bank Share Price, Infosys Share Price, Wipro Share Price, NTPC Share Price

    ...more
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