IT like trend in manufacturing over 5-7 years

“If a 35 bps rate hike takes place in India as expected, I don’t think there will be anything negative from the market point of view. The inflation worries are likely to settle down in the next three-six months. The path is now definitely good,” says Vikas Khemani, Founder, Carnelian Capital Advisors

We hit 17,000, almost 17,100 now. That kept you a little late?

The market always surprises us and it always does well on the wall of worry and that is what is happening precisely. Most of the hikes are behind us as the inflation trajectory seems to be getting down with commodity prices coming back. I guess that is the most comforting situation. As far as India is concerned, most of the drivers of growth are intact. The concerns around the global macros were clouding the market in the last couple of months, which seems to be receding.

I guess over the next couple of months, it will become a lot more clear. The only thing that one needs to watch out for is the impact of the withdrawal of $90 billion a month as it starts happening next month and probably that might have to be watched out but a comforting part is that the inflation trajectory is coming down and the comment from the Fed Chairman that recession is not visible right now made the market comfortable.

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The oversold situation will get corrected but I do not think the worries are behind us and the bull market will resume. It will just consolidate here but as far as India is concerned, all the indicators are in the right place.

I am guessing then you are not too perturbed about what the RBI is going to do next Friday when the MPC meeting concludes. The market is pricing in a 35 bps hike. Are you worried about the commentary from the central bank?

If you read in between the lines from the RBI Governor’s comment in Singapore recently, he pretty much played out his thought process very clearly. He is getting comfortable around inflation and he will do whatever it takes to support orderly movement of rupee. He continues to remain pro-growth. All the comforting statements he has made regarding policy rate hikes, have by and large been factored in. If a 35 bps hike takes place as expected, i don’t think there will be anything negative from the market point of view. The inflation worries are likely to settle down in the next three-six months. The path is now definitely good.

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What do you make of the overall earnings? There are a lot of misses but there are lots of hits as well in the overall scheme of things?

Absolutely! I see more positives coming out of the earnings cycle. The banking sector by and large has delivered pretty well and the growth outlook continues to remain positive. Automobiles have done well and we continue to remain positive on that.

Coming to IT, from this quarter’s perspective, there are worries about future demand, but their numbers have been by and large pretty robust, including the order wins. It can still be a bit of a disappointment but by and large, if I look at the macro level, there are many disappointments and in a environment like this, it is bound to happen because it is a very volatile situation and there will be businesses which will suffer, there will be businesses which will grow, but the overall index to market level earnings trajectory is on course.

As the volatility around the commodity prices and supply chain issues come down, India will do well. So we maintain that even through the volatility, this will be the best time to invest because from a 3-5-year perspective, India is one of the best stories around the globe, I see FII flows resuming once the rates cycle gets done. I expect to see massive flows coming from even foreigners and so this could be a very good time to deploy capital because the India story remains intact. Also, it benefits from what is happening around the globe – -be it the China plus one policy or disruptions happening in Europe because of the availability of energy.

So, India benefits from most of the disruptions happening around the globe. Net-net, we remain quite positive on India overall.

Should should one look at the domestic stories more now rather than the exports or IT companies directly linked to growth in the US or some other geographies?

It is not either or. It is definitely the India story. India is the fastest growing economy and it will remain so for a long period of time. One has to play the domestic story. But one more very big leg of the India growth story is building exports or reducing imports and in that sort of category, there are very big opportunities in the manufacturing space.

We have been outlining for the last almost 18 to 20 months that India is leapfrogging on the manufacturing front. Historically, progress has been a very weak point. Our manufacturing GDP which is around 16-17%, will go towards the 20-22% range over the next five-seven years. As this growth happens, we will see massive opportunities coming out both within the export as well as import substitution segments and global growth is not a worry because India is gaining market share. Even if global growth were to slow down, because of China plus one strategy, the market share gain itself will help us meet our growth targets as well as import substitution. There is no threat because the government is providing lots of comforting protection – both tariff and non-tariff to make sure that domestic industry flourishes and does not fear any unfair competition and dumping from anywhere else.

How exactly are you playing that theme? Give us some stock ideas.

We have a strategy which has been around since October 20, close to two years. This pans out across various segments. It is there in API, specialty chemicals, chemicals, auto ancillaries, garments space; it is there in consumer electronics manufacturing, defence items, toy manufacturing, footwear manufacturing. So there are lots of emerging areas.

A large part of our consumption was met through imports, especially when it comes to manufactured goods. Most of it is set to reverse. It is not that India could not manufacture that earlier but India faced unfair competition from our neighbouring country which was subsidising the exports. Now India is promoting the same thing and wants to replace them.

Secondly India’s cost competitiveness vis-à-vis China has improved significantly. Our labour cost is $200, China’s labour cost is $800; our power costs have come down and are more or less at par with China. We are getting better on the logistics costs side also. All those things are working in favour of India and these trends tend to play out over a long period of time. In some sense, I see a mini IT kind of a trend playing out in manufacturing over the next five-seven years. These drivers are not temporary, they are structural in nature and structural changes tend to last over 5, 10, 15 years.

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