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00:00 [MUSIC PLAYING]
00:03 Thanks for tuning into Talking Point.
00:11 I am Neeraj Shah, and our guest today
00:13 is Vikas Khemani, founder of Cardinal Asset Management
00:15 and Advisors.
00:16 Vikas, great having you, as always.
00:18 Thanks for taking the time out.
00:19 Hope all is well.
00:21 Yes, hi, Neeraj.
00:21 Good to see you.
00:22 Always great to chat with you.
00:24 Thank you so much.
00:25 The feeling is entirely mutual, Vikas.
00:27 And would love to get your insights, Vikas,
00:28 into some developments that have happened recently
00:31 before we move to some of the fantastic newsletters
00:33 that you guys have written.
00:34 But BOJ has made a tweak, much anticipated,
00:38 but the tweak has finally happened.
00:39 We are on the cusp of another Fed policy as well.
00:43 Central banking action, how crucial
00:46 would this be in the near term, particularly the BOJ move,
00:50 which has already happened?
00:51 I think there's no denial that.
00:58 I haven't really sort of tracked what's happening.
01:02 But more importantly, I think if you see,
01:06 we've had it already indicated that there
01:10 will be a cut over this course of this year.
01:12 Two of them in this space are peaked out,
01:14 and it's really a matter of time how it sort of comes down.
01:17 And I think we will have to see in that context.
01:23 But see, as far as Japanese debts are concerned,
01:26 they have been in a very, very low trajectory
01:28 for a very, very long period of time.
01:30 So I will agree, as well as Japanese economy
01:32 is recovering after a very long time.
01:35 We've seen a lot of positivity on that.
01:38 But I would say that, globally speaking, my own view
01:41 is that US rates are coming down.
01:44 It could be delayed.
01:44 It could take time depending on data dependency and all.
01:47 And that will determine a lot more global macro factors,
01:50 because I think that's where a lot of rise
01:53 had happened in the last couple of years.
01:55 I wouldn't think that a very, very big impact
01:58 would come from Japanese interest rate movement.
02:00 This is only a small tweak.
02:02 So I don't think that will have a major impact, per se.
02:07 That's my view, not that I'm a big expert
02:09 on the global macros.
02:12 I mean, you're being modest with us.
02:14 But here's my second question, therefore.
02:16 Do you think a delayed Fed cut cycle
02:21 would have a material impact on how flows or multiples behave?
02:28 Or do you think that now, by virtue of the fact
02:31 that the last two or three months,
02:33 the data and the commentary has not been very dovish,
02:35 that some of it is baked in?
02:39 Of course, if, let's say, Fed kind of delays
02:43 the interest rate cut, it would have some impact on that,
02:45 because the emerging market flows are directly
02:48 linked to the cut in this interest rate cycle.
02:51 The good part is that the interest rates are peaked out.
02:54 Other interesting part is that Indian currency is not
02:56 expected to depreciate.
02:57 To that extent, there is a kind of natural hedge
02:59 available on that.
03:00 So flows should start trickling in.
03:02 I do believe that '24 calendar year could
03:04 be a good year of flows.
03:06 Having said that, any delay in the Fed cut
03:08 can have an impact on the flows.
03:11 OK, because now you've been constructive on the Indian
03:15 growth story and the implications of it
03:18 for markets for a while now.
03:20 It's played out really well.
03:22 The last few days, we've seen some bit of moderation
03:25 in the risk appetite, particularly
03:27 towards the mid-caps and small caps, but even the larger areas.
03:29 Now, my question to you is, while India growth is--
03:34 let's assume the GDP growth stays,
03:36 as most people are predicting, as the RBI prediction of 7%
03:39 as well, could equity markets deviate a little bit
03:42 in this year of some bit of global policy uncertainty?
03:46 We have our elections as well.
03:48 And the fact that valuations are also nothing to scoff at.
03:54 Absolutely.
03:55 I mean, it's very natural that when
03:57 you have a year like '23, which was a stellar year
04:00 across the board, especially mid and small caps,
04:03 it's a very natural thing for it to consolidate.
04:06 And because you can't have these kind of returns very often.
04:12 But having said that, these are the kind
04:15 of years of consolidation.
04:16 These only are the years when you kind of construct
04:19 your portfolio.
04:20 That is where you get good quality companies
04:22 at a reasonable valuation.
04:23 I mean, I have no doubt on that in my mind.
04:25 So while I think from '24, you can keep your expectations low,
04:30 at the same time, this is also a great year
04:32 to build your portfolio, is how I would see.
04:35 There could be sideways movement.
04:36 There could be some more correction.
04:37 When I'm saying this, I don't expect a deep correction
04:40 in the market.
04:41 I feel deep correction will come only
04:43 if there's an unexpected 3, 4, 5 sigma event, which
04:47 you can't model for.
