This is not the time to take cash calls, go back to drawing table to evaluate opportunities: Nilesh Shah, Envision Capital

Nilesh Shah, MD & CEO, Envision Capital, says this is not the time to sit in cash. It is time to be constructive and proactive. There is a lot of the fear and uncertainty which is getting factored into stock prices. This is a time to go back to the drawing table and see what kind of an impact one sees in terms of this whole new tariff regime that is unfolding or a possible global slowdown or a possible recession in the United States. One has to keep evaluating sectors and opportunities rather than necessarily be tied down by the direction of the market.

It is said good investors love bear markets because you get stocks to buy. Are you feeling the same that it is a bear market, let us start buying stocks?
Nilesh Shah: I do not know about the bear market, but clearly, there has been a very sharp correction. And a lot of stocks are coming towards very attractive levels. The big question is how long does the uncertainty last? How long does this volatility last because clearly the tremors or the echoes of what is happening probably will be felt for some more time. This is really not like one event which just comes and goes. This is not like COVID where all the governments put together collectively work towards solving the problem. This is not like 9/11 or this is not like the 2008 crisis where all the central banks work collectively together to pretty much find a solution and take on the challenge.

This is an era of unilateralism. Lots of state actors play out there globally. It is going to take some time for things to settle down and normalise. It is not really about valuations or stock prices. It is honestly more about how long this uncertainty lasts.


As an Indian investor, what should one do? It is a little late, I guess, to throw in the towel, but you are wondering whatever little profits you are sitting on, do you need to exit that as well and just sit on cash, and wait for this uncertainty to subside? Unfortunately it is not in our hands really. It is now seeming to be a very EU-China versus US story and that is going to dictate the global growth trajectory. One wonders what to do because it is really uncertain?
Nilesh Shah: I do not think this is a time to take cash calls. Clearly, a lot of stock prices have fallen meaningfully and it is always going to basically be very difficult to really call the bottom. We also have to keep in mind that typically markets do tend to bottom out way before you see any improvement in the fundamentals or any improvement in the earnings, to that extent we have to bear that in mind that markets can bottom out way ahead of things normalising.

So, I do not think this is really a time to necessarily sit in cash. It is time to be constructive. It is time to be proactive. There is a lot of the fear and uncertainty which is basically getting factored into stock prices. So, to that extent, this is a time to go back to the drawing table and see what kind of an impact one sees in terms of this whole new tariff regime that is unfolding or a possible global slowdown or a possible recession in the United States. In that context, one has to keep evaluating sectors, one has to keep evaluating opportunities rather than necessarily be tied down by the direction of the market.

When you say that it is not a time to sit on cash and may be it is time to go back on the drawing board, help us understand which are the sectors one should be looking at this point in time because just after this near term, dust settles in or the volatility settles down a bit, which is the place that investors should go and hide at this point in time in the near term and the long term opportunities, where are you spotting?
Nilesh Shah: So, a few things. In recent times, a lot has been done to put more money in the hands of the consumers. The tax breaks that were announced in the most recent budget, the kind of direct benefit transfer that are happening through various schemes of the state governments directly in the hands of women is all leaving more disposable income and more spending power in the hands of Indian households and in the hands of Indian consumers.

On top of that, with a steep fall in crude oil prices, raw material costs are going to be lower and that will drive margins. So the best place to currently be in is the consumer space. And consumer space is totally inward facing or is dependent on domestic demand. There is basically a potential for consumer companies to essentially grow revenues and to expand margins and therefore to drive earnings, so that clearly is one space.

The second space are the digital platforms powered by both rising consumer aspirations, urbanisation, and digitisation. All three put together are a great combination. So, a lot of the digital platform businesses are unaffected by what is really happening, so that is again, one more great place to be in.

The third is the opportunity around infrastructure development and industrial expansion are, again, a place to be. They do not get affected by what is really happening globally and that is really where the role of the government will come in in terms of both the policy regime towards tariffs or to promote asset creation or to promote infrastructure development, so that is again going to be great.

All these pockets or set of opportunities really are not dependent on global growth or what is happening in the United States. I believe a set of these kinds of opportunities are a great place to be and on top of that, financials are again a domestic-led opportunity. There are a whole bunch of opportunities coming in and the current market correction or a meltdown creates several opportunities.

