Profitability at $1 tr, Nifty at 100K by 2035?

Vikas Khemani, Founder, Carnelian Asset Advisors, says the total corporate profitability of India today is $150 billion. In 2001, it was $8 billion. The 20X or more growth in our earnings have happened despite us having all kinds of government changes, global financial crisis, 3G scam, 4G scam, fragile 5, demonetisation, GST implementation, IL&FS crisis, pandemic, Ukraine war. My belief is that this $150 billion by 2035 will become $1 trillion. Even if I give 18-20 PE, our market cap will become $18 to $20 trillion. It means Nifty will become anywhere close to in and around 1 lakh, 5X from here. If you outperform by 2%, 3%, 4%, you can make a 7X return because small compounding over a long term makes a big difference.

The smallcap and midcap stocks have sprung back, especially the quality pockets have come back very nicely and you are about to launch a Bharat Amritkaal Fund. Our policymakers and leaders have been speaking about Amrit Kaal and Viksit Bharat ambition for some time now. But by the looks of it, it appears that things are much more concrete and getting better with each passing day. I want to start our discussion today on the thinking behind this particular fund and what are the building blocks which you are seeing that you think of launching this special fund.

Vikas Khemani: The idea is that most of the time, when people zoom in, they look at short-term volatility; our idea is to zoom out and see what could be the potential over the next 20-30 years as India is developing and transforming that perspective is what we are trying to build.


Unlock Leadership Excellence with a Range of CXO Courses

Offering College Course Website
IIM Lucknow IIML Chief Operations Officer Programme Visit
Indian School of Business ISB Chief Digital Officer Visit
Indian School of Business ISB Chief Technology Officer Visit

First of all, of course, we have a leadership which has given and it is a great thing that we have such leadership which has given a developed country of Viksit Bharat by 2047 as India becomes 100. So, what are the potentials and what are the possibilities and why this time around it will happen, why we believe that it will happen and if it happens, what are the opportunities and that is what we try to outline in this fund and that is what we are going to capture in this and that is the whole thing that India will move from $3.7 trillion GDP to $29-30 trillion over next 23-24 years.

Our per capita will move from $2,600 to $18,000. Our world share of GDP will go to 16% which is right now in and around 4%. As this transformation happens and it has happened elsewhere in the past, the same thing will happen in India. So the whole idea is to zoom out, look at what are the possibilities and how we can create supernormal or superior wealth in this period of Amrit Kaal as India is embarking on.

Let me scratch that point a little more while you may have a sip of water. I want to talk about the last few years of this leadership. In fact, from 2013, when Mr Modi was announced as the PM candidate, to 2024, it has been almost 10 years now and the bull run has continued. Do you see the momentum of reforms continue in a broad-based fashion even from here?

Vikas Khemani: One important thing to understand is that in the last 10 years, we have built a foundation. Massive reforms have been carried out on economics reforms, IBC, RERA, GST which have been pending for a very long time. We have done digital infrastructure, which has kind of built a very significant base for growth and lastly, infrastructure reforms, we are seeing today massive infrastructure is getting built across the board, ports, roads, railways, airports, everything. So, this foundation is laid and based on this foundation you can build a building or imarat which is Viksit Bharat over next 20-25 years, that is the dream.

More importantly, many tectonic shifts have happened. I think why we believe this time around this is possible is because there are six tectonic shifts and it is very important to understand. Once you understand that, you will have a lot more conviction around India.

Please go ahead and explain.

Vikas Khemani: The first big shift which has happened is that India has moved from incremental thinking to exponential thinking. Historically, everything we wanted to do in 5 years, 10 years, 15-20 years, today everything has to be done at a speed, at a scale, and in a short period of time. That exponential thinking is a very big departure from the past.

