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Rebase and restart, next four-five years look very interesting: Vikas Khemani

Carnelian Capital founder has turned aggressive buyer in midcaps in three sectors.

ET Now|
Updated: Mar 18, 2019, 11.59 AM IST
Vikas Khemani-1200
Over next three to six months, deploy money in a systemic manner, because risk-reward of investing in Indian markets are very well in place, said Vikas Khemani, Founder, Carnelian Capital Advisors, in an interview with ET Now.

Edited excerpts:

What a comeback by bulls! They have surprised everyone.

If you remember our conversation, one of the things which I had highlighted was that the market will always come back sharply when nobody expects and in that kind of market, the idea is to keep on deploying over a period time because risk reward was very well placed. But obviously nobody can time the catalyst to the turnaround and that is what has happened!

Two or three things have changed over last couple of weeks. One, the global scenario has changed especially around the Fed turning dovish around the liquidity scenario and is very important from a global sentiment perspective

Second, general election is one of the biggest events ahead of us which most people were worried about. All kinds of speculations were being made. All of us in the market expect continuity of the government or at least there is a greater chance of it.

Third, with the global clue that the interest rate environment has started falling in place, the new RBI Governor has done a great job in calming down the whole system in the aftermath of the IL&FS fiasco. For a long period of time, it was getting worse and worse. In my opinion, the new leadership has done a great job in settling down and these two-three things in my opinion coupled with the flows towards the emerging market, have helped our revival. This kind of environment is always sharp because there are lots of shorts which are waiting to be cut. There is always a little bit of buying, backed by short covering. So this is not the first time that we have seen this. The market environment sentiment has definitely changed and this is a good situation to be.

Would you be in a long only mood in the runup to the election, or has the party just about started or is it time to take 10% chips off the table?

I do not know how to play in short term in the run-up to elections because I think it is a very binary kind of event. My personal view is that the present government will be coming back to power, but anyway you can never take a call. You can only manage your portfolio at your own risk. I have been long believer that you should deploy money over next three to six months in a systemic manner, because risk-reward of investing in Indian markets are very well in place.

I do believe the Indian economy is very well on right track. A lot of structural reforms have been done and we will start seeing fruits of that coming through soon. Secondly, if you believe that the India story is good, you remain an optimist and pick up good businesses and stay invested even if it disappoints you short term and you have take a hit or for some macro reasons, markets come back.

I will continue to believe that India is a great story. We have a much better future ahead of us and we have just begun. Next five to seven years are very good. We had a very bad sort of setback in the recent past that has reset a lot on the basis that it has cleared the froth. The market is much better placed than what it was before. Of course, people have taken a knock on their portfolios and their wealth but there is no point in living in the past. You have to rebase, restart and as I look forward, next four-five years look very interesting.

We are seeing a lot of leadership coming in from banks. What is your stance on the overall growth outlook for banks?

BFSI as a segment accounts for a large part of the market cap. Secondly, it is very very critical for economic growth and I believe it will continue to deliver. You cannot aspire for 7%-9% growth and make money from Indian capital markets and not include banks. That is not possible. It will be a leading sector.

Also for revival of the credit cycle, banks’ confidence is very important so I think I am glad that markets are reposing faith and banks would lead the rally. There is no doubt on that. Of course it is not only banks, it’s the entire financial segment and in last two-three years, we have seen the market diversifying with BFSI space to many more players and you will continue to see that happening over next five-seven years.

I have no doubt in my mind that being almost 30-35% of the market cap, the banking sector BFSI’s entire basket will do well and even if you take 7-8% growth adjusted for the inflation and shift of market share from PSU to public this sector can grow at 18%-20% growth in a reasonable long period of time. So I think that gives me confidence that this will probably one of the big sector which given what reforms have been done in the past in form of IBC, RERA, GST I think this sector benefits the most from all the reforms which has been done and hence my confidence in the segment would continue to remain very high.

IT has had a solid move it lasted as over a year now but do you think because of the currency move, that trade could get challenged and it is best to take your profits off the table then?

I would say that the risk-reward in moving out has started falling into place. Other sectors like banks, industrials and consumer, would probably outperform over next couple of years for the simple reason that global growth is slowing down. While current outlook and order book of IT companies look good, the market typically tends to look forward. If you start looking forward, the market might start hypothesising a little bit of slowdown on the demand outlook as the global growth slows down.

That could vary and secondly rupee is also going to create a little bit of impact on the margin. What was working as a tailwind over last two-three years probably could turn little bit of a mild headwind. I would not say that sector is going to do decently well but given the valuations, given the little bit of mild headwinds, you would be better placed in some of the domestic-oriented stories. IT will be more of a defensive portfolio but risk-rewards are definitely shifting in favour of domestic plays.

Would you buy autos in this downturn?

Auto is coming from a significantly high growth background and a very high base. What we are seeing in Maruti and some of the cases is a result of that. The IL&FS crisis added a little bit more to it because of the credit squeeze to this segment.

Auto is a sector which gets impacted more from the availability and cost of capital. Along with the high base, both has impacted the segment and that is the reason you are seeing the reactions you have seen.

Maruti and Eicher grew very rapidly. That has got corrected. Auto will remain a sector which will do well but when to pick is the question. I would say wait for a few more quarters because the stocks are still not cheap. They are reasonably valued, they are good companies but market’s faith will not come back immediately from revival perspective till the time you see the volume growth coming back.

Probably you will have to wait over the next three, four quarters and pick the right time for the revival to be around the corner. But in CV space, players like Ashok Leyland can do very well. As credit supply eases out and interest rates come down, that segment will get impacted first from positivity perspective then cars.

IOC has gained over 5%, the most since 22nd February. What is fuelling this fire for OMCs?

Honestly, I have not been tracking much of that but the only intelligent guess is maybe this is because of dividend yields which are around the corner. Most of them are high dividend yield story but honestly I have not really tracked in terms of what is driving or fuelling this particular sub segment.

What did you purchase in this downturn that happened in Jan and March? A lot of midcap stocks were down 10-15-20%, what did you buy in that leg of decline?

There are lots of interesting stories in the midcap space. One of the sectors that I have always believed in is building materials. It came down very sharply and you could buy a lot of stocks there which were earlier sought after and corrected almost 40-50% in the last seven, eight months.

Chemicals as a sector did not correct much but the stocks were available at reasonably good price which have already pushed up. Within the NBFC space, some of the NBFCs which were well capitalised, diversified owned by corporate houses because those business models are very robust and sustainable, remain very interesting plays to look at.

There is a very wide variety of stocks, sectors you could look at in my opinion in the midcap space. We are looking at some of these three, four sub very aggressively.

Also Read

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Disappointed with govt intent to divest strategically in PSUs: Vikas Khemani

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