Markets

Go for ICICI Bank and HCL Tech in Samvat 2077

We had a very sharp correction in the interest rates and it is likely to remain here over the next couple of years and that has an impact on the asset price valuation, investment and consumption cycles, says Vikas Khemani, Founder, Carnelian Capital.

Do you expect Samvat 2077 to bring a lot more light, joy and continue this bull run?
The next one year will be very different from what we have seen in the last one year. Last one year was of course very challenging with pandemic around and just before the pandemic, Indian economy was about to recover. We have had demonetisation, GST, RERA and then the IL&FS crisis. The last three-four years were difficult for the Indian economy. Before Covid, India was just recovering. What Covid has done is unfortunate for humanity but it has also created additional growth drivers for India in the form of accelerated growth on IT services. Secondly, a very big change has happened on the manufacturing front. For the first time, India’s focus on manufacturing has become very intense and the government is talking about doubling that GDP.

Let us talk about the long-term prospects for ICICI Bank. Why is it your Samvat 2077 pick?
It is one of the big private banks. There has been a significant leadership change, driving a lot of changes in the bank in a short period of time. The culture, dynamics and energy levels of the bank has changed. All the baggages of the past have been cleared and the bank is galloping and doing very well.

What is the second big idea which you think is poised to do well over the next couple of months and years?
One of the very big shifts which has happened post pandemic is the spending pattern of large global companies on the IT side. There is a significant step up in Cloud migration and digitisation by every company — whether you are in the x sector or y sector. So, from BFSI to retail to industrials, companies globally are forced to spend at an accelerated pace on IT and that is the reason IT over the next four-five years will generate significant growth momentum across the board.

A great part about IT as a sector is that it is a free cash flow generative, profitable, high ROE business and that space and that sector will do well. But one company we like is HCL Technologies. A large part of that company’s business focus is on Cloud migration and infrastructure management. It is a broader services company but that proportion is very large. Over the next couple of years, you will see a lot of spends being done on that and this company will benefit from that. HCL Technologies can deliver 18-20% return compounded over the next four, five years and maybe it can surprise on the upside. The amount of money which will be spent on IT services over the next five years will be significant and many companies will be beneficiary of that.

There is a name within the midcap space — Praj Industries. What are its long-term prospects. How do you see the company growing? Do you think it merits a buy recommendation for next year?
Praj is a very interesting play on changing dynamics in the sugar sector. There has been wider expenditure on the capital goods side. This company is not only a global expert in distillery space but it also does a lot of process on the engineering side and many more which basically caters to the capital good side.

There is a significant capex expected on sugar, post the recent policies on the sugar sector. A huge amount of money will be spent on it as distilleries are focussing on ethanol. This company has a new product which is focussing on biogas. More and more investments will go into dealing with agri waste and bio waste to convert into gas and recycling and the economics of that are very interesting.

What do you think is going to be the key trigger on the minds of the markets come Samvat 2077?
There is no one key trigger, there are multiple triggers. The single biggest factor in my opinion is interest rates coming down. We have had a very sharp correction in the interest rates and it looks like that over the next couple of years, it is likely to remain here and that has an impact on the asset price valuation, investment cycle as well as the consumption cycle.

Today the EMIs have gone down significantly because of the drop in the interest rates, so that is one. Secondly, the government is targeting to double the GDP over the next four, five years. This will again kickstart the investment cycle as well as job creation in the economy.

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