Secondly, historically, we have always operated from a constrained mindset. India is a poor country. We can only do so much. Today, you do not have that narrative. India has moved from a constrained mindset to no constrained mindset. Gadkari has said that we have no shortage of money, whereas earlier we said we do not have money for defence. Today money is there for defence, infrastructure, welfare, everything. It is very different and a big change

The third big thing which has happened is that India has historically looked towards the west for the solution of its own problem. Today, India is finding its own solution to its own problem, whether it is COVID or whether it is UPI or even if you look at the world is still talking about universal basic income, but India has implemented it already in the form of DBT. So, India is finding its own solution.

Fourthly, India is innovating at scale at low cost, whether again it is payment or if you tell any foreigner that in less than $2 you can get unlimited data, it is unheard of! India is innovating at scale at low cost.

The fifth very big change which has happened is that historically you had only a model of socialism or capitalism. India has displayed for the first time in the world that you can have social welfare and development can coexist. It is not at odds with each other and that is a very big departure from the past.

And last but not the least, India no longer sits in the corner at the global stage. We all have felt and seen that India takes centrestage. India has a huge stature difference. And when you look at that today India is calling out an important voice in everything globally and that has a huge economic multiplier impact. According to us, these big tectonic shifts will lead to three things — strength, scale and speed. We are the most populous nation on the planet. We are the youngest nation on the planet and we are the most aspirational nation on the planet.

So, whenever you have these three things, it creates huge wealth. Look at any company over 20 years which has created massive wealth – Asian Paints, HDFC Bank. In any such company, you will find three things — strength, scale and speed. It happens at the company level, we have seen and felt. The same thing will happen at the country level. You will see these three things and this will lead to a massive wealth creation cycle over the next 10, 20, 25 years period and that is what our thought process is to tell people to stop looking at this 1,000 plus-minus correction point, look at the big picture and how things can pan out over….

I want to understand where this money should be going. I see that you are talking about certain areas of growth. BFSI, manufacturing, service exports, infrastructure and consumption. How are each of these places looking in terms of potential profit growth and hence you will be spotting for companies here.

Vikas Khemani: Again, we try to bucket five buckets like you said and within that, there will be an opportunity. Each sector will actually transform, so like to give an example, BFSI, we all know we benefited a lot from this. But if I were to tell you in 2000 the total market cap of the BFSI was $9 billion and today we have a trillion dollar market cap! So, we have seen massive value creation.

Interestingly, in 2000, a large part of the market cap was only in PSU banks, banks, and NBFCs. Today, financial services at $1 trillion is 15%, which includes insurance, brokerages, wealth, and all those things. So, in 20 years, we saw new segments emerging. As we move forward over the next 20-25 years, you will see many more segments coming about and building. It is our job to identify sub-trends within mega trends and invest into those opportunities.

As India becomes a global nation, globally integrated, bonds come, commodities will come; newer opportunities will come. We did not have mutual funds before, today we have them. We did not have platforms, today we have. So, all those things will keep changing. It’s the same way in manufacturing.

Yes, manufacturing I want to talk to you about because we were nowhere in manufacturing. Government-led push is leading to massive manufacturing. We are seeing some amazing companies getting listed as well. In which part of manufacturing do you see massive earnings blast happening?

Vikas Khemani: There are five-six segments on which we are very bullish, but new segments will come, pharma, defence, auto component, EMS. You will have chemicals, even textiles. So, these are five-six segments which will become very big. The example I like to give is that let us take the pharma industry. The total industry size is about $50 billion. Total market cap today is $200 billion. This $200 billion in the last 20 years has grown at 18X and many companies in that period has become 100X and 200X. So, a sectoral growth of wealth has got created.

This $50 billion by the time Amrit Kaal ends will become $450 billion. It means pharma itself would have a market cap of $2 trillion. From $200 billion to $2 trillion. Within that, many companies will become far bigger. Today, we are large in generics. But going forward, we will have very large APIs. We will have innovators coming about. So, the sector will transform and again it is the job of people like us to identify emerging companies within those emerging segments and create superior wealth. I can go on even in automobiles, I can go on in chemicals.

