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Markets are keeping you busy. Nothing has been happening in the market for the last month.
Prashant Khemka: Yes, it is business as usual. But no, it is a very exciting time for all of us to be in. There’s a lot of interest globally as well as amongst domestic investors in the equity markets. So, it is always fun to be deep in the trenches. So, very happy to be here though, will be more regular in the markets going forward.
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Look forward to that. You have just managed to create such a master franchise. Some of the stocks which you have picked up over the years, have been so classic that everybody wants to understand your thought process. Let us start with the very basic question. We have seen a bout of volatility, a sizable correction in small and midcap stocks. Is the market looking healthy enough?
Prashant Khemka: Yes, I think so. As a market veteran you know that if you go through a longish period without volatility, the market becomes all the more susceptible for a bout of volatility and what we saw in March was precisely that, in my view.
Since March of last year, for almost 12 months, the market has been more or less moving in one direction, particularly in the smaller cap segments. So, this volatility that we saw earlier this month is very much part and parcel of the equity market business as usual. I think of it as very healthy and if we keep having such corrections at regular intervals, then it takes some of the froth out of some segments of the market. I do not think the overall market was unfairly valued or out of line. But in any market, there are certain pockets which tend to get ahead of themselves and corrections help bring them back in line with the rest of the market.
You have run a portfolio which in a sense has centred around banks, that is one wheel. Most of the AMCs have a large exposure to banks. But the odd one out, which is a standout, is your exposure to some of the consumer staples or consumer discretionary stocks like Titan, Nestle. These are expensive stocks and you have owned them for years now. Why is that?
Prashant Khemka: I am not going to specific names, some of these could be classified as discretionary, some are classified as staples and vice versa. But in our portfolio, at all times we have a very healthy mix. By design, we have a very balanced composition across all sectors. Unless the theme is running some specific niche strategy, in most of our strategies, you will find a good balance across all sectors. So, we do not take any top-down sectoral call and we try to limit any bottom-up biases that are created from a sectoral perspective.
So, you will always find in our portfolio, consumer staples, technology, discretionary, materials names, banking and financial, real estate, and healthcare stocks across the board. Having said that, yes, there are certain sectors in which we have historically found more bottom-up ideas and they are private sector financials is one of them and technology and healthcare are other areas and consumption as well. But we have a lot of ideas in the industrial sector as well. So, while some of the largest names might come from a set of sectors, what you cannot ignore is the longs that we have. Beyond the top 10, you might find a lot of ideas from a variety of other sectors. Some of the names that you highlighted are maybe the largest names from some particular sectors, but beyond the top 10, you will find a very healthy balance from across all sectors. And they will be at all times. The names may change, but the sector representation pretty much is at all times, with some exceptions.Given a commentary which suggests that over the next 12 to 18 months White Oak is aiming at opening about 100 branch offices across the country. How is the asset management and related plays looking? You have some AMC stocks in your portfolio. After underperforming, they have shot up. So, what is the right way to play the asset management structural story here?
Prashant Khemka: Aashish Somaiyaa, who is our CEO, is a lot more in charge of the domestic AMC business and distribution strategy. I would not be able to do justice to the question and might, in fact, not correctly characterise what he is doing. But yes, I am aware that they have a very deep distribution strategy and I am aware that they are already up to approximately or close to 50 branches and the idea is to over time build the presence across the country and deeper beyond the B30 markets as well.
That was just a reference point, what I meant was that as somebody who has seen the capital market evolution of India and now the story is becoming much more structural, in your view, what is the right way to play because there is a bouquet of stocks available?We have a bunch of capital market related service providers or platforms, we have a bunch of AMCs. So, from your vantage point which look the best?
Prashant Khemka: See, we as a team look at all these businesses, each one of them. We often say that and tying to the earlier conversation, we were talking about sectors, you are talking about sub-segments within a sector or within an industry which is capital market intermediaries. So, we look for areas where there is a strong capture of value creation. I cannot go into specifics, but there are capital market intermediaries which enjoy a very strong market position, highly profitable and those are some of the names that we have owned for a considerable length of time and have very large positions in our portfolio.
We also continue to evaluate asset management companies. At this point, I am not sure that we have any one of those in the AMC portfolios, certainly in offshore portfolios as of now we have very limited exposure to the asset management space, but we do have distribution companies, wealth management companies, as well as some of these other intermediaries which service the asset managers and wealth managers. Unfortunately, cannot talk about specific names as you can well understand.
So, let us understand the importance of elections. While markets are not worried about what the election verdict would be, do you think from a market standpoint, more than the election, the Budget is of importance and we could see a swing move this way or that way depending on what we hear?
