Value doesn't mean cheap; stay in companies that can deliver 18- 20% growth for a sustainable period
Vikas Khemani, Founder, Carnelian Capital Advisors, says: “Our average portfolio valuation is about 19-20 times PE and average portfolio growth is about 17-18%. That tells you that you are in this market also able to find growth stories with a reasonable valuation and with the ROC or ROE portfolio upwards of 17-18%. We are not really worried about the lack of ideas in this market. You have to avoid euphoria. You have to avoid fads. We try to avoid fads and stay invested in companies which can deliver 18- 20% growth for a sustainable period.”
In your latest note you have talked about quality car companies at a reasonable price, which one should be looking at adding in the portfolios. You have them in your funds as well. Where is it that you are finding value in this market?
Again value is a very misunderstood subject. Value does not mean it is cheap. You know, it is about whether you are getting good companies at a reasonable price and that is what our focus has been right from the beginning and we will never buy something just because it is cheap. At times, cheapness or value can be a trap. There are segments where – and I am again telling you with a lot of responsibility – at one level, I feel India is such a diverse market that one is spoiled for choice. There are segments where – and I am again telling you with a lot of responsibility – at one level, I feel India is such a diverse market that one is spoiled for choice. There are a lot of choices to invest in. We constantly struggle to narrow down our portfolio because our mandate is between 20 to 25 stocks.
Every time you get a new idea, how do you fit into a portfolio? I really do not believe that there are investable ideas available, which are very promising, which can be compounded from a medium-term to long-term perspective and not an expensive valuation. So again, it is how you look at it. We constantly focus on companies, good management and reasonable valuation.
Our average portfolio valuation is about 19-20 times PE and average portfolio growth is about 17-18%. That tells you that you are in this market also able to find growth stories with a reasonable valuation and with the ROC or ROE portfolio upwards of 17-18%. We are not really worried about the lack of ideas in this market. You have to avoid euphoria. You have to avoid fads. We try to avoid fads and stay invested in companies which can deliver 18- 20% growth for a sustainable period.
90% of the participants of the Indian market have a timeframe of less than one year. About 5%, have a timeframe of one to three years and remaining 2-3% are genuine long-term investors who talk long-term and do long-term. They have a timeframe of five-year plus. I will take the first part out – 90% with less than one year view. Second and third buckets have 1-3 years and 3-years plus. What comes in one to three according to you? Which is a combination of tactical and structural and what comes in one to three according to you? Which is a combination of tactical and structural and what comes in five? Which is a classic compounder for you?
In 1-3-year bucket, we are finding a lot of interesting ideas especially in the PSU bank space, where re-rating is bound to happen, especially in some good quality PSU banks. A lot of consolidations has happened and most of the baggage has been left behind. They are run by good management and have good technology and on many accounts, are giving the private sector a run for their money. Some of them will do well from 1-3 year perspectives.
I do not know if they will do well from a 5-10-year perspective because we will have to see how sustainable that is. Like that, one can kind of find some ideas but from a three to five year perspective or from long-term perspective again, manufacturing is a theme we have been believing for three years now and we continue to believe. I do believe that it is a once in a decade or once in a lifetime kind of opportunity.
What the IT sector was in the mid ,90s manufacturing sector will be now. I don't think that changes anytime. It continues to remain a very high conviction theme for us for the last three years, despite having gone up and down. Usually banks in general and consumption will do well though we have not invested in consumer stocks in the last three years. But now we are beginning to evaluate some of the names which we think can offer interesting plays because in the last three years, we continued to believe that they will be under pressure, but now some interesting stuff is appearing.
We never get fooled by the long-term theme. Within a theme, you have to go and identify a good idea. Very often in what appears to be a very long-term theme, you do not find ideas to play in that and hence, it is a very difficult job to find good, interesting play. Consumption is one basket which appears to be very promising but very hard to find interesting ideas.
You have said that one should stay away from the fads. Do you think defence and railways are anywhere close to that because just about everyone wants to own them?
Absolutely. I have said this multiple times that defence is something where right now, there is a huge amount of frenzy. I am not saying defence is not a good sector. I am not saying it is not a promising sector. It is a very good, promising sector from a medium-term to long-term perspective, but businesses do not run the way markets do.
Businesses get created over a period of time. It is not that they are building infrastructure. The way currently stocks are getting priced as if entire defence story is getting built over the next two years. So ultimately in investing what price you pay also is very-very important for the outcome. We do not believe in the buy-at-any-price kind of thing. Risk-reward is very important in investing, and many defence stocks right now are way beyond risk-rewards. One has to be very careful about them.
The same way, chemicals and some of the tech stocks were there, new tech stocks were there throughout 2021 and if you avoided that time, from there, in ‘22 and ‘23, we saw massive wealth destructions happening there. So the time to look at them is when nobody is looking at them as long as you are convinced about the long-term trend and opportunity.
Any recent IPOs which you have liked and which are now part of your portfolio? Normally IPOs have a reputation of coming at a level where long-term investors do not like them?
No, absolutely. We are very-very careful because we do not want to be part of any euphoria. I have done IPOs in my career, almost close to 100 companies and I understand that game. It is better to participate in the early part of the cycle of the IPO, not in the late part of the cycle, because by then euphoria builds and people start kind of factoring in most of the valuations and so you have got to be careful about it. It is public knowledge.
We have participated recently in Yatharth, we are holders of Aeroflex. It is all public knowledge and so I am not recommending anything. Our criteria whether it is IPO or a listed company does not change. It has to be good quality management, it has to be good business which we like and it has to be available at a reasonable price. That is how we continue to believe in quality at a reasonable price, whether it is a private company, public company, or IPO company.