So, one is the legacy manufacturing which is growing. What about the new-age manufacturing — engineering R&D, defence, railways? What are your thoughts about here?

Vikas Khemani: All these are big opportunities. In defence, we will see massive wealth creation. There is a massive opportunity in auto components, engineering, to see massive wealth creation. Long term, it looks big, but it happens, it has happened in front of our eyes like in pharma.

You have actually used a very interesting quote which says that a lot of people, we overestimate what happens in the short term and we underestimate what is likely to happen in the long term.

Vikas Khemani: It is said by Bill Gates that most people overestimate what can be achieved in one year, underestimate what can be achieved in 10 years and the classic example of that I can give you, the total corporate profitability of India today is $150 billion. In 2001, it was $8 billion. If I had this chat with you in 2000 that one company’s profit will be more than $8 billion, I probably would have laughed at the idea. But today, Reliance’s profit is more than that and that has happened.

This 20X or more than that growth in our earnings have happened despite us having all kinds of government changes, global financial crisis, 3G scam, 4G scam, fragile 5, demonetisation, GST implementation, IL&FS crisis, pandemic, Ukraine war. You can think of everything possible that has happened, despite that we have grown.

My belief is that this $150 billion by 2035 will become $1 trillion. And even if I give 18-20 PE, our market cap will become $18 to $20 trillion. It means Nifty will become anywhere close to in and around $1 lakh, 5X from here. And if you outperform by 2%, 3%, 4%, you can make a 7X return because small compounding over a long term makes a big difference. So, we have and our whole thought process of telling investors is that when you zoom out and look at opportunity from a long-term perspective, your perspective is very different.

You do not worry about here and now the market correcting 2%, 5%. Then you look at it and see that you need to create wealth over this period of time. And we just tried to show on statistics that 10 crore investors today, if you compound at 18%, by the time Amrit Kaal ends, it will become 450 crore. This is the kind of compounding.

Let’s talk about your style of stock picking now. I want to understand specifically what do you look for in terms of profit, management capabilities and how do you assess?

Vikas Khemani: If you see, any investing is only three things, quality business, quality management, and reasonable valuation. But everybody does it differently. So, we have our own way of doing it. First of all, we do a detailed forensic analysis before investing into any company. We will never take corporate governance risk in our portfolio.

So, the books should be clean and all of that….

Vikas Khemani: And people have to be clean, never bet on crooks because that is the biggest risk. We are very clear on that. That is something we will not do, because that is important that what you will not do.

Secondly, what we look at specifically is what we call magic basket, where we typically can get both earnings growth and valuation rerating, that is where we make big money and that is where we have created our own proprietary framework that what are the situation when it happens, how do you play, it is a whole manufacturing theme shift strategy that came out of that framework. Stock picking like ICICI Bank, Aditya Birla Capital, Cipla, all came from that framework, so that framework allows us to identify companies ahead of the curve and that is where you make a lot of money.

Thirdly, we say that never invest into what you do not understand. So, in the last five years, we avoided all the new-age, new tech investments because we do not understand and I do not know how they will create value. So, we avoided accidents. But we internally say that if there is a tailwind, identify the tailwind and park yourself on a right ship, it will take you far. How far, nobody knows but as long as you are sitting on a right ship and there is a tailwind, you will go there. Our job is to constantly identify those right ships and tailwind.

But you are able to identify a company with 20-30% kind of earning visibility?

Vikas Khemani: Absolutely. If our corporate earnings are going to grow from $150 billion to a trillion dollars, it will grow at 14-15% and we have to identify at a corporate level and at a country level and we have to identify a company at 20%. I do not think that is difficult. I think you have to stay away from narrative.

For example, the whole of the last one, one-and-a-half years, there is a narrative that IT is not doing well. But if you look at companies in my portfolio, most IT companies are up between 50% to 200%. So, if you stay away from narrative and focus on the core and say, can this company grow, what is the segment growing, what is sub-segment growing, you can do well on that.

Harry Byrne

Related post