Markets are neither cheap nor expensive, investors need to keep return expectations low: Vikas Khemani

Vikas Khemani, founder of Carnelian Asset Management and Advisors

While markets aren't particularly cheap or expensive, strong earnings growth and ongoing structural revivals support a positive outlook, said Vikas Khemani, founder of Carnelian Asset Management and Advisors. In a conversation with Moneycontrol, he also said that consumption would be a key theme going ahead because India is a growing population.

Edited excerpts:

What is your view on the current state of the Indian stock markets, especially in terms of valuations as the analyst community seems divided with many viewing it as expensive and hence advise investors to be cautious?
People who say the markets are expensive are often looking at India with a “reversion to mean” mindset, thinking that historical patterns will repeat. But India is in a transformation phase, and in such times, reversion to mean doesn't apply. India is in a very different place now. So, while the markets aren't cheap, they aren't expensive either. Earnings growth is strong, and there are structural revivals happening.

We see continuity in liquidity and earnings growth, which will drive the market higher. Of course, it's important to keep expectations low. Given recent returns, the immediate future might not deliver the same, but over a 5-10 years view, India will continue to deliver some of the best returns globally.

What filters do you use for stock selection, especially in the current market scenario?
Our approach doesn’t change based on the market scenario. We strongly focus on the quality of management, followed by the business model - whether there’s talent and growth potential - and reasonable valuations. We avoid stocks or sectors that are euphoric where everyone is chasing them.

What are the major themes you are focusing on going forward?
India is in a transformative phase. Our demographics - being the youngest, most populous, and most aspirational nation in the world - are driving opportunities. Consumption is a key driver of growth, and we have been bullish on manufacturing since October 2020.

Manufacturing in India today is where China was in 2005, and we see a massive wealth creation opportunity. Financials also remain robust, and our banking system is one of the best globally. There are plenty of opportunities in credit, non-credit, and IT services, as well as disruptive ideas within these sectors.

Infrastructure, especially railways, seems overvalued. How do you view such sectors?
If too much growth is already factored into the value, we avoid those investments. You shouldn’t buy expensive stocks just because the sector is in development. It’s like how many people bought new-age stocks in 2021 out of FOMO (Fear of Missing Out) and ended up losing money. Investing is not about following the crowd but about finding value and adjusting for risk.

Any new age company stock that you have?
Ola Electric, it has a 35-40 percent market share and is launching new vehicles. They will turn profitable this year, and once that happens, they could become a large player in the automobile industry.

On the consumption side, are you focusing on any specific segments like discretionary spending or QSR?
Discretionary spending will do better, but we see opportunities across the board as the lower levels of society upgrade. We’re focusing on premiumisation, home improvement, and building materials, among others. Each segment has potential, but it depends on the company and sector.

What are your top three bets currently?
We own Aditya Birla Capital, which we bought at Rs 100 and is now around Rs 230. We also hold CDMO (contract development and manufacturing organisations) players like Laurus Labs, Newland, and Syngene. We are bullish on the CDMO space, and recently we’ve invested in chemicals like SRF, Deepak Nitrite, and Rallis India, seeing good opportunities there.

Could you elaborate on why you are bullish on the chemical sector?
In 2022, due to supply chain disruptions, buyers overstocked, leading to a lack of orders later. But now that inventory has cleared, growth is returning.

On the PMS side, do you think the tax on churn is a problem for clients?
Taxes are inevitable. The only argument could be about the tax on internal churning. However, many stocks we hold for five years or more, so the tax impact is minimal. The trade-off is between alpha generation and tax. In a PMS, we can be more nimble and agile than mutual funds, which comes with its own advantages.

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