Markets are seeing a period of consolidation, and there are no inherent risks broadly, according to Carnelian Asset Management and Advisors' Vikas Khemani, who sees a very positive bull market in the medium to long term.
A significant re-rating story is unfolding for public sector banks, most of which are currently at reasonable valuations, with many positioned on the cheaper side. This trend is expected to persist for some time, Khemani said. "Banking should be looked at structurally from a long-term perspective," the founder of Carnelian Asset Management told NDTV Profit.
In the near future, the sector is expected to perform better, with possible intermittent consolidation. "Structurally, I am very positive on banking," Khemani said.
Companies able to adjust and adapt to emerging trends need to be looked at, according to him.
"The aim is to invest in companies capable of achieving a 20% growth rate, especially those situated in high-growth areas. A very optimistic outlook is held for engineering, research and development within the IT space," Khemani said. He finds value in banks, information technology, and manufacturing.
Top Stock Bets
There are opportunities in every space, said Khemani, mentioning Tata Motors Ltd. is part of Carnelian's portfolio.
The Tata automobile company is a "great play" in passenger vehicles, electric cars, and commercial vehicles, and Carnelian is really positive about it, according to Khemani. Mahindra & Mahindra Ltd., another constituent of the portfolio, also has a multi level play, he said.
"This uptick in the auto cycle is led by the growth in the economic recovery and the increase in incomes," he said.
Watch The Full Interview Here:
How are you feeling about the markets right now? Last week I was thinking that with the budget behind us, with the election outcome almost given, earnings season also now technically behind us, the markets will be lacking triggers and will probably go into some sort of a price or time correction. And of course, then we had Thursday and Friday, when the markets rallied up. Do you feel like there is enough reason to buy right now or is it one of those markets that you stay on the sidelines and wait for an opportune time?
Vikas Khemani: First of all, I would request your team to get the name of my firm right. It's Carnelian Asset Management and Advisors. I have directed them many times.
I think, coming to your point on the markets, we have had many conversations on that. It depends on what your time horizon is. I'm quite optimistic about the market from a medium to long-term perspective. We are seeing a good consolidation in the market. Budget, I think, wasn't even expected to be any major event. Election concerns are behind, corporate earnings seem to be alright. So, broadly the market has no major risk per se. At the same time, I think it will take its time to get the trigger in terms of upside. So I think it'll be slow and steady.
But if you ask me from a medium to long-term perspective, I think we are in a very, very good positive bull market. Short term is very hard to predict.
Sorry Vikas. I don't know why they've caught the name of the company wrong, but we've notified them. I promise you this will not happen again. Talk to me about the sectors. I know last time when we spoke, you seemed quite optimistic on banks and IT. Now, banks also seem to be a beast in themselves. You've got the likes of an HDFC Bank that are grossly underperforming for reasons specific to the bank. PSBs have been on a tear, at least in the last couple of weeks. Where is the advantage sitting in your opinion? Value with the likes of an HDFC or opportunity with the PSBs?
Vikas Khemani: I think we have been holding PSBs for almost close to a year. We think that PSB is a very big rerating story in the making. Most of the PSBs still have reasonable valuation or I will say that the cheaper valuation, given the transformation they're going through. And I think that should continue for some time. You know, stock-specific, you always have to avoid it.
We have not owned HDFC Bank for some time. I guess, they will have some more time to go before the whole integration related pains get over. But it's a great bank. No doubt about it. We keep monitoring but we haven't bought HDFC Bank.
So, I think, banking you have to look at from a structurally long-term perspective and that Indian economy cannot go from here to $10 trillion, without the banking sector doing well. So, banking is the sector which will do well. It might have intermittent consolidation, might have intermittent phases of no return but that's the part of any sector. Structurally speaking, I'm very, very positive on banking and financial services over the next decade.
PSBs, are you adding right now? I did hear you say that you've had a whole lot of them for the last one year. So you're of course bearing the fruit of it right now. But if somebody were to ask you anything that you're adding incremental capital to, which ones would those be?
Vikas Khemani: You know, PSBs like I said that there are three major reasons why we like them. If you've seen all the PSBs earlier, there were three problems—technology, asset quality and governance.
Asset quality got sorted out in the last 3-4 years as the provisioning happened and the economic revival happened. So that's behind us. In fact, you are seeing more recovery from the provisions … over the last many years. They picked the CEOs for the banks which are very, very good and capable and they're driving the transformation in the banks.
Lastly, technology. About 8-10 years ago, technology was a big play. Now, it is plug-and-play. So most PSBs have invested significant amounts of money into technology. So the differentiation between private and public has narrowed down drastically. So having fixed all these three things, I don't think there's much difference or case, given their footprint, given the CASA of franchise. They should trade where they are… Over the next couple of years, you will see them trading at 1.5 times book and may be more, like how SBI took the lead... You know, other PSU banks also will walk through the journey.
You said you've got HDFC on the watch. You've still not gone out and touched it, but you wouldn't be tracking it closely. Now what are you tracking, a commentary from the management, revival in terms of earnings growth guidance, or is it a price correction that you're waiting for?