04:48 But otherwise, the normal correction
04:50 happens only because of two reasons, liquidity and leverage.
04:53 And both right now are very well placed
04:55 as far as the Indian markets are concerned.
04:57 The leverage factor in the market
04:58 itself is also very, very low.
05:00 The margin funding book of collective market
05:02 is very small, given the size of the market capital.
05:05 So I think it is leverage which generally
05:07 exaggerates the market for us.
05:08 So I don't see a major deep cut in the market.
05:11 At best, I think probably I save and accept
05:13 for some big unexpected event.
05:15 I think it will kind of trickle.
05:17 It will kind of remain sideways.
05:18 Consolidation, time correction might happen.
05:20 And that's a good thing to happen in any bull run.
05:23 You might think that I invoke IT in almost every conversation
05:26 that we do.
05:27 Not that your view changes, because it shouldn't change
05:30 quarter to quarter.
05:31 But I'm inclined to ask this to you because of the deal that
05:34 has happened in TCS.
05:36 And Tata Sense value in TCS are slightly lower level
05:38 than the buyback price, one.
05:40 Two, there were brokerage notes out
05:42 which speak about the commentary that select IT companies have
05:45 given at various investor forums,
05:47 including the city note on emphasis
05:48 when the company is saying that there's absolutely
05:52 no change in the demand environments
05:54 in the start of the quarter as well.
05:55 Because for somebody who is wanting
05:57 to put fresh money to work, is it a tad too early
06:01 to bet on IT?
06:04 I mean, for money that is already there, which is fine.
06:06 But for somebody who is wanting to put fresh capital to work,
06:08 are there better options than information technology
06:10 currently?
06:12 It really depends on your time horizon.
06:14 Of course, there are better options than IT as well.
06:16 So I'm not saying that there are no better options.
06:18 I mean, probably pharma could be very interesting one
06:20 as compared to IT.
06:21 Just if you look at the growth perspective
06:22 and the change in the entire environment is happening.
06:25 So you can always look for alternatives.
06:27 I'm not saying that.
06:28 But when you construct a portfolio,
06:30 it's a balance of pretty much a lot of factors.
06:34 And IT definitely offers a good hedge good.
06:36 And as far as we are concerned, we've
06:38 been very constructive on especially
06:40 the middle small cap ITs where the growth
06:42 prospects are very high.
06:43 We are very constructive on IT companies
06:45 which are focused on ER and D space.
06:47 They're very focused on companies
06:48 which are more focused on the product space.
06:50 So that is where I think the real growth lies.
06:52 So IT can't look at it with a broad brush.
06:55 You have to even-- while the sector is
06:57 growing at a moderate growth, within that,
07:01 there are many companies that are growing at 20% plus.
07:03 And it is our job to identify those companies
07:05 and kind of bet on that.
07:06 And if one is able to find that, whether fresh capital
07:09 or existing capital makes no difference,
07:11 you can definitely put it.
07:12 Because IT continues to remain an interesting play even
07:15 over the next 8, 10 years.
07:17 And IT will pivot.
07:18 It's not that current IT firm will keep on--
07:20 I mean, IT today is very different
07:22 from what it was in Y2K time.
07:24 So I think every time that a transition in technology
07:26 happens, there's a pivot which happens.
07:28 Most IT companies do that.
07:29 And today, they are pivoting towards AI and related
07:31 technology apart from cloud digitization and cloud
07:35 migration.
07:36 So this sector will keep evolving.
07:38 But I have no doubt in my mind that sector will be relevant.
07:40 It will grow from here.
07:41 It will continue to kind of deliver good value creation.
07:44 So sorry, I just heard you mention ERD.
07:47 People also talk about enterprise businesses,
07:49 which is a small subset, but doing well.
07:51 And then there is the larger IT services chunk.
07:53 So is IT services still in the fray?
07:57 Or are ERD and enterprise solutions parts of tech
08:03 a better aspect?
08:05 It's still in the fray.
08:06 I mean, IT services are not going anywhere.
08:08 Within that, I think ERD will be faster growing sort of part.
08:12 So that's ultimately, as an investor, what we are changing.
08:15 We are changing basically growth and growth
08:19 at a reasonable valuation.
08:20 So wherever you find this, and especially in any sector,
08:23 growth is what determines the outcome.
08:25 So if you're able to get a reasonable valuation
08:27 at a good growth--
08:29 and I think sector by and large, governance is not an issue.
08:31 Most companies are good.
08:32 So if you find a good business with a good traction
08:35 and the growth, you go for it.
08:36 And those are the kind of companies,
08:37 especially ERD as a space, is growing faster
08:39 than the conventional IT services.
08:42 And that's the reason most of the place we have
08:44 is to have a larger portion of that, which
08:46 is driving both profitability and the growth.
