Implications Of RBI Move Positive For Markets Over Long Term: Nilesh Shah, Envision Capital

ET Now: How have you been reading into the RBI's move because market clearly has not digested it too well. What according to you could be the implications both in the short as well as the long term?

Nilesh Shah : Well, the RBI's move is structurally very positive. The implications of this in the long run will be very very good. However, in the short term it will open up several challenges for the Indian consumer as well as corporate India. Basically the intention of an aggressive rate hike is to slow down demand. And we clearly believe that this will have implications in terms of demand, may be slowdown the line and so to that extent while companies have seen de-rating in terms of valuations and margin compression, we think that these rate hikes will have implications in terms of demand slowdown and so to that extent you could basically see a muted earnings growth for this fiscal.

ET Now: What has been your portfolio strategy of late, are you buying defensives or are you now thinking out of the box and you are revisiting infra/real estate and machinery space?

Nilesh Shah : Well, it is a simultaneous strategy. We continue to look out for growth-oriented businesses. We will continue to kind of explore opportunities which would be disproportionate beneficiaries of the India growth story. Clearly, financials and consumers and have been proven to be extremely defensive in this environment because these are the kind of companies which are demonstrating visible growth for the last few quarters, and I think that has really been an extremely good place to be in. On the other hand, the entire infrastructure pack and the engineering pack has been beaten down. We have begun a process now very closely examining companies in the space, be it companies which are either asset plays or material plays or component plays or services plays. And while we have not begun to invest in the segment in a big way, but we have basically commence starting in terms of what can be really the long term potential of these companies. And which are the companies which will turn out to be winners in the long term despite the kind of macro headwinds which they are currently facing today.

ET Now: Let us talk about the index levels. Are you convinced that perhaps 5200 to 5300 is a strong support base for the Nifty?

Nilesh Shah : In the current environment we believe that 5200 is an extremely good support base. At those kind of levels themarkets basically begun to trade at 15 times which is in line with the long term averages or below the long term averages. So barring anything catastrophic which could happen at the global level, we clearly believe that the level of 5200 should act as a good support for the market.

ET Now: Bankers are still feeling that they will be able to pass on the price hike as well as bank stocks have not really cracked much up until now what is your thought on that?

Nilesh Shah : I think that there are two or three things which we need to look at in the backdrop. First of all is that banking stocks have been reasonable outperformers, most of the private sector bank. And particularly in the last leg, a lot of private sector banks did rally significantly from the lows which they had in February, March. I clearly believe that the success of rate hikes have been an important trigger for price corrections, but purely from a fundamental point of view we are beginning to see slippages in NIMs for the banks. Clearly a lot of the private sector banks have seen slippages of anywhere between 25 to 50 bps reduction in their NIMs over the last one to two quarters. And we think that there could be further slippages over the next two quarters. Second is that there would definitely be stress in terms of the asset quality. I think clearly what we are basically going to see is margin compression happen for banks. In terms of demand for credit clearly the Reserve Bank of India itself has basically tone down or brought down its estimate for credit growth for the current financial year. To that extent we are clearly going to see that while banks have a pricing power, but what they do not have control over is basically the demand for credit. I think that is going to be a challenge for banks in the current financial year.