market: We continue to remain fully invested; bullish on pharma and IT sector: Vikas Khemani

“We have been reasonably positive on pharma. We have been reasonably positive on IT. So, within all these things you got to find niche which can grow faster than the rest of the pack and that is the real challenge,” says Vikas Khemani, Founder, Carnelian Asset Management.

What all files and ideas are there on your desk to study, your team must have culled out a bunch of ideas, anything interesting, the themes which you are studying right now?
Vikas Khemani: To be honest, themes and ideas keep coming up and I guess they do not change very often. Our view on markets remains very-very bullish. We continue to remain fully invested. Long-term stories in place. I think you will see a bit of a sector rotation. We added the consumer first time in last five years in last couple of months which I think has done well. We have been reasonably positive on pharma. We have been reasonably positive on IT. So, within all these things you got to find niche which can grow faster than the rest of the pack and that is the real challenge. Otherwise, overall India story is so diverse, so broad based that we will keep getting surprised in terms of how the earning growth is playing out.

So, nothing changes from our original hypothesis perspective and we do not churn portfolio very often, so our holding continues to remain more or less same.I want to talk to you about a theme which is really gaining momentum over the last few weeks is the alcohol theme. Yes, United Spirits, Radico are the poster boys of the massive value creation, which IMFL has seen. But now it appears to be going down. There is a primary market offering as well out there. Do you have that representation in your portfolio? Have you looked at it?
Vikas Khemani: We used to have it and then we do not have it anymore. Of course, this is the sort of play on the rising consumerism or discretionary spending of the country and as India progresses, as India become developed nation alcohol is one of the sector which obviously always does well.

The only challenge in this segment is always the regulatory intervention, constant sort of talks about the ban and so it has that aspect, is always challenging, otherwise this looks pretty interesting. And so we invested earlier, but now more or less we have been focused on other consumer companies where we find better risk reward.

But not to say that this sector will not do well. Of course, this sector also has to do well because it is a play on the rising consumption per capita income of the country.

Tactically, what is it that you are looking at in the market right now if at all you are looking at fresh avenues? IT for instance has seen a good comeback, at least the stock prices in the last one month or so. We are yet to see whether that is going to translate into any better numbers from the companies or not very soon. And then FMCG as well since that election day has sort of made a comeback as well. Many are betting now on a rural recovery. Are you looking at these bottom-up stories at all?
Vikas Khemani: Like I was saying we have been very positive in IT. We added IT more especially in some of the larger names. We have been always positive on IT and we added our weight in last couple of months. IT continues to remain very positive, especially it is also a play on the interest rates coming down in US, recovery happening in US, so as the IT spends play out there.

But in general, I see even IT companies playing a reasonably good role in the entire AI related disruption. So, obviously you do find plays which are well placed and which can kind of benefit from them. Same way like consumption last five years we never bought any consumption stories because we never believed in the valuations and the kind of combination of both.

But now some of the names, not all, are kind of falling into place. We are not really thinking only because of election and rural recovery, we think that demand in rural economy is fairly robust. Some companies who create this narrative that demand in rural India is weak are the ones who lose their market share, not the ones who are gaining market share.

So, rural demand has been robust and continues to remain robust. We have to play and find out companies who are in this, getting market share.

Consumption interestingly is going through reasonably good disruption and there are companies who are losing market share, gaining market share.

Smaller players are giving good challenge to bigger companies. So, you got to find companies which are well placed and are kind of benefiting from that.

Let us also understand which are some of the sectors where you believe that now the run up has already played out, where valuations are not looking pleasing anymore and therefore, it would merit a cautious stance or a complete relook?
Vikas Khemani: Saying that some of the railway, defence, some of the sectors which have caught fancy of large part of the investors. No doubt they are great opportunity from a long-term perspective, no doubt about that the sectors will do well, but ultimately as an investor we have to look at the risk reward based on the valuation. So, I have been continuously always believing that. There are pockets of froth. There are pockets of excesses.

And I would say more than sectorally calling out, there are names where you find and across caps, it is not only about small and midcaps, there are excesses and you got to kind of be very careful. In capital goods space, I see companies trading at 20 times sales, makes no sense. But unfortunately there is a fancy of capital goods, capital cycle hence people are kind of buying that and making those bets.

So, at least we are careful, we would be careful, long term we have to take into account the growth versus valuation, the risk reward of remaining invested and that is how at least we think about.

I want to talk to you about an area or a small niche of the IT space which is often ignored and seldom discussed in the listed universe because it is not represented very well and that is cyber security. Bulk of the action in cyber security is actually happening in the startup universe, the new tech unlisted space. There are very few small companies out there. But I want to understand from you since I understand you have looked at this cyber security as an opportunity, how large can it be and what is the technological edge of Indian companies versus some of the western peers in area of cyber security in India.
Vikas Khemani: So, I think cyber security is a very-very fastest growing, I mean one segment which has to grow and is growing very rapidly, the fastest growing segment within IT space because cyber threat is one of the biggest threat to any company, any country, any individual.

We have seen cybercrimes going up significantly. It is the focus of the governments. It is focus of corporations. We have seen how many companies who have been kind of attacked by hackers and have seen disruption in their businesses for quarters and the profitability has got, they get compromised on their databases and all.

I mean this is a new kind of theft. So, like you think about it, 50 years ago, 100 years ago, the physical locks will do well because the growth was there when different kind of stealing and crime would happen, so same way you do not need now physical locks because everything has gone digital, your assets are digital, your most of the value is digital, so that is a new kind of crime.

And hence, if you ask me, take 10-year view, this segment will become very-very large, maybe 100x from here now and every company is gearing up on that. And so in the fastest growing segment, if you find a good interesting company, you must stay invested.

Indian companies also can do very well like any other IT segments. It is not that Indian companies cannot do well. It is again about the knowledge of the platform building, investing into that. Fortunately, Indian companies are now ready or they have wherewithal to spend into platform building, spend into R&D capabilities.

So, those are giving them the edge. Of course, there will be many companies, it will not be one company, there will be many companies in this space because the market is very, very, very huge and hence this should be very promising area within IT space.

It is similar to about 10 years ago what digitisation and cloud migration was in my opinion where if you see Persistent kind of companies have become from a 1000 crore market cap to 70,000-80,000 crore market cap.
So, those kind of opportunities when you take a 10-year, 15-year view where you can get potential multibaggers come out. So, I do believe that many large cybersecurity companies would be there in India.