08:49 And conventional model also continues to do well.
08:51 It's not that it's under big stress and it's not doing well.
08:54 That also continues to do well.
08:55 So ideally, where you get both combination or accelerated
08:58 in form of ERD, you go for that.
09:00 Got it.
09:02 Before we take that break, since you mentioned health care
09:05 as being a sector that could have a good run to--
09:10 I mean, not verbatim, but you said something like that,
09:12 maybe better than IT are the prospects of health care.
09:15 It's a wide bucket now, Vikas.
09:17 What within this do you like the most?
09:19 Because when you joined us in the opening week,
09:21 you were of the view that CDM or CRO seems
09:23 to be set for multi-year growth.
09:25 Is that the first amongst equals?
09:29 I'm more specifically meant for pharmaceuticals.
09:31 And of course, health care has a wider listing,
09:33 including hospitals and diagnostics and all.
09:38 The pharma piece has reasonably good links.
09:41 It's come out of a long time of hikers.
09:42 And I think we are seeing demand environment in the US
09:45 changing significantly.
09:46 We are seeing CDMO and CRO getting, in my opinion,
09:49 a decade shift from China plus one.
09:53 Of course, right now, because of the biotech funding drying up,
09:56 it's been a bit slow.
09:58 But if I take a 5, 10-year view, I
10:00 think just like how IT services grow,
10:02 you will see CDMO and CRO places,
10:04 companies will grow over the next 10, 15 years.
10:06 And I won't be surprised if there are many CDMO and CRO
10:09 companies, which could be 2, 3 lakhs market cap,
10:13 when times to come.
10:14 And this will happen in front of our eyes.
10:16 So again, it depends on the time horizon, portfolio location.
10:18 It's a combination of all.
10:20 But we remain very positive on pharma as a segment,
10:22 and CDMO and CRO as a sub-segment of that.
10:25 OK.
10:25 Because the PSU move has taken a bit of a breather.
10:31 I wouldn't say it got derailed, but it has certainly
10:32 taken a bit of a breather.
10:33 It was the toast of town until recently.
10:36 How are you thinking about it?
10:39 Absolutely, Nikhil.
10:41 Just like how you see that after such a sharp run--
10:44 last year was a stellar year for you, PSU.
10:46 After such a sharp run, it is very natural for it
10:49 to consolidate.
10:50 And in case of some PSUs, I think probably a bit of an
10:54 overstretch also happened.
10:56 So again, it is not PSU.
10:58 You can't brush it to the ballpark basket.
11:00 But there are PSUs where still there is a lot of value.
11:02 Of course, some part of the deep undervaluation went away.
11:05 Today, they are in a favorable zone.
11:06 But I guess as the transition and transformation continues
11:10 to happen, I think we will see more valuation
11:13 re-rating happening.
11:14 So I would say the last part of the run is done.
11:16 And now, we will mostly track the current earnings growth
11:19 as Indian economy keeps growing.
11:21 So also, you have to look at sector specific.
11:24 You really can't-- each PSU in a different sector
11:27 will have a different lever for growth and delivery of returns.
11:32 We've been very, very bullish and positive on PSU banks.
11:35 We haven't sold any.
11:36 We continue to remain invested because we
11:38 think that will do well.
11:39 Power sector, we've been quite bullish.
11:41 We continue to hold.
11:42 So we haven't really sold anything
11:43 because I think this kind of consolidation,
11:45 correction, temporary things will come in every market cycle.
11:49 And we would like to just continue to hold and play out
11:52 the full story.
11:54 In some sense, is the market getting unduly worried
11:58 about what's happening to all marketing companies,
12:02 moat around the business?
12:03 Looks OK.
12:04 But yes, there has been some intervention and some uptick
12:06 in crude prices.
12:07 But the de-rating has been very significant.
12:10 To be honest, we haven't really bought any of the oil market
12:12 and marketing.
12:13 That's why I'm saying that you have
12:15 to look at different sectors.
12:16 We do well.
12:17 We think there's a good management control
12:19 on the field of the company and the sectoral tailwind.
12:24 Unless we are convinced about these two,
12:26 we won't buy, and specifically in the PSU segment.
12:28 In any sector, any ownership matter,
12:30 but especially in PSU segment.
12:32 Especially oil marketing company,
12:33 you know that it's not being--
12:35 the CMD of oil marketing company doesn't control the outcome.
12:41 There are lots of variables.
12:42 So we have never taken a bet on that.
12:45 Got it.
12:46 Because we are going to be talking at length
12:48 about this on a separate show.
12:50 But the headline of the article or a note
12:54 that you've written recently is intriguing.
12:57 The India story rebegins, Bharat Amrit Kaal.
13:00 What are you trying to say from an investing perspective here?
