Carnelian's Vikas Khemani Sees Wealth Creation Scope In Indian Consumption Story

Vikas Khemani: Absolutely. I think if you see specifically in the recent past, you know, when you talk to clients, investors, most of them are worried about here, now, the valuation, what do you think and we said, you know when you zoom in, you are all the time worried about short term here now.

So we thought let's build a perspective to zoom out and say what can happen in India over the next 2025 years. Of course, you know, India is on one of its best transformative journeys. We have said this many times, but we generally believe that.

So if India were to become a developed nation, by 2047, what are the possibilities and also more important to examine whether it can become or not, and why it can become and once you examine that, build conviction around that, and then look around what are the potential trends which will emerge because every time an economy transitions, or transforms, new trends and new opportunities come about. So why not tap into them because those are the superior wealth-creation opportunities.

So our idea here is that, you know, anchor investors from a really long-term perspective, you know, because we've seen that when you look at 10-20-30 years, wealth creation is superior. We'll talk about it in detail, but so you don't worry about it, and secondly, show someone the possibility of the trends and then tap those investment opportunities through this fund.

Vikas Khemani: So in this fund basically, you know, we identify broad opportunity spaces, namely manufacturing, banking, financial services, consumption, infrastructure and services. Within those five broad spaces, what are the emerging opportunities? How we will tap into them, how large they can become, what are the companies, which can, you know, sort of do that, so we tap into them.

In some of our previous funds, we have a slightly narrower focus, like the shift strategy largely focused only on manufacturing and technology, which we launched in October 2020.

So I think, this is after long that we are launching a fund, which basically, you know, is again anchoring towards creating wealth on a sustainable basis for the next 10-15-20 years perspective and we invest with that kind of mindset.

Investment philosophy does not change. I think, probably the lenses which you will look at some of the opportunities will kind of be very different.

Vikas Khemani: We all know that India had at one point in time a quarter of a share of GDP, you know, before it was ruled by foreigners. Same with China, and during British rule, we all lost 2–3%. China started the journey 40 years ago and regained them.

I think India has started recently, in the last 8–10 years. A lot of work has been done. Foundational work has been done. You know, we have had long pending economic reforms carried out, we had digital infrastructure getting built, physical infrastructure getting built.

So a lot of foundational work has been done and we do believe that now India has embarked on this journey of gaining the lost share in the world GDP. Today, we are around 3.7–3.8%. This number can go to 15–16%. It means our GDP can go from 3.7% to almost $29-30 trillion by the time Amrit Kaal ends and whenever this kind of almost like 90% of GDP is ahead of you, 80-90%, this kind of growth happens, massive wealth creation happens.

It is important to know why it is possible this time. I do believe that major tectonic shifts have happened in India. In the mindset of India, specifically in the recent past, I classify them as six tectonic shifts.

Number one, India has moved from incremental mindset to exponential mindset. No more do we think it will take 10 years, or 20 years to do things. You know, we want to do here, now, with a sense of urgency.

Secondly, India has moved from a constrained mindset to a no-constrained mindset. We were always told that India is a poor country. We don't have money for defence, famous statements in Parliament. That is no more the case.

You are building world-class infrastructure, you're doing everything. We will figure out money, but there are no mental constraints.

Thirdly, if you see, historically whenever India faced any problem, we look towards the West for the solutions. The UN, World Bank will come and preach to us. That is not the case anymore.

We are finding solutions to our own problems. World is still debating about universal basic income. We have implemented it in the form of DBT. So that's the beauty of India right now.

Fourth, India is innovating at scale and low cost. UPI, telecom, nowhere in the world, you will find less than $2 unlimited data, including China, by the way. That's a very big change happening in India.

Fifth, if you see, you know, historically we've always believed in socialism or capitalism. India has beautifully experimented and proved that social welfare and development can coexist. They're not at odds with each other. We have lifted 20 crore people out of poverty, which is a big deal.

Lastly, when it comes to the global stage, India no longer sits in the corner. We all feel and touch that. I mean, India is sitting at the centre driving the agenda. So I think, all these will lead to broadly strength, scale and speed.

We are the most populous nation on the planet, we are the youngest nation on the planet, and we are the most aspirational nation on the planet.

So if you again see in the last 10-20-30 years, any company which has created massive wealth, you will find three common things in that—strength, scale and speed. That is happening at the country level.

So this is what we believe that we are going to see at a country-level—massive transformation, transformative wealth-creation opportunity, because we are seeing strength, scale and speed. That's the key thesis behind this and then look at some of the mega trends within those mega trends, what are the opportunities.

