Vikas Khemani's 3 stock picks for Samvat 2078

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IT has done very well over last one year and many stocks have become 3x to 5x from their lows and demand environment is very robust and has changed structurally from the next three to five years’ perspective, says Vikas Khemani, Founder, Carnelian Capital Advisors

What are the learnings from this year and should people extrapolate these returns or should return expectations get normalised from here on?
Last year around Diwali, the fear was probably high and expectations were very very low and down the line, the situation completely reversed. We have high expectations and somewhat low fear. Last year, the pace of recovery surprised everybody. But there was a second negative surprise in the form of the second Covid wave but net-net, some of the sectors like IT have done phenomenally well. Many manufacturing ideas have done very well. There were multiple themes at play in this period. Real estate has done very well over the last 12 months. Many sectors which were considered otherwise untouchable, have come out and done very well.

You are one of the first people who have identified the Nifty midcap IT theme. Is there more steam left over there going forward in Samvat 2078?
IT has done very well over last one year and many stocks have become 3x to 5x from their lows and of course there is no doubt that demand environment is very robust and it is not going to be only a short term demand outlook which has changed; it has changed structurally from next three to five years’ perspective.

You always like IT and banks. Which is your first pick this time around? Could it be from the banking space?
Among our larger portfolio companies, I like ICICI Bank. Banking is expected to do well over the next 12 to 18 months specifically given the fact that the NPA cycle is behind us, the credit growth is picking up and both these factors are very good for banking. Also, a mild increase in interest rates always helps banks or lending institutions.

What is your second pick? I see the infra space coming in. What is making you so positive on L&T?
The capex cycle is picking up in the country across private as well as public sector. We are seeing big spending on infrastructure, real estate, factories across the board and this is a one company which is leveraged to the country’s infrastructure building again in private as well as public. I think there is no company which comes close to L&T’s capability across various segments.

L&T is an obvious beneficiary of infra spending. if you just adjust for the market cap, there would be subsidiaries in the IT space. L&T’s market cap is lower than or similar to what it was in 2008. So it has significant value which is still not captured. If the Indian economy has to do well, there is no way L&T cannot do well and more importantly, it is also leveraged on the IT sector through its subsidiary which hit larger value.

The risk reward of remaining invested in L&T is significantly in favour of investors at this point in time.

What is your third pick and the final pick for our viewers?
I would say I would go for

again you see stock has not done really well again it is backed on totally in the real estate, credit growth on housing finance side and I think this is one of the company which have the lowest borrowing cost on the liability side like it was for HDFC. But if you look at the valuations, it is very much close to one time book so NPA cycle. I personally think that as the credit growth picks up and starts showing up in numbers, it will not again deliver 15%-20% returns. It has almost 2.5 lakh crore of credit book versus the market capital of the company around 20000 crore. I think you know there is a huge potential from here to get rerated as the concerns around NPA which helped in the past in last couple of quarters which has been bottomed out.

It has significant risk reward safety as well as potential of high returns.