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We continue to remain quite positive on IT sector: Vikas Khemani

"Of course, there are some pockets of exuberance in mid and small cap space but one has to be careful and avoid those. Otherwise, in general I do not see any major risks to the markets," says Vikas Khemani, Carnelian Capital.

What is the general view on the market at the current juncture? We had that almost touch and go moment with 20K. We have retreated. The earnings now pretty much seem to be out of the way. Macros are looking fairly decent. What does that spell out for our own markets?

I think broadly things are working out very well. Earnings season has passed with reasonably good output and liquidity continues to remain robust. So of course whenever market rises very sharply it is bound to get into a narrow consolidation zone which I think is going to be around in and around here and maybe a little bit of correction as a part of normal market correction. But in general I think we are optimist about market from a medium term to long term perspective.

Of course, there are some pockets of exuberance in mid and small cap space but one has to be careful and avoid those. Otherwise, in general I do not see any major risks to the markets.

I think broadly things are in place. Earnings season is continuing. The economic growth is fine. The next year election season ahead, I think spending in the economy will increase. So broadly I think things are chugging along well and I think markets are looking pretty decent.

That is exactly what I want to talk about right because while no one is looking at exiting the market no one thinks that it is heating up yet. The indicators do not seem to be suggesting so. But within the market where do you think are pockets of over value and under value right now?

I do not believe that whenever a lot of people chasing a particular theme or a particular segment, you are bound to see some amount of exuberance or euphoria in there.

Small and midcap space in general, I have seen a bit of a stretched participation and stretched valuation.

Again, I would not broad brush everything, but there are pockets where within that one has to be careful. In markets like this typically less quality also ends up doing well, and that is where people fall into trap.

So, I think that is one should always be warned about that in a bull market quality of the portfolio deteriorates, and one should be very careful about that.

Secondly, things like defence and all, according to me are while it is a structurally long-term good opportunity, but a bit stretched from all points of view.

In general, at least our approach has been to be a lot more careful about what you are participating. We are looking and finding ideas in companies and segments where nobody wants to look at but the structural growth drivers are still intact.

I will take you last year, nobody wanted to buy IT, and everybody had a negative about IT, and you see how IT in the last three to six months have done, especially the midcap IT.

So, always you have to look at something which is a differentiated approach and when markets are not looking, and where there is euphoria is something one should avoid.

You made a very interesting point about defence and how it is top on everyone's radar along with many other sectors which we will discuss. But what I find interesting is and considering this is declared data, so maybe we can talk about it, as to how within defence you are now digging out and scouting out for ancillaries. And I am talking about an unlisted company that you actually made investment in, in your structural fund, Aeroflex Industries, quite the interesting business model, and ancillary to the larger defence theme?

Not really. I do not think that is, I mean I would avoid speaking about stock, it is not a defence ancillary. It is definitely part of the theme where we are playing China plus one, where it is 80% export kind of business.

So, it is a part of the China plus one and manufacturing theme, and that continues to remain very-very robust. I mean, this theme is here to stay for next 10 years. And if you can identify and get into companies which are solid, robust, and stay into them, in my opinion, multi-baggers would come out of that.

So I mean, that has been our approach for last many years, and we continue to follow that approach. Wherever there is an exuberance, we will stay away.

I stand corrected. Defence is one of the thing, many things that, or rather, many industries that they cater to, aviation, space, semiconductors, EVs, oil and gas, chemicals, they cater to a large gamut of the industry. Tell me what has actually stood out for you? And just IT as a theme at large, do you think that in terms of the commentary that we have heard from the management, I mean there have been some shockers as well be it a Tech M or an Infosys with the kind of guidance slash that we have heard from them. Do you think we are at the fag end of the worst news, or there is more to come?

First of all, I think you must understand most IT stocks have done well. So, let us not in last three to six months specifically after the fall last year. I think barring one or two companies which I think are more local issues like Tech Mahindra has had a change of CEOs a bit of, I would think that there is a kitchen sinking has happened.

And there is a transformation in the play. Infosys has its own challenge in terms of a lot of leadership leaving. So, I mean, in general, we are not negative on IT, we are positive on IT. We think IT is a very good trade on interest rates coming down in US.

And right now, most companies are winning contracts for the survival spend.

Growth spend is yet to come, development spend is yet to come and that would happen only once the environment settles down globally, worries about recession, potential recession goes down.

Then I think CEOs would sort of loosen their purse and spend more on the developmental growth part. So, we think it is nothing to worry. And especially in the mid and small cap IT space, we have seen companies like Cyient, BirlaSoft, Persistent and many of them have continued to deliver superior results and continue to guide well for the simple reason A, they have a low base and plus each of them have their own strategy and segment to target.

I mean, ER&D space is growing very-very well. Aviation is growing very well. So, you do not have to sort of invest IT in general but you have to invest into stock within the sector. And that is where we always think slightly different according to us and we continue to remain quite positive on IT.

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