Can't avoid pain in the markets; have a well-diversified portfolio: Prashant Khemka

Prashant Khemka

In the markets, one can’t completely avoid pain and needs to have a well-diversified and balanced portfolio to remain safe, said Prashant Khemka, Managing Director (MD) and Founder of WhiteOak Capital Management. Khemka said no one can predict downturns in the market, and having a diversified portfolio can make sure one won’t have concentrated exposure to any particular sector.

In this second part of the exclusive conversation with Moneycontrol, Khemka shares his views about protecting one’s portfolio from corrections and stocks from the railway, pharma, and PSU sectors. Edited excerpts of the interview:

Could you elaborate on your sell-side discipline and the guardrails that you have put in place to ensure that you are probably out before a serious correction?

We, as a team, always stay fully invested. We don't take market calls.  But you can't completely avoid pain if you are in the market. Like they say, if you are swimming, you will get wet. So, you will also feel some pain. And nobody can, with any degree of consistency, forecast these turns in the markets.

But what helps our team is that we remain well-balanced and well-diversified in our portfolio. So, we won't have disproportionately large exposure to a particular sector, a particular segment, or two or three themes in the market. The large gaps haven't necessarily seen a flow-driven lift in prices.

The majority of the portfolio in most strategies still remains in large caps. We do have a healthy allocation, much more so than the benchmark in mid- and small-caps. This rally or frenzy is not necessarily across all small- and mid-cap stocks. There are segments of mid and small-cap stocks that haven't seen anywhere near the frenzy that we are talking about in the more domestic and deeply cyclical segments of the market.

So, in our portfolio, we have a good balance across market caps and across sectors so as to not get caught in one or two themes where you do very well while those themes are working but then are left holding the bag when they unravel.

How do you see the railway pack? That is one part of the infrastructure segment where not much institutional money has come in, but a lot of retail investors have jumped on that bandwagon. 

Certainly, one has to be careful. First of all, in railways, there are many companies that provide different services and products. So for some companies, railways may be nearly 100 percent of their exposure. For other companies, it may be 50 percent, yet for other companies, it may be 10 to 20 percent. We do think railways is a segment where a tremendous amount of capital expenditure is going to take place over the next decade or so. There are many opportunities, and there are many companies whose businesses would benefit disproportionately from these opportunities. So we do have investments in the portfolio that would benefit from some of this increased capital spending on railways. But again, I would not make it a blanket statement that you can ride any train, to use the pun, in the market that is supplying or is in this business. Just because you are in the railways business doesn't mean you can merit any valuation. There are businesses that are very competitive. You may have a large market share at this time in a particular segment, but if indeed the expenditure in that segment goes up five-fold or 10-fold over the next few years, it would attract new competition, and the company's strength to withstand such competition is very important to analyse. So, based on all these assessments, we do have some exposure to the railway sector in companies that we believe still provide room for upside in the context of the prospects.

What is your take on pharma? Is it showing leadership qualities in the mid-cap space? Since the specialty chemicals sector has gone through a lot, how do you see things panning out there?

In pharma, we definitely have a lot of exposure, as we find a lot of companies attractively valued at this time with fairly strong fundamentals. It has not been a favourite of the market for quite some time. At least post-COVID, there was some euphoria for pharma stocks, as people believed for a while that the consumption of medicines would rise post-pandemic. But for almost three years now, pharmaceutical stocks have struggled on a relative basis, though as a sector, some stocks have done much better. We do find at this time a lot of good opportunities, not just in pharma but in healthcare more generally, which includes hospitals and services. So, the team does like and own several companies in the broader healthcare space, as we believe fundamentals relative to other segments of the market and overall relative to the market are still very attractive for quite a few of these opportunities. Similarly, in specialty chemicals as well, we have investments. In the near term, this year, there's been some softness in demand globally for agrochemicals, which does spill into the sales momentum for various Indian companies as well. It's hard to generalise; just as we were talking about within the domestic cyclicals, even from these levels, many of the companies would do well, while overall the sector might not do well. Similarly, in specialty chemicals, we believe several of the companies still have a very long runway of business growth and profitability growth by virtue of the segments they're in and the markets that they're catering to, and the small near-term demand softness notwithstanding, they remain fantastic opportunities. We have a good amount of investments in speciality chemicals as well.

How about the PSU space? That's another pocket that has seen a one-way upmove over the past many months. Does the issue of overvaluation hold true for the PSU pack?

I've always struggled with PSUs, I must admit, not just in India but across the world. We have an emerging markets fund, and in other countries, the weight of PSUs in the market is much higher than in India. In fact, the emerging market average is 20 percent, compared to 10 percent in India. Because there are several countries where PSUs make up between 30 and 40 percent of the index. However, we've struggled historically to find attractive investment opportunities among PSUs. Valuation does, on the surface, look compelling. Anywhere in the world, PSUs would have a higher dividend yield, low PE multiples, and whatnot. But the problem with the PSUs in general, again, not talking in particular about India, is that the alignment of interests is not there with shareholders. The government of the day in different countries may have different objectives that they want to achieve. Some of them are in the name of social service or a greater social cause. And those aren't necessarily the objectives of investors when investing in equity markets. Hence, from a governance perspective, we've always struggled to get comfortable with PSUs, or SOEs (State-Owned Enterprises), as they're called around the world. We do own some, not just in India, but across the world, but they are a fairly small portion of our portfolio.  When it is such a large component of the market, you cannot completely avoid it.