New-Age Businesses To Fuel Next Growth Leg: White Oak Capital's Prashant Khemka
Prashant Khemka highlights the growing role of new-age companies in India’s equity markets, projecting their index representation to rise from single digits to potentially 20% in coming years.
India’s equity markets are set for a turnaround, with earnings recovery expected in the upcoming financial year and new-age companies taking a larger share of the market, driving significant structural changes. Prashant Khemka, founder of White Oak Capital Management, anticipates low double-digit growth in corporate earnings over the next 12 months, signalling a strong foundation for sustained market returns.
“From here, low double-digit growth in earnings over the next twelve months is a reasonable expectation,” Khemka said, adding that valuations already account for the ongoing earnings slowdown, leaving room for long-term growth. He highlighted that while market momentum may not match the highs seen earlier this year, the outlook remains positive, with returns in the double digits still plausible for the next year. “It's possible that earnings growth might not differ much from the trend we have seen, but it is likely to be in the low double digits to low teens,” he said.
Khemka also noted that sectors like consumer goods have seen weakness in recent months, which could affect short-term earnings performance. However, he does not anticipate this to significantly impact overall market multiples. Despite the current challenges, he believes the Indian equity market remains well-positioned for medium- to long-term performance, thanks to its broad-based growth potential.
Prashant Khemka, Founder, White Oak Capital Management
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Power Of New Businesses
Khemka noted that new-age companies have the potential to transform the current market landscape. He compared them with developed economies like the United States and Europe and markets such as China and Korea, noting that these countries have a much higher representation of new businesses in their market indices, ranging from double digits to 25%.
“In India, the proportion of new-age companies in the index is still in low single digits. While I’m not suggesting that the current set of companies will multiply tenfold to make up 20% of the market, I believe we’ll see numerous new opportunities emerge over the coming years,” he said.
Khemka projected that this evolving segment, which currently comprises only a handful to a few dozen companies, could expand to hundreds in the next five years.
He added, “Their representation in the index could rise to double digits and possibly reach 20%, following patterns seen in developed and other emerging economies. While cycles of growth and correction are inevitable, the trajectory for these businesses points toward a much larger role in India’s market future.”
Prashant Khemka's Sector Picks
Khemka’s sectoral outlook remains focused on healthcare, technology, and financials, which he sees as resilient and aligned with long-term growth trends.
“Pharma, tech, and private-sector financials continue to be our key picks. These sectors are well-positioned to benefit from domestic and global trends,” Khemka said.
Watch The Conversation Here
Here Are The Excerpts
Prashant, how do you see the landscape currently? There are a lot of moving pieces. I know you always say that the macro is a cost of a toy, and therefore, focus on the micro, but the macro is impacting the sentiment currently, with what Donald Trump and the likes are going to do or not to do, and what happens to Fed rates. How do you think about that aspect?
Prashant Khemka: With that caveat that macro is inherently unpredictable beyond what is priced into the markets already, would say that at this time, from an equity markets perspective, it's looking quite positive, neutral to positive in that the global backdrop with Trump getting elected with or leaving aside all our political views, anybody's political views about him, I would say, is positive for the U.S equity market.
The U.S equity market is the 800-pound gorilla or more in context of global equity markets, it should have a firm undertone, and that has an uplifting force on equity markets globally, in general, with some puts and takes, particularly for India. I think it's relatively positive because going by his first term, and the rhetoric so far coming out, and the appointments that are made so far, they are again indicative of a harsher stance relative to China. That should only be on the margin positive for India, not as much. I'm not talking as much for money flows in the near term, but more from a real economic perspective. Again, these are all on the margin that we're talking about.
But on the margin, I think the whole China plus one phenomenon started with in 2015 when Trump hit the road for the primaries, the first time around and and it has subsequently, over the last 10 years, only paid momentum and this should prove to be another boost to his second term. So that is a positive backdrop from a global perspective.
Secondly, from a domestic India perspective, the sentiment, investor sentiment, particularly was after the central elections in June, a little bit of a, I won't say, a big setback or something, but was no longer as confident following the June elections, and that confidence really has resurfaced, or is resurfacing following the recent state election outcome, because not the state election outcomes themselves are important, but to the extent that they are an indicator for the mood of the population at this time towards the central disposition.
I think it is a positive outcome from the markets perspective. So both these, I think, do present a firmer backdrop for the equity markets, as we head into the next year.
Prashant, can earnings live up to that as the third spoke in the wheel, if you will, simply because we know Q2 was bombed out. The expectation was Q3 will be good, and it definitely is better than Q2 but I mean, while we are all hoping for it, we suddenly have this warning from Godrej Consumer today that, oh, you know, demand situation still remains weak. So, therefore, we know that some pieces of consumption will be impacted, despite it being a festive quarter too. So can earnings live up and support this positive construct that you laid out for us just now?
