2018 could be the comeback year for Indian IT: Nilesh Shah, Envision Capital
In 2018, a lot of headwinds would go away and it could be a solid year for Indian IT cos
Is the underlying strength that the markets have exhibited for 2017 here to stay for next one quarter at least?
Yes, 2017 has been a fantastic year and the strength that we have seen in the flow of liquidity is something that should surely spill over into 2018, especially the early part of 2018. Obviously, the most important event is going to be the Budget and its details and numbers. Till then, we seem to be on a pretty solid wicket.
We have not had any big or large macro concern in 2017, but now the bond yields are at about 7.3%, global liquidity has been in a switch-on-and-switch-off mode. There is a concern about the way crude and commodity prices have spiked up. Do you think somewhere it is a sentiment which is overlooking the obvious macro concerns and markets are underestimating an upside risk to inflation?
What we have seen over the last two-three years have been some really solid macros and maybe some kind of softness in the micros. The macros have shaped up much better than the micros at the very aggregate level. Over the next one or two years, what the market is probably factoring in is that while the macros have the potential to slip a bit, that should get compensated by the micros. What it essentially implies is that given that 2019 is going to be a very big election year, 2018 is probably when the government gets a little bit more aggressive on expenditure and that could result in basically the fiscal deficit not being as solid or robust as what we have seen over the last few years.
Versus that, it is quite possible that the market is factoring the earnings growth to start materialising sometime in 2018. It is hard to really put a timeframe to it in terms of which quarter it could be but it looks like the earning season for FY18-19 is definitely a lot better than what we have seen over the last two or three years and that is perhaps what liquidity is going to be focussing on over the next few quarters.
You track the entire IT space with a magnifying glass and now it seems the base effect has kicked in for the IT sector. Are you getting a sense that 2018 could be a year which could be selectively dominated by IT companies?
I probably think 2018 could be the comeback year for Indian IT. If we look at it over the last several years, some of the IT companies have been grappling with the demand environment, with basically pricing environment, with some of them grappling even with leadership issues and on top of that the currency. What we believe is that in 2018, a lot of these concerns or a lot of these headwinds would in a way go away and 2018 could be a reasonably solid year for Indian IT companies. This is because some of them have been able to tweak their business model. They have been able to develop capabilities on some of the emerging opportunities in technology and in addition to that, if some of them can also basically get back into strong pricing environment, it bodes well.
In addition to that, the frontline IT companies have done buybacks in a very consistent manner over the last year or two and they have been able to put their extra cash to work in buying back their equity which should in a way lead to marginal improvement in their ROEs as well. What it looks like is that 2018 could be a pretty good year for some of the leading IT companies.
In addition to I think the frontline IT companies, there would always be individual opportunities in the next level of IT companies and some of these companies look very attractive. On the whole. the growth environment looks a little better for IT companies and on top of that, the valuations are surely compelling relative to rest of the market. We believe technology should be a very big sector to watch out for in 2018 and beyond.
In the beginning of 2017, if you would have done a dipstick, the general moot point was that markets would be flat, demonetisation will force a large slowdown in the economy and GST implementation will come at a cost. But now the picture is completely different. The way markets are going up, everyone feels that there is no worry in the world, nobody is talking about froth valuations and everyone is super confident about equity as an asset class largely based on liquidity. Are you getting some telltale signs of complacency in this market?
There are pockets of exuberance in the market and you could clearly say that there are pockets of complacency but at the aggregate level, we should be fine. Clearly, valuations at the aggregate level are high but there are pockets of opportunity. Some of the risks at the global level are surfacing and we clearly need to kind of get into 2018 with some concerns in terms of global liquidity. It is something on which, one should really not bet on in 2018 and we believe that local liquidity will play a counter to the global liquidity.
2018 is going to be a year where local liquidity is going to take even more centre stage than in last two years. That is one big area. From a local standpoint, the concern the bond markets will have would be to do with how the fiscal deficit shapes up and clearly the government is focussing both on infrastructure and on the agri rural side.
One event to really watch out for in the middle of the year is going to be the monsoons. The last two years have been reasonably good for monsoons and we have to hope that even in 2018 we will have a normal monsoon. If it is normal, it will relieve the government of some pressure in terms of its allocations to the agri and the rural sector but if it is not a normal year for monsoons, then clearly the government will have to spend more on agriculture and rural and that essentially could be an additional cause of worry for the bond markets.
2018 is going to be the year where earnings start ticking up, local liquidity continues to be sanguine and the only local factor from a downside point to really watch out for is basically going to be the progress of monsoons in the middle of the year.