Vikas Khemani stocks: Structurally there is no challenge to the India story: Vikas Khemani

“The first half this year you will have some uncertainty whether it is to do with the fed rate issue or to do with the worries related to inflation, interest rates. In my opinion it will settle down in some time,” says Vikas Khemani, Carnelian Capital Advisors.

First up as far as the market setup is concerned we are not breaking out of that range at all whether it is earnings or whether it is budget we are not seeing that big reaction and of course the entire Adani saga continues to weigh on the market. Do you expect us to break out of the range anytime soon because you had quite a bullish target for the year 2023 as a whole?
I think we are in a consolidation phase. We had said that this year will be a mix of headwinds and tailwinds and markets will be in a fair value zone.

So whenever this kind of setup is there it takes time to break out of the range and so I personally think that this year maybe in first half, it will be in this range and the breakout probably would happen in second half of this range.
The simple reason is that the first half this year you will have some uncertainty whether it is to do with the fed rate issue or to do with the worries related to inflation, interest rates. In my opinion it will settle down in some time.

I think the market will gain probably more direction in the second half than in the first half but this year is going to be mixed year from a headwind and tailwind perspective and directionally of course we remain positive. At a lower level you will find a lot of interest coming in as well. So structurally there is no challenge to the India story. Of course, in a structural bull market there will always be periods of consolidation and periods of correction and this is what we are passing through.

It is clearly the Adani saga right which has occupied most people’s names and their social media feeds as well. But just wanted to understand that aside whether or not you think the panic is overdone and whether the fears of a contagion impact as we have seen play out on the past couple of trading sessions that needs to sort of get arrested now?
I mean again we have said that clearly that we do not think there is any contagion effect happening at the systemic level. The banking system fortunately didn’t have a large exposure for the investors into the groups and stocks especially even in the mutual funds and institutional category.

So to that extent I think the loss as the markets have fallen is also very limited from a systemic level perspective.

I am sure there are investors who have lost money as well but so at the systemic level I do not think anything is alarming. My sense is that we are more or less done from a contagion or whatever the impact of this and there will be a lot of initiatives taken by the group to gain confidence back from investors and I think in few months’ time in my opinion this will be behind and will be settled.

Let us also understand your view on the overall manufacturing theme because that was clearly one of the focal points in the Budget. Given the fact that maybe there was slight disappointment when it came to the defence outlay, what is your outlook in terms of new opportunities that you are identifying within this space?
It is a decadal shift. It is a very-very long-term opportunity whenever these kind of shifts happen in short term. We look for short-term and sort of incentive reasons to buy but in long term they play out really well. I will take you back to IT cycle when the IT cycle structure things started falling in place in mid-90s it went all the way for next five six years and also it continues to remain till now.

So India is a very large country which has its own consumption of the manufactured goods which is that so far we have been mostly imported and now government is making sure that we not only remove our import substitution dependency also be export competitive and both things are working very well.

Of course in manufacturing it is a long time to play out because by the time you build ecosystem, by the time you build your manufacturing plants it takes time so if I want to take a five-ten year view, I have no doubt that many multi-bagger opportunities will come out in this segment.

What that means for next two or three quarters nobody knows and probably that may not be even meaningful. So we see this is a very-very structural and very long-term opportunities and budget and many more such events are only furthering that cause and government is taking so many initiatives.

So there are two things to support this theme, one is the government initiative and secondly the natural tendency of demand from China plus one perspective, Europe plus perspective and also improved India’s cost competitiveness vis-à-vis any other location.

This confluence of three-four factors is making this attractive opportunity even if one of them were to reduce let us say government focus were to go down this will still stay is our belief. So we will be very-very positive on this across major segments out of this and we think that this will play out in a big way over next 5 to 10 years.

When one talks about what really should an investor be doing from here onwards you clearly continue to be very-very bullish on the prospects of both banking as well as automobiles. Just help our viewers understand because these are large sector pools where within banks and autos do you find comfort to put fresh money at work?
Again banking cycle always plays out in four ways; one that you have a credit growth and NPS cycle comes and the provisioning cycle happens, capitalization happens and the credit growth comes back. So we have just got over about a year ago about from the NPS cycle capitalization event and now credit growth is coming. So typically I would say that at least next two three years credit growth should remain solid and robust both on the corporate side as well as on the retail side. So we are in that phase. We are the middle of the cycle, we are not in the early cycle and it has still at least in my opinion three, four years from cycle perspective play.

We own

, and even so we have a reasonably large exposure to credit space but we think credit is likely to do very well. Between NBFC and banks we have taken large exposure and it is likely to play out according to us from 15 to 20% kind of return over next three years.

Similarly, I think for the automobiles if you see, the last four five years we have had a very poor demand environment and now as the environment is settling down there were serious issues; IL&FS crisis, Covid and chip shortage. Now I think all of them are behind and companies are looking to grow and credit is being made available.

So we will see reasonably good amount of growth from automobile manufacturers. We own

, we own in our portfolio, we own M&M. So I think these are some of the plays we think that will deliver well for the next couple of years. I think 18-20% return is quite possible. Anything above that, you will have to be lucky and you have to see the cycle.

You also have a large exposure when it comes to the entire technology sector. And apart from the large cap names, the likes of , , LTI Mind Tree, you also have exposure in your structural shift fund to the specific names, the likes of Tejas Networks, , etc. Could you talk to us about where you are seeing value when it comes to the mid-cap and small-cap category in the IT sector? And are you disappointed with as it continues to report losses despite a good top line growth?
We have been very bullish on the technology sector per se. There are two types of this technology sector; one is the IT services, where the names like HCL Tech and LTI play a role and they have been doing very well. They have been growing in the range of 14 to 15% with a good dividend yield.

We continue to believe that there is a good tailwind in the entire IT sector that is likely to continue. This IT sector right now is more a combination of growth and defensives, and especially when in an uncertain environment it also offers in some sort of currency hedge.

So that is our thesis there and we continue to remain positive on that. Companies like Tejas Networks and all are very different. They are more into manufacturing and technology, a combination of that. They are into telecom equipment space. And this company is a very, very high promising company from a capability perspective. They have a huge amount of capability on the 4G and 5G side of equipment. And with Tata coming in, their initial problem of capital and credibility, despite having the capability was a question. But with Tata coming in, both credibility and capital availability has got sorted out.

So this is really, in my opinion, 5-10 year trend. It has the potential to become Huawei or Nokia of India in that sense. Whether it will become or not, we will have to wait and see in time. So in this kind of place, we are not really looking from a short term perspective. And a single order from BSNL could be 20000-30000 crores and it will change the game of the company. So these are the companies with a very different investment approach. And you would not be able to see value from a traditional valuation perspective so this is slightly different call we have taken and we think that it sits right between technology and manufacturing.

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