Prashant Khemka: I think that the next major event to look out for is the Budget in July. The election is also very important, particularly from a foreign investor’s viewpoint. The domestic investor base has already concluded and acted upon that conclusion regarding elections. But amongst foreign investors, there is still a large segment which wants to see the event behind us. They have prepared or have been preparing to act, but they want to see the event behind us before taking action.
So, putting the event behind on June 4th would be an important milestone if you will, not taking anything away from that but beyond that I think the budget of July would be very keenly watched to see what the priorities of the next government would be, how aligned they are to the last few years, whether they take those policies forward with greater momentum or is there any stalling and what implications that would have for long-term economic growth as well as capital markets. So, we very much agree that the Budget in July is now the next very important event for the markets.
You hold too many manufacturing or so-called energy transition names. Your top holdings do not include a great manufacturing name, excepting L&T. I hardly see any pharma names. Are you staying away from these so-called new energy manufacturing themes?
Prashant Khemka: Not at all and I would strongly encourage you to look at the entire portfolio and not just the top 10 names, because historically there would not be much difference in the top 10 names. They will come from a certain set of sectors. I doubt at any point in time you will find industrial names amongst the top 10, leave aside one or two exceptions. But once you go down to the next 25 and the 25 behind that, our teams have tended to always have a fairly large number of names and that is a topic that I have talked about umteenth number of times.
Not to bring that up here, but if you add up those names midcaps or smallcaps are not likely to be in the top 10 names, but a lot of the industrial names, let us say capital goods names or various other sectors, healthcare or many other sectors, they would feature in very good measure beyond the top 10 and collectively when you add up, they represent a sizable chunk of the portfolio and some of the greatest alpha opportunities.
In India, alpha opportunities are available across market cap spectrum. But it is a known fact, including our own performance and empirical evidence that we have about, our own performance suggests that the richest by magnitude of alpha opportunities reside in midcaps and also in smallcaps. These sectors – industrials, materials, consumer discretionary – are very rich in mid and smallcaps whereas banking, IT are rich across large, mid and small. Yes, we have a greater exposure to some of these sectors in mid and smallcaps, whereas largecaps are more dominated by the financials and the consumer staples and so on.
Where could we head in the next three years in terms of your internal return assumptions? If the starting point is, let us say, 1st of April 2024, three days from now and one is looking at three to five years, do you think in a classic equity diversified largecap fund like yours, there is a strong probability of a 12-15% return even after the recent run up? Do you think there is an 80% probability of this?
Prashant Khemka: I would expect that. So, from the market, our expectations are usually not very different from time to time. Over the next three, five, ten years, it is like if you flip a coin 100 times, your expectation would be 50 heads and 50 tails and that expectation would not change, would be the same 20 years ago, 10 years ago, today and 20 years from now.
So, our expectation from the market is somewhat similar, that the market return should be nominal GDP plus dividend yield. Nominal GDP over the next 5 to 10 years can be expected to be low double digits, 6% to 8%, 6% to 7%, if you want to be more optimistic, 7- 8% real GDP growth and a deflator of 4% or so. So, call it 10% to 12% nominal GDP growth rate, add to that dividend yield, remove taxes you will get back to about 10-11% kind of return from the market. And I would expect our team to generate alpha commensurate with what would put them in the top ranking of the peer group, which would then suggest somewhere closer to low to mid-teen returns as you pointed out from our team. But market returns of low double digit and low to mid-teen from the team would take it to amongst the top ranking of peer group.
So, hypothetically, if you get a call after this show, Prashant bhai watched you on ET Now, loved your interaction, here is my cheque, you are free to invest for next three years. No question asked. I am happy to digest a 15-20% volatility, but I am looking for absolute return. If you get a call like this, what would you do? What would you indicate to that client?
Prashant Khemka: If it is indications in terms of return expectations, I will say, market return would be the same across large, mid, small. There is no evidence from anywhere in the world empirically speaking that smallcaps outperform largecaps or vice versa over an extended period of time and I believe that going forward, you have to expect the same return from large, mid, smallcaps. Having said that, alpha opportunity is higher in midcap and smallcap stocks.
So, I would recommend that if you are happy to digest volatility, I would recommend a midcap fund as there is the best return. Obviously a midcap fund also has the ability to invest in smallcap to a considerable extent and compared to a market return of low double digits, more of a mid to high-teen returns compared to the standard all-cap fund where I see low to mid-teen returns, I would expect in a midcap fund, more a mid to high-teen returns over the next five years or so.
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