13:05 I think very often we get a question that,
13:07 what is happening with the valuation?
13:09 What is happening to the markets?
13:10 So when you zoom in, you're worried
13:12 about here and now short term.
13:14 In this note, we're trying to say when you zoom out,
13:16 your perspective can be very different on the Indian story.
13:19 You can look at a very, very different aspect.
13:21 And if you are zooming out and seeing, let's say,
13:23 next 10, 15, 20, 25 years, your perspective
13:26 about how to look at equity investing changes completely.
13:29 And this is what we're trying to say here in this note.
13:33 As you know that India is embarking on a journey
13:35 to become a developed country by 2047, which
13:38 means that we will have over $29 to $30 trillion of GDP,
13:42 which is between 7 to 8x from here.
13:44 So what are the possibilities as it happens?
13:46 Why we think it can happen?
13:48 And in India, many changes have happened.
13:50 And to give you an idea, today's corporate profitability
13:54 at a country level is $150 billion.
13:56 In 2001, it was $8 billion.
13:58 And despite all kind of uncertainties in the last 22
14:02 years, Indian corporate profitability has become 20x.
14:06 Now, this corporate profitability
14:07 will go from $150 billion to $1 trillion by 2035.
14:11 It means our market cap will be between $18 to $20 trillion.
14:15 It means our NIFTY will be anywhere in and around $1 lakh.
14:18 Now, if this is the kind of journey
14:20 you have next 10 to 12 years, then you
14:23 don't really worry about what will happen next quarter.
14:26 Not to say that--
14:26 I mean, our job is to keep an eye open.
14:28 But you don't really then try to say,
14:30 oh, let me book a profit and come back and buy 5% cheaper.
14:33 So if you look at this perspective of over next 10,
14:36 12 years, massive amount of wealth will get created.
14:39 And you just focus yourself on participating in that
14:41 without getting bogged down by the short-term intermittent
14:44 choice, which is there always in the market.
14:46 And this is the perspective we are trying to build.
14:48 Also, we are trying to say that what has changed in India?
14:50 Why do you think it's possible this time around?
14:53 India has always been a promising country.
14:54 But that is where we are seeing the big mind shift
14:57 change that happened in India.
14:58 And those mind shifts change are what are driving.
15:01 Number one, which I always say that India as a country
15:03 has moved from incremental mindset to exponential mindset.
15:06 Today, we are executing everything at a rapid pace,
15:10 as of yesterday kind of mindset.
15:11 This is a very big change, very big departure from the past.
15:14 Likewise, India doesn't operate from a constrained environment
15:17 anymore.
15:17 We're saying we have resources for everything,
15:19 and we don't act like a poor country anymore.
15:21 Our mindset has changed from the big time on that.
15:26 Like that, there are many six, seven tectonic shifts
15:28 which have happened, which we think
15:30 will make sure India will reach to that size and scale
15:33 over the next 20, 25 years.
15:34 At least our conviction on that is very high, as we analyze.
15:38 And that is very well articulated
15:39 and noted in a very detailed manner,
15:41 that what are the big departures from the past,
15:43 what are these tectonic shifts, and what will drive
15:46 the future of the country.
15:49 So we think that we are in a massive wealth creation
15:52 cycle over the next 10, 12 years.
15:55 Of course, over 25 years, but the acceleration
15:57 will be far, far, far more higher in the next 10, 12 years.
16:01 So that is one we should look to capture,
16:03 rather than worrying about what will
16:05 happen over the next three months.
16:07 So this is our whole perspective.
16:08 What we are calling is in Bharat Amrit Kaal period,
16:11 what will happen.
16:13 And Vikas, just before we wrap up, there's 60 seconds left.
16:16 But there are investing implications
16:18 for this in a meaningful way.
16:19 You're launching a portfolio on this as well.
16:22 Yes, absolutely.
16:24 So one is that opportunity we are showing,
16:26 and then how do we capture it.
16:27 Around that, we have a fund called Bharat Amrit Kaal Fund,
16:29 which we are launching.
16:30 And you will see that coming out soon.
16:34 And so how do you capture this massive wealth creation
16:36 opportunity ahead of us?
16:37 And that is what we'll be talking about.
16:39 OK, well, Vikas, let's get you on a show
16:41 to talk about this, because our viewers can certainly
16:43 benefit, even if they can't invest in your fund.
16:45 If they can't, they certainly benefit from the conversation
16:48 that happens around it.
16:49 So looking forward to that.
16:51 But thanks so much for joining in on Talking Point today,
16:53 Vikas.
16:54 It will be my pleasure.
16:55 Thank you very much.
16:56 The pleasure is ours.
16:57 And viewers, that's all that the time
16:59 we have for this edition of Talking Point.
17:01 Thanks so much for tuning in.
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