Prashant Khemka: I think Consumer has been weak, as you noted for some of the pre-release, if you will, that comes out, and it's continuation of that same phenomenon that's been going on for the last several months. So we might have, I think, over the next quarter or two, still earnings numbers that are not as strong as we were used to, let's say, over the prior few years, but I don't think that would necessarily have an impact on the multiples.
So we are not to be clear, not suggesting that we should expect the kind of momentum from equity markets that we saw till June, July of this year. But I would say, nonetheless, a double-digit return from here over the next 12 months. This is reasonable. That's more or less in line with what the longer-term market expectation will be. I'm just saying that that is a reasonable expectation, and feel more confident about that over the next 12 months. It's possible that earnings growth would not be much different from that earnings rule over the next 12 months, it's quite likely would be in that neighbourhood of low double digits to low teens.
It's also Samina joining in. We take your point that the valuation of attractive expecting a double digit growth in calendar year 2025, is also very likely. But the fact also remains that we've borrowed returns from the future because we've had a very good run. Look at most portfolios. Look at some of your funds and your PMS. They are commendable, to say the least, right? But this now becomes a stock picker’s market and active fund management is what value will be seen in. Till up until this morning, we've had conversations of how the value emerges in the large cap space. Point noted, but the fact remains that every time there's a recovery, money is being made in the broader market universe. So how does one play this because it isn't easy?
Prashant Khemka: I think, at this time where we are. We are at any time we don't and first of all, thank you for the compliments. We don't have any strong bias towards a particular market cap, or other large cap versus small caps or anything like that, from an overall market perspective. Though, the portfolios generally have higher allocation in small caps and mid caps, because there are more Alpha opportunities in mid and small caps. So when I say more allocation to mid and small I'm talking about relative to market, still the majority of the portfolio, generally across our you know, portfolios would still be 50% plus likely be towards large caps.
But you know, even at 40-50% that's a very healthy allocation to mid and small gaps, because stock selection opportunities are stronger in small and mid and that never changes. That's always the case because they are a more inefficient segment of the market. So I would say that we don't have any such top down, you know, biases from a market-cap segment, and even on a sectoral basis, we have structural preferences, which continue to be the case today as well. Be it in Healthcare, be it in Technology, be it in the Private sector Financials, these tend to skew higher in our portfolios, and that is the case today as well. So a broad based opportunity set, where from the team is able to identify opportunities.
Mr. Khemka, I want to talk to you about what's happening in the primary markets, 2024 historically has been one of the best years, because we are in a structural bull phase compared to markets like the UK, where you get maybe two listings a year, if you're lucky. With the P and VC investment phase that kicked off in the country about three to four years ago, or maybe even five years ago. Do you feel the euphoria for primary markets will continue into the next calendar year, and will the subscription to this continue to remain as healthy?
Prashant Khemka: It is a very exciting time. I think it's all-round positive. The best part about a bull market is that so many businesses get funded and have the opportunity to tap the markets. Yes, some of them would end up, you know, disappointing, but nonetheless, I think on the whole, at least so far, what we've seen and the levels we are in the kind of issuances that have been. These are very healthy times and optimistic times, but they've been not the euphoric times we think, on the whole.
Yes, there are certain segments of the market, like, obviously the SME exchange, one can, you know, always point to, or certain, you know, small cap issuances, which may be potentially stretched, but on the whole, it's a very healthy phenomenon that's going on in the primary markets. I just hope, and we should all hope, that this continues. The longer it continues, the better it is for overall, the economy, the corporate sector, for fund managers like us and for investors.
Prashant, a couple of sectoral things. I mean, this whole China, plus one thing that you spoke about, you spoke about Pharma and and while this whole thing was going on, about the BioSecure Act and more supplies from Indian Pharma to the U.S, we suddenly get the news that maybe the Bio Secure Act might not, I mean, it's not a part of the current defence bill, and therefore, doesn't become an act, maybe becomes an act later on, et cetera. You reckon it's best to ignore what's happening in the U.S until Jan 20th, because the policies post Jan 20th might be completely or materially different than what is happening right now in the U.S.?
Prashant Khemka: See, we should not overplay the U.S aspect first of all, and we should certainly not get too caught up with any particular such development as the BioSecure Act not getting through. You know, we are in the final days of the current regime. Overall. I think the overarching thing is, as I was saying earlier, if Trump is anywhere close to what he was in his first term and there are all the signs that he would be even more so.
Then, you know, on the whole, he would take a hard stance on some of the countries, including China, and that plays to the advantage of India. So there will be particular instances like what you are seeing right now with the BioSecure Act. But all those are, you know, a few puts and takes in the overall scheme of things.