If the world slows down, decision making will get delayed. Government spending got delayed because of the election. It took 1% out of India's GDP. Right now, corporations are saying they have stopped production. We do not know where to expand. We do not know how to expand. The sentiment is not great on the capex side at a global level. It is a matter of time things will start biting demand, supply, or for that matter even fresh capex. Would not that hit us then?
Nilesh Shah: In terms of consumer demand, I do not see that getting impacted and we also saw during the COVID period that people thought people would sit at home and there would be no demand but look at it. I mean, yes, it lasted for a few months or a few quarters, but after that there was essentially a very sharp uptake and there was revenge shopping.

But I really do not see these sorts of events to impact consumer-led demand or the consumption-related sectors. So, I am less worried about that. I totally agree that private capex might take a backseat as companies and managements wait for some more clarity and see how this uncertainty essentially is going to settle down, it is also going to wait for different policy responses as well.

But these are some things which I do not think will take probably more than a quarter or two to basically iron out. So, yes, maybe for a quarter or two there would be essentially some pullback in terms of investment-led demand or capacity creation if I would kind of use that phrase, I think, yes, there will be some setback, there is some pullback, but I do not think it is something which is going to get permanently impacted.

Clearly over maybe one or two quarters from now, you actually will see corporate India sensing this actually to be an opportunity where now because the tariffs imposed on India are relatively less compared to our Asian peers and maybe there is essentially once again a very massive export-led opportunity for manufacturing companies and I am reasonably confident that this is going to be more an opportunity and corporate India will turn this adversity into an opportunity along with support from the government. So, I am not too worried on that count as well.

It is probably a question of a couple of quarters, but post that I clearly think you are going to see again growth come back and an all-round comprehensive growth come back.

Do you expect anything magical from Q1 earnings season or is it going to be nothing short of disaster because corporate India says that they don't know. If they do not know, how will they tell us?
Nilesh Shah: I think it is too early. This whole development is barely a week old. So, it is still too early. I probably think, maybe in a couple of weeks from now we will have more clarity. But I would probably say that it will still take a few months for clarity to emerge. Keep in mind that the timelines which were set for a bilateral trade agreement with the United States for something like September, October.

Maybe this development pretty much expedites that process. It fast forwards that process. So, it is quite possible that it may not even probably last till September, October but that is a reasonable time frame I would put for a fair bit of clarity and uncertainty to emerge. In between, we have also been in an era of lower inflation. We could be in a period of lower interest rates and all of that will actually act as some kind of incentive for corporate India to take very concrete action plans.

While I agree that it is going to be a little more calibrated, but maybe after the initial J-curve in terms of a decision making, you will essentially see corporate India beginning to accelerate and have their eyes set on the global opportunity which is now emerging because of this event.

We all know your views on IT and you have maintained for a while now that the heydays of the largecap IT services plays are behind us. But given IT susceptibility to whether the US goes into recession or not, what happens to growth and discretionary spends as well, when do you think IT stocks could bottom out in case of a recession?
Nilesh Shah: That is a great question and one thing which I would want to really say while right now the street is very concerned on the prospects for IT companies, we have to keep in mind that our IT companies, a very large part of the revenues come in from non-discretionary spending by Fortune 500 companies, which is essentially demand coming in because of application of IT, maintenance of IT services, or a bit of the transformation which every company undertakes at very-very regular intervals.

I really do not see demand for Indian IT services to fall off a cliff. Bear in mind that even during the 2008 Global Financial crisis, IT companies did not degrow even one or two years later despite the fact that the Global Financial crisis so far on a relative term was significantly more than what we are seeing today. So, I am not too worried, just that the large IT services companies are not great growth stocks, even in the last 10 years where there have been so much of progress, prosperity all around, or growth all around, our IT services companies have grown in single digit in rupee terms, at best 10%. In dollar terms, it has been a lot lower.

It has been a mid-single digit growth thing. So, to that extent, I do not think one should even look at them as really growth stocks. The opportunity will get created. And if we look at the last many years, IT services companies have traded between say 17-18 PE multiple on a trailing basis to maybe on the higher side about 30 times trailing earnings. Currently a bellwether like Infosys is trading at about 20-21 times probably on a trailing earnings basis, maybe a 10% to 20% lower from here, it would create a good value buying opportunity, but I do not think that should essentially be mistaken for buying into a sector or a business which is a high growth sector.