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Don’t be adventurous, stick to top 1-2 players in categories you like: Vikas Khemani, Carnelian Capital


On the budget day when I spoke to 10 people, all of them told me this market is not headed anywhere. Where is it now?
You did not speak to me that day, though. Obviously, there was a reaction to the budget in a particular way but at least as I wrote in my article post budget, that we are neither excited nor disappointed. We were neutral. We have seen many budgets over the years. They are generally a one or probably two week kind of phenomenon. Post that, markets get back to day-to-day normalcy of economic development and realities of earnings growth and what is happening on the ground. The same thing has happened again. The good part is that the liquidity flow remains fairly strong in equities and in the short term, demand and supply is driving the market.

We continue to remain positive on the markets from a medium to long term perspective. Of course, one should not overlook the risk from coronavirus outbreak in China. Markets right now are overlooking that in expectation of sort of stimulus or a revival from the governments. But I guess, the real impact would be felt a couple of quarters from now because every global economy is integrated with China in one or other way.

What are the lessons to be learnt from D-Mart? Have those who called it expensive, missed out on a multibagger in making in the last three years?
Absolutely. In my opinion, there is only one lesson to be learned; if you have a business which is run by an outstanding manager or a promoter, a good business which has structural legs to grow and a low floating stock, do not worry about the valuation in shorter term. We have seen it is not only D-Mart, but also in Bajaj Finance and many more…

Bajaj Finance promoter ownership is actually very low and they have not participated…
It is not low given that business because there the raw material is money.

Deepak Parekh does not own even 1% of HDFC and look at the franchise…
But he is an outstanding manager.

Piramal promoters own more than 50% stake, look at what has happened?
I personally believe that if there was a 60% floating stock in D-Mart, these valuations would not trade. It plays a role because it is a company which everybody wants to have in their portfolio and ultimately it is about demand and supply. If you have less supply, you will tend to overvalue it. That is how I see it. The lesson to learn is stay invested as long as you see a great manager and long legs to growth. D-Mart can be a 20-year story. We have seen how Walmart played out in the US over 20-25-30 years. If you look at that kind of value creation, D-Mart probably would also be well in that league. I do not know that, but there are signs that from a management perspective, from the opportunity perspective, they are rightly placed.

Are we missing other stories in the rush that the market has towards these handful of stocks? Is there reluctance to go beyond that?
In the last three-six months, it has gotten better than what it was six months ago. There is a little bit wider participation in the stocks. This is all a function of risk appetite coming back, a function of how money flow is coming to the market. Still the all-out confidence in economic revival is not there. It is a function of more confidence getting built in. As the data comes through, we will see wider participation happening. Also, one of the big reasons why midcaps took a beating was SEBI’s rule for mutual funds restricting them in a particular basket. If they ease out on that, probably that can lead to some sort of wider participation.

Is the year going to belong to even the consumption related pick up? On the basis of expectations that the rural economy will see some sort of uptick, would consumption be a sector that you would look at? Today, there is a dichotomy between HUL vis-à-vis ITC.

I cannot really say what the year will belong to, but I do believe that a wider participation of sectors would happen. Of course, BFSI — both credit and non-credit — has been doing well and will continue to do well. Consumption also will do well as long as there is growth. ITC is not doing well on that count.

As long as growth stocks do well, we will see some of the sectors like pharmaceutical and maybe to some extent commodities and some sort of manufacturing coming back in later part of the year. My hypothesis is that if the credit growth picks up from here, you will see a reasonably wider participation. The green shoots of credit uptick is happening but it is nowhere close to where it should be.

The only indicator which we watch is how the credit growth is going to be because that is one of the biggest problems of our economy right now. There is ample liquidity which is one of the preconditions of growth. But it has to still trickle down to the users of the capital. RBI is trying. The government is trying but we have to still see that happening and once that happens, a lot of concerns will start receding.

Everybody in the market now has reconciled to this 80-20 rule which is that 80% of the earnings will belong to 20% of the companies. There is evidence of it in the aviation, auto, construction and even in the media sector. If that 80-20 rule is going to be the universal accepted theorem or theory, how does one go about investing in those 20% of the stocks?
I would say that one of the key fundamental principle of investing — especially in India which is going through a phase of move from unorganised to organised — it always pays off to remain invested in the category leaders.If you invest in number one, number two players, you will usually do well. So the call you have to take is which category or sector you are bullish on and go invest into the top 1-2 players.

I would assign more than 90% probability of the economy doing well in three years time. I would assign a very high probability to a three-year recovery path.

