“Companies are trading at a crazy valuation so in that sense one has to be very careful and cautious and we have seen from our experiences in the past that while things look good but growth do not come just one way, it takes its own time so there will be periods of consolidation,” says Vikas Khemani, Founder, Carnelian Asset Management.
I would like the today’s discussion to start with defence space. I was looking slightly deeper and one found that though say half a dozen of the defence stocks may have run up a whole lot in the last few quarters, but one can divide the defence space into service providers around defence and the real manufacturing companies which are manufacturing deep tech high value added kind of parts and the play, not only for domestic but overseas too. Which end of the defence are you bullish on and do you think that the low-hanging fruit in defence may have gone but one can still work around them?
Defence is no doubt a big opportunity but given the nature of the opportunity it is going to play out over a long period of time, the challenge in defence right now is that a lot of future growth, future opportunities are really factored into the pricing of many companies.
Companies are trading at a crazy valuation so in that sense one has to be very careful and cautious and we have seen from our experiences in the past that while things look good but growth do not come just one way, it takes its own time so there will be periods of consolidation. We have seen that in many sectors like chemical in 2021 was like a sector where nothing could go wrong and in 2022 we saw correction happening. So, while we believe in the long-term opportunity, but there one should be very careful.
And you have been quite positive on the pharma space as well, not sure of your bet on Laurus, but at least Orchid Pharma has turned out really well especially after that got the European approval as well. Within pharma, are you looking at expanding your presence?
We are fairly large overweight on pharma if I remember correctly in different-different funds, but we have like upwards of 20% weight in some of the pharma and API space. So, we are very well positioned and we keep looking at it. Never say no, we keep looking at opportunities all the time but yes, we are quite bullish and optimist and overweight on pharma as a basket.
When it comes to IT, would the preference tilt towards midcap IT versus the largecaps?
Again, we really do not look at midcap versus largecap, we look at really the growth and like we have discussed in the past that in every cycle there are companies which go through a transitionary phase and go into the next orbit and I think this cycle also will have many companies which will go from smallcap to midcap, midcap to largecap.
So, our idea is to look at those companies which are well placed to get this transformation or transitionary phase where they can become big and there could be midcaps in that, there could be smallcaps in that and on the sector we are quite positive and of course, we have been quite overweight on IT midcaps. We do not really decide based on the market cap criteria only, we do decide based on the business model and the growth profile and the quality of the management of the company.
You have been observing a lot of commentary lately coming out from our policymakers, be it finance minister at the Budget. People have got into the habit of or we are used to taking vote on account as a complete non-event. But there were two big surprises coming out. One was lower borrowing number and, of course, fiscal deficit number which did play a big part in this commentary. Then, there is a question that the government is now looking at the next generation of reforms. There has been a talk from the prime minister himself around it. What could those new generation reforms be in your view? We have seen slew of reforms already in the nine years. Will we have more of the existing ones or there could be some aces up their sleeve, new ones?
See, it is not that we have kind of done everything, done and dusted. Right now what has been done is to build strong foundational reforms without which we could not have even tempted to achieve 6-7% growth whether that was a banking sector reform to RERA, to IBC, to tax reforms.
I think all of them are in place. So, they are kind of making things well. But if you ask me, judicial reform is a very big pending area which I think has been wanting.
If we want to become a global centre, we need to have a judicial reform which is pending for quite some time. Likewise, what we need to do on the skill training or skill development side, while there a lot has been done, but we have miles to go on that, how do you make a large population of the country productive and effective, which also gets linked to the educational reform, which government has been talking about.
There is a capacity building which needs to happen both in education and healthcare and we might think that is a narrow focus on those segments, but they have a huge transformational impact on the overall productivity of the company.
For example, I would give you the FASTag which seemingly appears to be a very small reform, but it is a very big reform in terms of improving the logistics cost of the country.
So, we do not realise how small-small things have a large impact on the overall. Now, nobody would have kind of said FASTag is a reform, but to my mind it is a very big reform. It is a reform of mindset. It is a reform of kind of taking smaller things and making a big impact.
Same way, I think healthcare and education reforms are very big, looks like smaller reform and narrow reform but they are actually very big overarching reforms.
So, they will touch upon, in my opinion, building the capacity, improving the productivity. Of course, infrastructure, a lot of reforms are pending and we need to build the next level of infrastructure which is underway, but it can definitely be much more than what we need to be if we want to be Viksit Bharat and we need to have manufacturing picking up, if we need to have $30 trillion GDP by 2047. So, all those things, in my opinion, you will see a lot more happening in the next five years.
But for the PSU pack as a whole, is there a FOMO feeling in terms of missing out, whether railways or whether the PSU banks and OMCs for that matter as well?
I think FOMO feeling comes to guys who have not invested. We have been participating in PSU, so we have been invested in PSU stocks, especially PSU banks. We own BHEL. We own HAL. So, I think we participated in that and we really do not look at anything as a PSU or non-PSU, we look at wherever there is a transformation happening, especially we like where there is governance in place, business model is in place and valuations are in place and in many of the PSUs most people have missed out a very big change in the governance part and people who looked at PSU governance with the historical lenses have missed out.
And I still see a lot of investors just reject PSU, no, we do not invest in the PSU. Thing is that when the country is going through transformation, the government’s mindset is transformative in every area of this thing.
When the prime minister himself has said or in fact, why he has said, we can see, witness in every action of them, they are giving freedom to the PSUs, they are giving enabling environment to the PSUs.
So, that was a historical problem. So, if it is happening, then why would any PSU bank trade at significant discount to any private sector bank and our biggest call has been that this bridging of the gap will create biggest value and still there is a lot of value on the table if we look at in most of the PSU bank. So, I think that is the job of an investor to kind of look where market is not looking but there is a big change happening and PSU still is looking good.
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