Prashant, one more question is, how do you see themes which are futuristic in nature and investor interest thereof? I see you guys do a lot of pre-IPO deals as well into companies which are probably not even a part of a sector, but suddenly catch the imagination. So great stuff there, but there's a lot of promising themes. The whole Energy Transition piece that is happening suddenly, the influx of this whole data-centre output opportunity, so on, so forth, etc.
Where is it that you believe lies, or even new tech, for that matter, right now, it's an established sector, but still relatively new to three years old. Where do you find the best bang for the buck within a lot of these new opportunities, which could be sizable, 5-10-15 years out?
Prashant Khemka: I agree and you mentioned that, I think when you compare countries like the U.S in the developed world or Europe or in Emerging markets like China, Korea and others, what you find is that they all have these new age companies, if you will, as a far higher proportion of the market. It's double digit to 25%. So in India, that is still a low, single-digit proportion of the index at this time.
Now, I am not suggesting that the current set of companies themselves would multiply tenfold, on a relative basis to become 20% or so, but I think there will be a lot of new opportunities that will be coming to the market over the coming few years. Obviously there will be cycles, and they'll, you know, ebb and flow. But I do expect this New Age set of companies which are right now, you know, handful or a dozen they would or a couple of dozen, depending on how you classify them, they would be in hundreds in the next five years or so, and their representation in the index would go to double digit and then possibly to 20% as we have seen with developed countries like the U.S or other Emerging countries.
Prashant, well, I know you talked to Niraj about newer themes. I can't not talk about the old economy or pillars of the India growth story. If you are expecting double-digit growth, expecting the markets to contribute and do as well, one can't ignore Banks. It's probably a blanket approach. You buy into Banks. You buy into the Rural, the Urban. You buy into Consumption. You buy into various themes. Are you aggressively acquiring Banks in terms of portfolio allocation across all their portfolios?
Prashant Khemka: Sure Samina, banks haven't done that well, but we it's an area of the portfolio that's not performed, let's say, up to expectations so far, but we still do believe that well run banks continue to hold a lot of promise, especially at the valuations where they've gotten to now. In relative terms, I would say, if you look at any of these, can't name any individual names, but any of these private sector banks, it is one sector of the market that is trading at below average multiples compared to their own past 5-10-15 years history.
But also, as we might know, we do manage global money, or we do invest in global markets, more particularly global emerging markets. So when we look at the valuations and the prospects of Indian banks compared to banks anywhere in the world, in Asia or in Latam or in Europe, the growth prospects are far stronger for Indian banks. The return profiles are by and large. Well, there are again, some that are better than these, but the combination of the return profile, the growth prospects, and the balance sheet risk, because in the case of banks, that's a very crucial element, the quality of the asset, the quality of the book.
This combination of the three we find most powerful in India and in that context, the valuations to be very compelling, and hence, the team continues to have very good allocation to some of the select private sector banks. You're from management financials as well as capital market intermediaries.
I'm glad you brought that up, because that was going to be my next question, capital market play, and you're leading from the front with the number of Mutual Funds White Oak has launched, gives me a sense that you're very constructive on the capital market business. You want to elaborate on any particular vertical that you like.
Luckily, you're not in the listed space. You don't need to comment on Vito. But also Q, and I don't know whether you know you're the right person for me to have this conversation. Maybe a fund manager of the fund may be more appropriate, but you've had significant performance in the White Oak Flexi cap fund. Similar strategy to what the PMS offers. You want to elaborate on that, if you may?
Prashant Khemka: Thank you, Samina, for asking questions. Now the team has done very well. It's over two years now, coming up to two and a half years, and most of the strategies last time I look, are fairly well positioned from a peer group performance perspective or relative the benchmark perspective and we want to take this opportunity to thank all our distribution partners for supporting us in this early years and putting that confidence in us from from day one.
I would say that we were asked when we started, two and a half years ago, that you are the 42nd or the 43rd AMC, you know, how do you expect? What is your right to win, if you will. I have worked for eight years in the US market and managed mutual funds in the U.S competing against thousands of competitors. So in India too, it's only a matter of time that we would have first hundreds of mutual fund companies and then eventually would breach, you know, the 1,000 mark as well.
In the U.S, there are more mutual fund companies, then there are stocks. So we would also have that over time. Then when we look back, we would look back to say, Oh, you were one of the earliest. You were 42nd or whatever the number is. I don't remember exactly, but somewhere in the 40s. So you know the 42nd 43rd AMC, which of the context of 1,000 AMCs would look very early and over time, as has happened across the world, if you deliver returns in a first of all, with some degree of consistency and in a manner that can be explained to investors, and if investors believe that is representative of what can be, you know, achieved to some degree in future. Then, generally speaking, they do trust you with their capital.
So we are not necessarily just on the asset management companies per se, but more generally, several capital market intermediaries. We do have in our portfolio, as we expect, the trend of financial savings channeling themselves into capital markets to be a multi decade phenomenon in the Indian context.