Vikas Khemani: Not necessarily, let me give an example. Let's take the banking and financial services space, which is as it has been well for the last 20 years. So India’s total credit in 2001 was $125 billion. Today it is $2.5 trillion, almost 20 times growth in the last 20 years. Despite the fact that we have so many problems in the economy, the banking system was not robust. We didn't have an IBC.

So as we move forward, this $2.5 trillion will grow to $65–70 trillion. So we'll see that kind of growth. Now, if you look at the last 20 years, in 2001, the total market cap of banking financial services was $9 billion. Today it is $1 trillion.

But more importantly, in 2001, we had only three segments—PSU banks, NBFCs and private banks. FSI was hardly anything less than 1%. Today, FSI in this $1 trillion, almost 18-19%.

So the point is, every time economy transitions, you have new segments coming out with the so-called banking and financial services segment. You didn't have wealth platforms, you didn't have mutual funds, you didn't have insurances as big.

So as economy transitions in the next 20-25 years, you will have many more such new opportunities coming out. It is our job to keep looking for those emerging opportunities and invest into that.

Like MSME, one of the biggest or fastest-growing segments, which so far has grown but not as fast. We think that it's going to grow significantly from here. Now we need to tap that, you know.

Insurance will do very well. Insurance and as your per capita income grows, what do you do? You save more, you channelise, you spend on different things, which you earlier would not do from a savings perspective. You wouldn't buy insurance earlier, now you will buy more insurance.

So all those things will create massive opportunities. So the whole idea of building a perspective is to first build perspective and then we will keep tapping. It is not that you're building static portfolio which will remain for 25 years. You will keep attending to the opportunity, keeping in mind long-term trends, and yet the short-term risk-reward of the opportunity as well.

Vikas Khemani: So if you see, the total corporate profitability of India today is $150 billion. In 2001, it was $8 billion. In the last 20 years, we have kind of grown almost 18-20 times. This $150 billion, according to me, by 2035 will become almost $1 trillion and by 2047 $2.5 trillion.

Let's stay in 2035, so if we are almost 6–6.5 times of profit we are talking about, it means our market cap can become $18–20 trillion by then, even if I take 18-20 P/E.

Today, we are at $4–4.5 trillion. So at a market level, we will see significant wealth creation opportunities, and if you have a little bit more alpha, you can make six or seven times returns at the portfolio level. That's the kind of opportunity that India is sort of presenting.

An interesting part is that this time around the typical fault lines of India are not there. Historically, if you see, only four or five fault lines have been in India—current account deficit, fiscal deficit, banking system health, inflation and a debt to GDP.

If you see on each of these, our current account deficit is sorted and we are moving towards a current account surplus. We are one of the best managers in the world tax collections are robust. Inflation we have managed so well, our banking system is robust, squeaky clean and well set for growth and you know, our debt to GDP is one of the lowest in the world and we are the only country with a reduced debt to GDP since the global financial crisis.

So the whole leverage cycle is ahead of us. So you know your fault lines are not there. Your vital statistics of your body are there in place. So you are ready to grow. Now, when I am saying it's not that it's going only one way, there will be ups and downs. But the thing is that you can invest a lot of peace today because your underlying strength of the economy is very high and then you can, you know, spot those emerging trends which you can invest into.

Vikas Khemani: My point is that you talk about BFSI. You don't have to necessarily talk about banks. While I think I'm positive on the banks they are not necessarily only the credit to the capex.

Today, we're talking about MSME credit, we're talking about personal loans, we're talking about mortgages. So banks are catering to a very wide variety of services. In fact, banks are also doing a large part of services on the wealth management side. I mean, it is kind of fairly wide gamut. It is not small.

So the bigger point is that as long as economy is growing, savings are growing, you'll have to channelise that much more... If you see today, your savings pool is about, you know, whatever that number you can take at your GDP or let's say 25% number $1 trillion. If your GDP is going towards, let's say $10 trillion, that number of $1 trillion will become $2.5–3 trillion. So that more will have to be channelised through the same channel. So it means more volume and the same thing has happened in the last 20 years. So what I'm saying is not new.

It is going to happen a lot more efficiently, a lot better, is my point. So your idea is to keep looking for short-term challenges. Short-term ups and downs will always be there. Some time deposit challenges will be there. Those you navigate, but they should not come in your overall view of the long structural opportunity.

Vikas Khemani: Not really. I mean, we have been one of the biggest believers in this and I think this is only the beginning. Today, our manufacturing GDP is only $5.6 trillion; this number will become $ 8 trillion-16 x from here, twice of our current GDP.

