Vikas Khemani, CEO Carnelian Capital talking on various themes, rural, consumption, BFSI.... Do read the interview to know more.
Q1. Markets have run up sharply and leading indices are 10-12% from all-time highs, while earnings visibility hasn't improved commensurately. Are markets in a bubble like situation, and is there is reason to worry?
Market recovery from the bottom is surely sharp and gives the feeling of euphoria. However, one should not forget that on the other side of the COVID crisis, lies a great future. Low interest rates augur well for equities. Two things go in the valuation of equities - Earnings and cost of capital. While earnings are compromised for FY 21, interest rate drop compensates for that. Once the earnings growth comes back, which it will, markets will do well. However, short term correction and volatility can happen any time.
Q2. Rural India is reportedly doing well. To what extent can it help lift the GDP and India Inc's earnings?
Yes, rural India is relatively insulated from the COVID crisis. It is not only the agri-productivity but also rural consumption which helps contribute to the GDP. It will provide a very good cushion to both GDP and earnings.
Q3. Are you seeing any green shoots in the other parts of the economy, namely manufacturing and services, or in specific sectors?
I see India embarking on to a manufacturing boom over the next 5-10 years and it will surprise everyone. Manufacturing GDP can hit USD 1 trillion in next 5-7 years. We have many non-believers to this. Covid is a very big catalyst for growth in local manufacturing led by import substitution and exports. Do you know India has half the labour cost, equal power cost and 1/3rd logistics cost, as compared to China? India is already competitive and this event coupled with tariff & non-tariff barriers will serve as catalyst. Even in the services sector, IT services will see a big growth. Every organisation has to get ready for the new digital economy and billions of dollars will be spent. This is non-discretionary just like Y2k. We shall see a big growth in IT services . Both these themes will result into record levels of employment generation over the next 5 years. You can well imagine the impact of that on consumption.
Q4. Many banks have raised significant sums through equity and debt even as their capital adequacy was comfortable and growth is down? Is this a preparation for a surge in NPAs? What is your view on Financials, including NBFCs?
COVID has brought a lot of short term uncertainty specially for the Banking sector. This pandemic will cause significant cash flow and profitability issues for MSMEs and individuals both salaried and self-employed. This is likely to create a risk of NPLs in the industry. In a leveraged business, it is sensible to be prepared for it and keep the balance sheet strong. In case, NPLs are lesser than anticipated, banks can grow without a capital raise for 3-5 years which again is a great scenario for banks. We like to see a well-capitalised and stronger banking sector as it is essential for confidence and growth.
Q5. There was a time when consumption was a key theme. How do you see it, both discretionary and non-discretionary, play out over the next 1-2 years? Consumption is still a theme and will remain for next 2 decades. India has very young and aspirational population. Non-discretionary spending is linked to an increase in earnings, hence might happen with a lag but will pick up for sure. Given the slow demand, many stocks have corrected well thereby creating opportunity for the investment.
Q6. What is your reading of the rise in global prices of commodities like copper, aluminium, etc?
Global cyclicals like commodities are strongly linked to liquidity in the system. A combination of quantitative easing and fiscal spending by the central banks and governments across the globe will lead to significant run in commodities. We are looking at a 3-4 years bull run in commodities. It might be similar to 2003-2007 period.
Q7. In the current situation, how difficult has it become to pick stocks. What are the things you are considering while making investment decisions? Stock picking is always important in all kind of markets. Currently, it’s a great market for stock pickers and one is spoilt for choice. We are fully convinced on India recovery, boom in manufacturing and significant scale up in services. India will see a widespread recovery.
Q8. What are your preferences in terms of stocks and sectors?
We like IT, Pharma, Industrials, non-discretionary Consumption and financials, specially non-credit financials,
Q9. What is your interpretation of rising direct retail participation in equities?
It is worrisome to see such direct retail participation. We have seen many penny stocks without fundamentals being traded. People are doing lot of trading. Markets can always disappoint you. Short term euphoria can be seen. Retail participation is best through MFs and PMSs.