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4 sectors Vikas Khemani is bullish on for next 2 years

Whatever hiring is happening in the new tech is helping IT companies to recover from attrition which they faced, a year, year and a half ago in a major way. So to that extent, it helps them, says Vikas Khemani, Carnelian Capital Advisors.

IT took a hit. Persistent came out and said, look, we have got a little exposure. We also heard from other IT companies where they have said that so far there is no problem in terms of a direct correlation with the SVP Bank. But when you see a problem like this, the sector PE multiples rarely expand. And on top of that, there is a US slowdown. On top of that, there is a layoff which is happening in the big tech funds. Do you think IT has peaked out for a long, long time now?

Not really. I think if you see, IT demand is only if you ask me getting better. Now, again, there are two perspectives to look at; one is a medium term to long term or secondly, the short term, immediate term. Whole of last year, everybody called out that IT demand will collapse but we did not see that happening at all in the order wins of any of the large, mid or any company for that matter. We continue to see order book getting accredited better. Secondly, I think this time around, IT spend is very discretionary.

Yesterday, I think in LTI MindTree analyst meet also, they kind of alluded to similar things that structural demand is very, very robust. Other thing which I think today when somebody is giving an order to any IT company, he is doing only bare minimum what is essential for his survival or operational purpose. The developmental expenditure on IT is yet to come, which in my opinion will start happening once the US economy stabilizes or interest rates starts coming down. So if you ask me, IT could be a very interesting play on interest rates coming down in US, whether it happens six months, 12 months down the line.

Meanwhile, these companies are generating reasonably good amount of growth and cash flows. Now, these one or two clients going away, getting bankrupt, those events happen in every business, will continue to happen. But I do not see a reason why one should get significantly worried, especially when IT companies are delivering reasonably good growth and attrition rate coming down. Whatever hiring is happening in the new tech is helping IT companies to recover from attrition which they faced, a year, year and a half ago in a major way. So to that extent, it helps them.

Truth be told, we are down a good 10%, from the top on the index. What as a strategy is it that you are doing in your funds at Carnelian? Have you been a buyer in the recent decline or the consolidation as well in the market previously?

I think, again, we have to see it in the perspective. Please understand, markets are down only 10% from the peak but in this period, what has happened, in this period, we have had sharpest rise in the interest rates. We have seen inflation shooting through the roof, global situation completely changing. We just came out of a major, in the textbook, whatever, you know, you read, major shocks to the economic, global economic growth, we are all seeing that.

So in that context, also, if we are down only 10% from the peak, it, in my opinion, tells you a lot of resilience of the Indian economy. And it has outperformed most of all markets across the board.

So one is to look at on absolute basis, other is to look at what is happening elsewhere, because market operates in a relative scenario, it does not operate in isolation. And these kind of corrections only do provide, like I was saying, that great opportunity, as long as you believe that Indian story continues to remain robust, Indian corporate earnings cycle is robust, Indian balance sheets are robust.

So yes, investment cycle has just kicked in, consumption cycle has not even started according to me. So we as an economy have a lot of drivers of growth. And whatever is happening, rest of the world is in some sense, certainly benefiting India. So I will say these are the corrections, which are great opportunities to deploy capital. And that is what we have been doing. In fact, we are calling some of our clients saying that, deploy money, if you want to deploy more money, this is the time.

Are you telling them to deploy money, then if you believe that there is this opportunity?

Absolutely, absolutely.

Where is it I am asking that you are telling them to deploy?

I think clearly, in my opinion, banking will lead the rally even when it recovers from here because that is a large sector and the sector is in great shape. It is growing well, credit growth has just picked up, and it just continues to generally sort of remain robust for some time. So I think for at least next 18 to 24 months, the sector remaining pretty decent. And that would lead the rally.

I am quite optimistic and positive on the manufacturing story. We are seeing companies changing their scale and that kind of uplift happening in many manufacturing spaces across the board.

And one can look at companies again, this is very diversified way but I think some of the great opportunities are there, stock prices have corrected 40-50% in many cases. And those are very, very interesting opportunities, according to me, to have a look at it.

I feel like I was saying, we continue to remain reasonably robust. Industrials, capital goods cycle again looks pretty decent. So I think India has a very wide playbook and some of the three, four sectors, we are very, very sort of convinced about it.

Only thing we are right now not buying is consumer durables or consumer discretionary, because recovery is still some time away. Maybe to some extent we are also avoiding commodities and real estate kind of players. But rest structural stories, where there is a long runway of growth ahead of us, we are right now buying and nibbling and advising same to the people.

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