-Vikas Khemani

So for the sake of being adventurous, you do not have to go to the names which do not have any advantage. You might as well go to the companies with moats and which control a large part of the profit pool of those sectors. That is the way to make money in the market.

I have interviewed an economist who said that the economy is not going to turn. I have a fund manager on the show today who believes that things are looking up. One of you will get it right, one of you will get it wrong. Will markets prove the economists wrong or the fund managers wrong? So far fund managers have been proven wrong.
It is all context. At some point of time everybody is right and everybody is wrong. In three years…

Last three years fund managers said the template with which markets worked well is that earnings will come back and that has not worked. The economists came out with a template that the economy will slow down, it has worked. Markets are saying fund managers will get it right, economy is saying that economists are getting it right.
If you spoke to anybody in 2018, I do not think anybody gave any sort of probability of IL&FS kind of a crisis and we cannot ignore that. IL&FS in my opinion, was our mini Lehman moment and whatever we are seeing in the last one, one and a half years or post that, was the aftermath of that.

Of course for the US kind of economy, the government’s response would have been very different, the recovery could have been fast. But unfortunately in our setup, that is not happening and hence we had a prolonged slowdown and impact on the economy. We are seeing lots of concentrated efforts being made to revive the economy. Risk appetite goes away very fast but comes back very slowly.

I feel a lot more coordinated moves need to happen and not piecemeal effort to bring back risk appetite. That is still missing which makes me believe that it will be a more prolonged and slow recovery, rather than a V-shaped recovery. But I would assign more than 90% probability of the economy doing well in three years time. I would assign a very high probability to a three-year recovery path.

The Prime Minister speaking at the Times Now Summit yesterday, talked about the government is working overtime and that this is India’s decade, He was referring to growth in tier two, tier three cities and he has also talked about reducing the tax, not terrorism and the overhang bureaucracy and so on. Do you feel the government has done everything possible to ease doing business and ease everyone’s liquidity as well?
There can be a very long answer to this question but the short answer I can give you is that I have no doubt about the intent of the Prime Minister and the government. I have a lot of issues with how it is being executed in a coordinated manner. Last budget, we announced providing liquidity to NBFCs and it took them six months to implement the first or more than six months now…

Because this government only has a certain amount of time left. So, if we are talking about three years. they have to…
It is not about time. If you compare with the Lehman crisis, you know a coordinated effort was made to revive the economy in a short period of time. Here, I do not think we can question the intention at all. I am a big fan of Prime Minister Modi as a leader but I think there needs to be a lot more coordination, lot more thought through efforts in implementing and getting it down. In my opinion, letting Jet Airways get grounded was one of the biggest disasters India could have and who is paying? Consumers are paying and also banks are paying.

Somebody had to decide let it remain alive and that could probably happen to Vodafone as well. These are the big blocks. These are things which create a huge amount of issues in the economy but somehow it appears that the government has taken a hands-off approach on that whereas right now you need to have a hands-on approach if you want to revive the economy. Today credit growth is not reviving. That is one of the urgent needs of the economy. Without credit, no matter whatever numbers we talk, it would not happen.

This is an endless debate because they will continue to say they are doing all that they can and people are not following suit on some of those measures. The combination which you work with is buy good business where there is a change of management every year — the CEOs.Where do you see that combination? Right now, markets are nervous that the underlying business is going through a cyclical slowdown and a change at the top could reignite the business?
Time and again, you keep seeing that and there are good businesses. One of the businesses we have liked and discussed is ICICI Bank. Post the change of management, there is a huge amount of change in the bank and how it functions, its operating profitability, customers satisfaction etc. We believe good management can make a very big difference to the same business. Banking has always been a great business.

IndusInd Bank and HDFC Bank will soon see a change of guard. What Aditya Puri has built is a franchise that was built to last. As for IndusInd Bank, in last 10-15 years, it has done much better than HDFC Bank. If there is a change of guard, I hope their successors are able to take the brand forward. But from a market standpoint, would these two stocks run the risk of the market performing or underperforming?
It can be seen that it is very difficult to fill the shoes of a leader like Aditya Puri you know he is a legendary leader. Anybody who comes in, will have to fill very high expectations. So, to that extent, in my opinion there could be some disappointment. The markets hypothesis right now is that if Mr Puri goes and whosoever comes at a base where it operates, it will take a couple of years of readjustment condition for it to continue the same kind of growth.

Also, HDFC Bank operated in last 10-15 years when the competition was weak. Now it is picking up. I have no doubt that these organisations will last for long and they will continue to grow. Can they disappoint in the shorter term? The answer is yes. We need to see who comes in and what kind of vision is being charted out. This is a hypothetical situation but is this a market worry? The answer is yes.





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