Vikas Khemani: HDFC has been going through a lot of internal shuffles and integrations. They also have to raise deposits. So there is an overhang of integration. So we will watch out for that. In my opinion, it will be at least a year away from where we think you know. It is not going to happen in a hurry. It's a great bank, a great institution.
But from an investment point of view, we would like to see a clear trajectory. Investing is all about comparing. I think if you compare with other alternative options at a similar valuation where you're getting other alternatives options like ICICI Bank, when there are no kind of overhangs that it's better to play there. I mean, you might still get similar returns, but you know, it has a lower risk. … That's the only thing. So we will still be, you know, watching out over the next couple of years.
As you know, with earnings and with auto, we saw a theme and the cases where rerating largely were all about EVs. It's all about the EV segment in Maruti, Tata Motors, and M&M last week. What is your preference here—an Electric Vehicle, or an ancillary?
Vikas Khemani: There is opportunity in all spaces. I think, we own Tata Motors which as you know, is leading you know. It's a great play in EV. It's a great play in commercial vehicle. So we've been very very bullish on that.
We've been owning M&M, which again, is you know, fairly multi-purpose play. It is also a significant EV play. So I think, we will be owning these and there are many auto ancillaries, which we have been owning, which will benefit from the cycle.
So the segment is coming after a long growth phase for the last 1-1.5 years. And whenever such a turn happens, it will be at least 3-5 years, if not more. So I think this uptick in the auto cycle is led by the growth in recovery and economic recovery and increase in incomes.
Auto is one (sector) which will benefit a lot also from the infrastructure development. So you know, we will be kind of positive on some of the names which I mentioned to you.
I know you are optimistic and have been on the mid-cap IT pack. I think the two broader themes, not just in the markets but in the economy, have been EV and AI. Now this AI is still in early stages. It's uncharted territory for a lot of these players. Would you bet on the tech companies who have an AI exposure, AI play or would you be going with, you know, tried and tested large companies who will figure their way out? I am a little confused about how one approaches and plays or you know, takes advantage of this AI rush?
Vikas Khemani: If you ask me, you know, you can't segregate IT from AI incrementally. It's like this. I'm here with the stimulus to make businesses with a new tech. If you see today, every business has to be tech-enabled. Same way, every technology services firm has to be AI-enabled. That transition will happen and in the process the market somehow gets excited with the buzzwords today. I don't think any technology services company can afford to say I don't have AI capability. It is becoming an incremental, integrated part of life, like how digitisation and cloud migration was there, say for example, 8-9 years ago.
So, you have to look at companies, which are able to just adapt to the emerging trends and are able to grow faster. So our attempt has always been to buy companies, which can grow 20% plus, and which are in high growth areas of that and like ER&D (engineering, research and development) is a very, very high growth area within IT services. We've been very bullish. We have many successful investments in that space. So like this, we keep on looking for this area. And I think the technology sector per se will do very well. Today, our exports are around $220 billion. This number will go to $500 billion over the next 8-10 years. So the sector will grow and within that, our job is to identify a company, which can grow faster—whether it is an AI or ER&D.
What are top three stocks or sectors that you're incrementally still adding to at this stage?
Vikas Khemani: As we get money, we keep buying. So it's not that I can't comment on one or two names and stuff, but I can tell you that if you're bullish on a market from a 8-10 year perspective, there's no way, you will not buy. You might optimise for one or two quarters, a month or you know those kinds of things. But structurally speaking, like I said, I find value in banks including PSUs. I like and find value in IT services companies. I find value in manufacturing. There are many plays despite such a good run. We find it interesting and investable at this point in time. We find it reasonable now incrementally. We've never invested in the last four years on consumer names. Right now, we're beginning to look at other consumer names… So, opportunities do keep coming.
Power sector—that we bought in about two quarters ago—has done very well. And I still think, there's a lot more—given the structure over the next 8-10 years—run in the power sector. That also especially in the conventional power sector. So there is a value in the market we benefit from. I don't know why there are pockets of over exuberance, overvaluation. For sure, you can't deny that. But we are able to find ideas within the space which I mentioned to you.
You keep getting liquidity into your fund. Hence, you need to go and allocate but you also do have the ability to take a cash call at times. Are you going in staggered, with fresh money. And if you are staggering it, what is the sort of staggering you're doing? And for existing portfolios, have you done any sort of a cash call at this stage?
Vikas Khemani: No, we haven't taken any cash calls because we think that the market still has a lot of legs to grow. But whenever new money comes in, what we do is we deploy it in idea-specific stocks.
Out of my 20 stocks in portfolio let's say, there'll be 8-10 stocks which we are very convinced to buy immediately. Some stocks, we will probably try to wait for a couple of weeks to get optimised or so. ... So once it moves out of the buy zone, then we kind of replace it with some other stocks and I can tell you we are able to find ideas which we are convinced about. So there's no shortage of ideas where we are. We think that money can be made. But I can tell you, we are not in a situation where most of our portfolio is viable right now.
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