Markets

Opportunity in Equity In Post Covid World with Vikas Khemani

“People will consume. Migrant workers will come back to factories in 3-4 months’ time. Larger companies can gain market share and small companies will lose market share. But demand will come in each and every sector in a matter of time.”


In an insightful webinar with Mr. Vikas Khemnani last week, we discussed about current scenario and way forward for the Indian economy and companies. Below are the key takeaways from his talk along with responses from the Q&A session of the webinar focusing on investing in post-Covid times.

Key Takeaways:

  • There are two aspects to it. One is health crisis and second is economic crisis.
  • As far as the health crisis is concerned, a lot has happened a lot has been talked about my personal views is that we have seen probably worst, the peak of the health crisis already occurred, and it’s settling down a lot more.  Actually, people are getting used to it.
  • Second aspect of that is an economic crisis, when the world is down the first time, functioning with only 30-40% capacity. And, with $90 trillion of world GDP, the losses will be anywhere between $8-$12 trillion.
  • However, response to current scenario next 3-4 months can be volatile period. Regarding demand, India is a young country. We all consume. We don’t have to see macro picture or need any experts, you just go and see, are you consuming or not? Are people around you are consuming or not? In 2016 at demonetization time, everybody created horror scenario. But things bounced back. People will consume. Migrant workers will come back to factories in 3-4 months’ time. Larger companies can gain market share and small companies will lose market share. But demand will come in each and every sector in a matter of time.
  • View on government stimulus package providing liquidity to MSME of Rs 3 Lac crore additional loan is a very good initiative. MSMEs, once comes out of lockdown, would not have working capital to restart. With this they can restart the business and make a profit within 6-12 month. so, I would say it’s a good start, but my worry is on implementation part. Lot of the reform process is happening at state level. It is good for the new manufacturing. Overall, its good start and they will follow through more.Opportunity in equity in post Covid World: – Sector wise view:
  • Pharma: Pharma sector did not perform well because of two reasons – regulatory overhang and pricing. The international business was more impacted than domestic demand. The companies invested lots of money and were not able to sell. Therefore, they were making losses, coming from their international businesses. This has changed. International business started making money, so now the sector is seeing a revival.
  • IT:  Most of the companies postponed their 2 quarter expenses because most of the companies are thinking about their survival this year. So, this year could be difficult for IT but next year IT will see a bounce back.
  • Telecom:  is in very good stage currently as we are consuming more data, industry is being consolidated. Vodafone is not dying as the government cannot afford to let it go and allow a monopoly situation in the market.  Telecom stocks will eventually do well, telecom industry will have to change. They will come out with more ways to monetize themselves.  Reliance Jio is on a transformation journey.
  • Power: Power is a sector which government will have to revive, if they want some manufacturing to shift from China.  Government is very serious about a large manufacture setup in India, that’s why they have given 90,000 crores to SEBs. You should watch out this sector, it will give you the opportunity.

Q&A from the Webinar

Q- How do we look at paint stocks? People like Saurabh Mukerjea say that good companies can be bought at any price. Why are paints so overvalued?

Vikas Khemnani: In India we have very few good companies and managements. If you can find them, they are not cheap, because company is delivering consistently over a long period of time as long as growth comes in so they remain expensive. My personal bias is to look at somewhere middle ground where we can see growth and more scope for valuations to sustain. Good quality company will always be expensive and deliver good return, in my opinion. HDFC bank has always been expensive.

Q- What’s your outlook on the stimulus package announced by government? The markets are not taking it in a positive stride and it seems that actual stimulus is only 1.5-2% of GDP in actual terms rather than 10% announced by government.

Vikas Khemnani: In politics there are always realities and projection. We have seen it twice that the government projects bigger than what they are actually doing. In my opinion, providing liquidity to MSME of Rs 3 lac crore additional loan, it’s a very good initiative. MSMEs, once they come out of lockdown, would not have working capital to restart. With this they can restart business and make profit within 6-12 month. It’s good that Rs 3 lac crores go in the economy asap. So I would say its a good start but my worry is on implementation part. Lot of reform process are happening at state level. It is good for the new manufacturing. Overall, its good start and I am sure they will follow through more.

Q–  India’s story is consumption and demand. Migrant workers moving back to their hometown. How will India create demand in auto real estate where there is maximum job creations? Although Q1 is fully vanished for most of the sectors so, after Q1 results market will be bottom out or has it already bottomed out?

Vikas Khemnani: I think next 3-4 months can be volatile period. I would still believe that we will see a weak market in 3-4 month. Regarding demand, India is a young country. We all consume.  We don’t have to see macro picture or need any experts, you just go and see, are you consuming or not? Are people around you are consuming or not? I believe in 2016 at demonetization time everybody created horror scenario – this will happen, that will happen. But things bounced back. People will consume. Migrants workers will come back to factories in 3-4 months’ time. Larger company can gain market share and small company loose share. But demand will come in each and every sector in a matter of time.

Q- You have a great collection of books. Can you recommend a few good books on investing and in general?

Vikas Khemnani: I love the classics. My personal favorites are “Poor Charlie’s Almanack” by Charlie Munger, “Intelligent investor” by Benjamin Graham and “What It Takes: Lessons in the Pursuit of Excellence” by Stephen A Schwarzman.

Q- What about power sector and petroleum sector, infrastructure sector power?

Vikas Khemnani: In power interesting thing will happen. Power is a sector which government will have to revive if they want some manufacturing to shift from China.  Government is very serious about large manufacture setup in India, that’s why they have given ₹ 90,000 crore to SEBs. You should watch out this sector, it will give you opportunity.

Q- Will pharma sector see more upside from here?  

Vikas Khemnani: Pharma sector did not perform well because of 2 reasons – regulatory overhang and pricing. The international business was more impacted than domestic demand. Company invested lot of money and was not able to sell. So, they were making losses, coming from their international business. This has changed. International business started making money, so now the sector is seeing revival.

Q- Please share your view on IT sector and telecom sector.

Vikas Khemnani: IT Sector good in IT is technology. There is a big difference in 2008 crisis this crisis. In 2008, suddenly crisis happened, and everybody cut their expenses, including IT, which that time was a good thing to do. This time it is a much different situation.  Most of the companies postponed their 2 quarter expenses because most of the companies are thinking about their survival this year. So this year could be difficult for IT but next year IT will see a bounce back.

Telecom sector is in very good stage currently. We are consuming more data, industry consolidated. My personal view is Vodafone is not dying as government cannot afford to let it go and allow a monopoly situation in the market.  Telecom stocks will eventually do good, telecom industry will have to change. They will come out more ways to monetize themselves. I think Reliance Jio is on a transformation journey.


About Vikas Khemnani

Mr. Vikas Khemnani is the founder of Carnelian Capital, an investment management firm based in India. He was previously associated with Edelweiss as the Head of the Wholesale Capital Markets and was earlier working as the CEO of Edelweiss Securities Ltd, where he spent 17 years incubating & building several businesses to leadership including Institutional Equities and Equity Research. He is a Fellow Member of the Indian Institute of Chartered Accountants of India and Chartered Financial Analyst from CFA Institute, USA. He has served as a member of the CII National Council on Corporate Governance, FICCI Capital Markets Committee and was an invited member at the Executive Council of Bombay Management Association. He is a member of Young Presidents Organization (YPO), a global forum for entrepreneurs and CEOs and was awarded Young Professional Achievers Award for the service sector by ICAI in 2014.

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