markets: India in one of the best wealth creation and earning growth cycle for next 8-10 years: Vikas Khemani

“There might be some psychological or emotional reaction in a shorter term, saying government would not be able to carry out this reform, that reform, but I do not think structurally speaking anything would change,” says Vikas Khemani, Carnelian Asset Management.

The main plank of this government’s politics or one would say this entire canvassing has been vikas. In fact, you have come out with the Amritkaal Fund as well. Now will the speed of that vikas get challenged if the numbers are not exactly as per market’s estimates as far as the actual poll is concerned? Do you think that the speed of vikas and the reform process, something which the Street actually got sold out to could get impacted and that is a bit of a risk?
Clearly, if the question is that if let us say government gets majority but below market’s expectation, answer is no, I do not think anything will change. There might be some psychological or emotional reaction in a shorter term, saying government would not be able to carry out this reform, that reform, but I do not think structurally speaking anything would change.

Of course, if an outcome where this current government is not able to form the government, then I think there will be serious questioning about the pace of the reforms and potential disruption of the growth, all those things, so I think that is the one thing that one has to very clearly keep in mind. As far as my view is concerned. I think this government is coming back. You can argue whether it is coming back with 300, 350 or 400, but I think only we will know in some time.

My own view is that they will probably likely to get between 350 to 400. But frankly speaking, it does not matter even if it is 300 or 350 because they have majority in Rajya Sabha, they would have a majority in Lok Sabha, so they should be able to carry out a lot of things which they have been continuing.

And you were also part of the CIO poll that we conducted. You do not believe that the election outcome will mark a top for the markets this year, do you, because it seems like somewhere the markets are already baking in the good and already moving up. We are already at 23K on the index alone.
I think so. Ultimately once the election is out, big event is out, uncertainty would be over, I see two things. Focus will be back to fundamentals, earnings growth which currently is looking quite robust. Secondly, probably a lot of international investors and some investors who were sitting on sideline given this big risk event as people were perceiving, those kind of money flow might start happening.

Even if you start seeing some money flow coming, my sense is that we will start getting a lot of flows from FIIs in later part of this year, especially when the rate cut cycle starts in US.

You will see liquidity also driving bit of valuation higher. So, I see markets remaining quite positive, quite robust, and I do not think market post-election would be a peak.

Of course, corrections would come. I mean, nobody can sort of rule them out in a journey of returns the market would be. I mean, recently we saw correction happening. So, corrections would come out for many reasons.

Just from capitalising on this very theme, just to understand what exactly the division would be when it comes to looking at the largecaps, would that be the focal area in terms of where investors should be concentrating their wealth? Would it be spread across mid and smallcaps as well or is there a sense that there could be a little bit of consolidation?
Investment philosophy should not change or portfolio construction should not change based on, let us say, whatever happens. I mean, assuming that continuity happens, your investment philosophy should remain across cycle similar.
I mean, I have no doubt in my mind that India is in one of the best wealth creation cycle over next 8-10 years and if that is the case, of course, mid and smallcap would tend to create lot faster wealth than the largecaps.

But having said that, even largecaps tend to create reasonably good amount of compounding. So, it is a philosophy each person has to decide based on the risk appetite of the person. But I do believe that we are in one of the best wealth creation cycle and hence that should continue. Any continuity will only further that confidence.

I want to understand your positioning on PSUs or which end of the PSUs you still find value and where exactly are you trimming position because clearly PSUs both banking and non-banking, defence, railways what have you, have been the key vehicle or market has played this government’s reform stance via these PSUs but that trade has played out a bit as well, so where are you trimming and where are you still holding?
We do not look at PSU per se as PSU. Within PSU also, wherever we saw good governance part continuing, growth part continuing, and undervaluation happening, those are the places where we find value.

So, PSU banks is something we have been quite positive and we continue to remain positive.

But let us say for that example, oil and marketing company, we have not been at all buying because the governance is not fixed. It is a lot more political. So, government interference keeps on happening every time price of oil goes up and down.

We basically prefer where there is a tailwind of the sector, where there is least government policy interference happening. It is more run by the individual banks, individual organisation, then the leadership of the organisation has to be good, so we have been kind of approaching from that perspective.

We have been continuing to hold most of the PSU banks. We bought companies like BHEL where there is a sectoral tailwind happening in the entire sector, especially the thermal power space and defence. So, some of these things more, we look at bottom-up ideas where the leadership has to be there, tailwind of the sector has to be there and the governance has to be right.

The other space I want to talk to you about is the pharma space, pharma and chemicals, if I may put it together, that is one of the big sector allocations, but look at the numbers posted by Divi’s, it has come back very nicely, even Aurobindo, though the market estimates were kind of elevated, but good numbers. Have you made changes, added some pharma, chemical names in the last few months in your portfolios?
We have been quite positive on both these segments you did mention and we have been overweight for last almost eight-nine months and we continue to remain positive. Pharma, of course, has come out of a very long cycle and we think that there are many more years to go.

So, there is no need to kind of panic and kind of get out and continue to remain invested. Chemicals, we did quite contra buying in last six-eight months when most of the markets were selling off. And we think that there is a lot more promise ahead. So, both these segments we continue to remain bullish and positive.

Is there anywhere within the entire market cluster where you would trim your positions or at least take profits off the table because it is looking toppish right now?
That is more company specific. I mean, from sectoral specific like I said we are in one of the best wealth creation and earning growth cycle.

The good part about this cycle is that there is a very broad based growth happening. It is there in banking and financial services, it is there in manufacturing, it is there in infrastructure, it is there in consumption, it is there in across the board.

We have not bought single or very few consumer names we bought, but we are beginning to now look at some of the consumer names which offer quite good risk reward.

So, you never say never, something you keep looking at ideas and specifically, I mean, while some of the segments like defence, railways, where you find a little bit of excesses you avoid them, but I cannot say the whole segment is kind of uninvestable.

You kind of avoid where there is excessive valuation or excessive euphoria getting built and look for where there is a value and look for where at least you understand the drivers of the growth.

When you say consumer, what exactly are you referring to? Are these some of the FMCG consumer names where commentary has been good about rural recovery or is it some QSR names or anything else? What exactly do you mean?
We have bought some of the consumer discretionary as well as non-discretionary, so FMCG plays we have taken. We never invested in any of them last five years, we felt risk reward was not in favour, but we are beginning to see some interesting opportunities. So, both in discretionary as well as non-discretionary first time we are finding overweight situation in our portfolio in the consumer.