Vikas Khemka: If you look at the last three or four years, we've been gaining. The entire manufacturing sector is growing. I mean, largely three, four reasons. One is, of course, the government's focus on substituting imports and encouraging exports. But more importantly, our cost-competitiveness with China has improved because of geopolitical China, plus one is playing very well. Most of the companies we invest in are telling us that the demand is very, very robust, it is that we have to get the capacity up and ready to deliver. So the demand profile has changed and today we know how the world is setting up capacities here. Apple and Samsung, both for domestic as well as export markets. So once the ecosystem builds, it finds its own life, and I do believe that we have one of the best manufacturing cycles ahead of us.

Vikas Khemani: Infrastructure always has a multiplier effect. I mean, John F. Kennedy once said that American roads are not good because America is rich. America is because American roads are good. So you know, infrastructure has its own multiplier effect on the economy and you know, if you see, India is going to spend a huge amount of money. 40% of GDP in India is spent only on railways. In the U.S. when they did during the railroad era, only 30% of GDP was generated, and they had a massive rally or economic growth post-that period. So India's spending on roads, railways, ports, airports, you know, metros—everything India is spending. So it will have, apart from ease of business and ease of living, a multiplier impact on the economy. That is what we have seen in Germany happening; we have seen it happening in many parts of the world now.

Vikas Khemani: Ultimately, it's all about governance. I mean, there was a time, and today we have, because of the use of technology, lots of policy changes. I think governance frameworks have changed. If you see that EPC companies have been doing well, you know, I mean, lots of things have been fixed, and I still am sure there'll be challenges. You got to be careful; never say that everything's fine. So you know, your whole fundamental bottom-up risk reward is what you have to do. I'm not saying that the perspective is that the opportunity is large, but you have to figure out your risk reward for individual opportunities. So if it is not there, we will not invest in some of the, let's say, setup. There might be some setups where risk reward is not favourable and clarity is not there. So that part should never be lost.

Vikas Khemani: It will only change. As your per capita income goes from $25–2,600 to $18,000 over the next 20–25 years, your household income graph is basically shrinking at the bottom, and the top is sort of broadening. So as this happens, each of these categories of households will consume more, newer, and better. As you upgrade your life, you consume more and better, and that means what? That means, you know, you will move from staples to premiums, durables, you know, Discretionary and you will spend a lot more on travel and tours. Lots of new opportunities will come, which today don't exist. Luxury in India has not even started. According to me, there is a huge play for luxury over the next 10–20–30 years and we will see those coming about because we are a very aspirational society. We don't mind spending, so the meaning is changing already. Today, the way youth are spending, I don't think we were spending when we were young. So that is changing and it will change further. But under penetration, everything is so steep and so low that we have a long, long way to go.

Vikas Khemani: Now, when you invest in what we are thinking and planning as a FlexiCap fund, there will be a combination of companies that can have value re-rating and accelerated growth in what we call our parlance Magic Basket stories, where you can get a combination of both. So you have to catch the trend early and stay invested in it. So we will have those kinds of names as well. But 70 to 80% of the fund will be concentrated into 20–22 names and we will have a long tail of eight–10 stocks, which can potentially be, you know, multibaggers, so to speak, in fullness of time. So, which can create significant alpha as well? So our idea is to, you know, fundamental bottom-up risk or quality growth at a reasonable price that doesn't change. Of course, we will never bet on a company where the corporate governance issues are there; the crooks are something we never bet on and we're very careful about that. So that's the only no-go area we will have. So we will carefully pick up companies run by great management in the middle of the mega theme and where the risk reward is in your favour and we hope that if you do that basic right, like in all our funds in the past, we have had great performance. So I'm hoping that we are able to replicate that in the times to come.

Vikas Khemani: Simple. I think my favourite, followed by a statement from Mr. Munger, is Invert, Always Invert Tell  me where I'm going to die; I won't go there. So we're always constantly looking for where the risk content can come from, and, you know, where we can kind of lose capital. So our biggest focus is that we should never lose capital; we should never have a permanent loss of capital and, you know, largely the source of that is broadly only twofold. Either you bet on inferior quality management or you bet on a business that is prone to disruption. So these are two things we're focused on that we hope we never have in our portfolio and if we are like Hawkeye, we have this kind of thing. So if you avoid major mistakes, your outcomes are going to be, by and large, okay. So you know, generally, I think if you are slightly above average and avoid mistakes, a combination of these two things will take you far.