We are seeing tailwinds in a couple of sectors like manufacturing which uts across many sectors and in IT, says the Founder, Carnelian Capital. In your latest report you have come out with shift strategy, talking about how every crisis brings about a shift as we saw in 1991 or 2008. This year is going to be no different. What are you banking on by way of a shift in strategy post the Covid pandemic in 2020?In this strategy, what we are talking about is a big shift which is expected to happen in the manufacturing space. If you look at the post Covid crisis, two big things have changed. One, the government’s focus is on making India self-reliant, especially to reduce our current account trade deficit. Secondly, companies across the globe are looking to diversify their supply chain and that was accelerated due to Covid. If I combined this with the fact that India was already improving its cost competitiveness vis-à-vis China, in almost 70-80% items, India no longer has a cost disadvantage. In fact, in some cases India is at an advantage. A combination of all these three factors showed that we are on a cusp of seeing a reasonably high growth in the manufacturing sector. The government also had to put a target of 25% of the GDP coming from manufacturing which is currently about 15%. Even if you believe that that is aggressive, even if we put the target at 20%, we are still talking about doubling our manufacturing GDP in five years time. We are seeing a lot of ground level reality but this is not a big bang announcement as far as the government is concerned. We are seeing a lot of things moving at the ground level. Out of this, two things will see it through over a long period of time. One is our cost competitiveness and secondly the whole global mindset change of diversifying the supply chain. We think this will cut across many sectors, especially when India historically has proven its own advantage and where we have skill advantage, cost advantage and domestic demand because India is also the only market where you can have a very large domestic demand. You can use it as an export base so that gives you economies of scale. Lastly the government is also focussed. Wherever you see these three-four factors coming together, those sectors over the next five-seven years will see significant growth. We call it a once-in-a-decade opportunity and this is the big shift this crisis has brought. For the longest time, everyone was talking about that disconnect between the economic reality and the market. Do you think there is more alignment between the markets and the economy now?Do we see our markets a little ahead of the economy? The answer is very much yes. But that always has been the case both on the upside and the downside. When Nifty went down to less than 7,000, the economy was not all that bad. It is just that the markets are swinging between extremes. Right now, we are seeing a good amount of pick up happening on the ground level. The sharp reduction in interest rates also have had a significant impact coupled with the liquidity profile changing. That is pushing the activity but it will still take time for it to pick up completely. We are not saying that it is completely normal. The only thing is the market is not factoring in the current year’s impact on the earnings and from next year onward, things are looking fine already. Once the vaccine is found, the market will probably be a lot more comfortable. We are seeing it across the board. The amount of real estate activity which has picked up, the velocity in the real estate which has been wanting for the last three-four years is not funny. It is really a significant pick up given what has happened in the last three-four months. These are the things which are pointing out that this is not going to stay here for long. Probably a couple of quarters more and then we will slowly start getting back to normalcy. What does that mean in terms of strategy going forward now, what are you focussing on, what is top of mind for you?Nothing changes in that sense. There is no alternative to looking for good companies, good management and the best way to look at it is to find that tailwind and invest into the right ship. It will take you far. We are seeing tailwinds in a couple of sectors like manufacturing which cuts across many sectors and in IT. We think IT over the next three, four years will be doing very well. Many of the IT stocks will get rerated. You will see a combination of both earnings growth as well as the rerating coming through and we are seeing a decent pickup in the real estate activity which has been beaten down over the last many years. That also has a tailwind and as a theme, you can bet on it over the next three to four years. Real estate also has an impact on associated sectors like building materials which basically captures on the real estate growth and those are the things which we are seeing. So, our approach has been the same; look at a broader trend but there is no alternative to identifying good companies, good management, good balance sheets and then betting on them. You have also been confident on the other select themes like chemicals, API for example. Any topping out in some of these pockets where you look to book profits?It has been the theme which we have been riding and we still think that it is a very large trend which is still unfolding. There is no doubt on that and some of the stocks have kind of run ahead of the reality in the sense that in many stocks I see even FY23-24 earnings also have also partly been factored in. So to that extent, you got to be very careful. If you are already invested, you can still ride through but if you are making a fresh purchase, one should be very careful before doing anything because you might have a period of consolidation when there is no return. I am confident that if you take a five-year view, it will give returns but there might be a period, given whatever the recent run has happened when there is almost a frenzy. If I were to look at only at this point in time without saying that the trend has not gone away but from a risk reward of investing perspective, sectors like IT, real estate probably would offer much better risk reward. But these are very name specific and thought specific but we continue to remain very positive structurally on chemical and API as a theme. ET Now: Because of everyone staying home and digital transactions taking place, do you think that is why the market is assigning such a hefty premium to some of the platform names – from InfoEdge to an IndiaMart and of course Reliance?Vikas Khemani: There is no question that there are more digital transactions. In the US, they took 10 years to have 12% online activity and that has gone to 23-24% in just less than three months time. So what took 10 years, you have got in three months time. There is no question that you will see a lot more and once you get habituated, you tend to follow though that. So, this shift is definitely here to stay and it is also creating some of these opportunities you mentioned. One has to see and study name wise and all because again typically these are the names where you tend to have a little bit of hope and froth gets built and only the reality is that the platform plays will do well and the shift is here to stay, Maybe many more ideas would come out. Players like Jio will do phenomenally well and they tend to benefit from this trend in a very big way.
SHARE