Why Vikas Khemani is positive on both banks and IT stocks now

“Neither are we trimming, nor are we adding to IT positions. We are just holding on to that and I do not know whether it is 6 months or 12 months, but down the line when the US environment settles down the Fed starts talking about interest rate coming down, that would be the time to add IT in a big way. So, we will be looking for an appropriate moment and time to add our position; right now, we are just holding on,” says Vikas Khemani, Founder, Carnelian Capital Advisors

Khemani further says that it is never IT versus bank for them. One always plays what you think has a growth profile and right now, we are significantly overweight in the banking sector because credit growth has just started and we have long legs to do so in the next 18 to 24 months. The banking sector looks pretty decent. We continue to do that.


There is a development brewing over Aditya Birla Capital and they are selling off one of the insurance arms to Samara Capital. There’s a leadership change as well. Does it appear to be a part of an overall strategy of hiving off non-core business and bringing focus back because they could not scale this business up over the last 10 years. How does this news look to you?
We own the stock. Here's a full disclaimer that we like the stock and we typically look for companies with a good business model and whenever there is a change of leadership, we believe that leadership can put the growth trajectory back on track. Like you said, in the past, the company has not gone anywhere and we believe that the new leadership is capable of putting this platform into the new orbit and that is where institutional ownership is almost negligible or none; valuations are far lower than most of the competitors and players.

So, that is where risk reward is and we think two-three years out, 25% to 30% growth is possible and whatever transaction we saw is a part of the ongoing strategy of consolidating and focussing on their core areas and selling off non-core business. That is what every leader does when somebody gives the organisation a new direction based on the strategy. I see this event as a step in that direction.

What are you doing incrementally with your IT positions? You have exposure to HCL Tech, LTIMindTree, Infosys, etc. Are you adding on to them, trimming your positions?
We are just holding on to that and right now, neither are we trimming, nor are we adding. We are just holding on to that and I do not know whether it is 6 months or 12 months, but down the line when the US environment settles down the Fed starts talking about interest rate coming down, that would be the time to add IT in a big way. So, we will be looking for an appropriate moment and time to add our position; right now, we are just holding on.

About 18 months back, you liked banks but after that, IT has made a top and corrected quite a bit as have a few banking names. You have been in the market for a long time. It has always been IT versus banks. What would you want to buy now?
It is never IT versus bank. You always play what you think has a growth profile and right now, we are significantly overweight in the banking sector because we think credit growth has just started and we have long legs to do so in next 18 to 24 months. The banking sector looks pretty decent. We continue to do that. In IT, we were significantly overweight and became equal weight and at some point in time, we might look to become overweight. Right now, we have a positive view on both. We like banking more. I really think that if the market is going to rally from here, the banking sector is the one which will take the lead. A large part of the heavy lifting will have to be done by banking and industrials.

Within banks, are you sticking with ICICI Bank as your top bet or expanding the view a tad bit there?
We have ICICI Bank as our top bet. We have been holding that position for the last three-and-a-half-four years and we continue to do that.

ICICI Bank is of course in a different league now. When you talk about the banking sector, you can also include PSUs and NBFCs. Any of the other names or smaller sectors within banking that you like? Microfinance for example, if you do not want to give names. Are there any smaller banks that you like?
Not really, we are not a very big fan of smaller banks because the business has shifted in favour of large financial services and large players, be it NBFCs or banks because raising the liability side is equally very important. Also investment, technology are very important. Both of them remain the domain and the edge is in favour of large players. We typically stay away from microfinance, small finance banks or smaller banks for that matter. Large banks or NBFCs are what we prefer.

What do you make of fee-based companies like life insurance, AMC business, where capital requirement is less and fee-based earnings are high? Are you a fan of that? A lot of changes are happening from IRDA. Earlier, we saw some changes in mutual funds as well.
You like every business, you monitor, there is no question on that because non-credit financial services are also a very large emerging growing area. Within that, there are different players. AMCs have been going through different challenges for the last few years. We still think that there are more challenges right now, especially for the larger AMCs.

The insurance business again is going through a significant change. We are expecting a unified license coming through. Tax changes happened. So, certain headwinds are out there. We right now do not own anything but we keep evaluating and will get some point in time when the risk reward is in our favour. One constantly keeps looking for these franchises because they are all very credible franchises with high ROEs. The only thing right now is that the growth part is something you have to take care of. Stocks typically do well when growth comes and right now, in most of these franchises growth is becoming a little bit of a challenge given whatever changes are happening. We will look for a moment when we get a lot more comfort around the growth and that is where we will get in.

Let us talk about midcap engineering names because the Siemens, ABB variety are often called expensive and they do not correct a whole lot also, even in market disruption times. But, does this pocket of midcap engineering interest you beyond what you own?
India is in a massive capex cycle and that capex cycle is going to last over the next four to five years and when this kind of capex cycle happens, most of the engineering companies do well and today most large and midcap companies are reasonably well placed.

So, in any such correction, one has to study the business model more, management and everything else but we like that space a lot and we constantly keep on evaluating companies in there. Many companies today which are small or midcap companies will become fairly large because that is a very promising space at least over the next three, four, five years.