Invest in small and midcaps, not largecaps: Infina Fin

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Invest in small and midcaps, not largecaps: Infina Fin

The buoyancy in the markets doesn't seem to be subsiding anytime soon. With the indices nearing all-time peaks, the bulls surely have enough reasons to rejoice and cheer. In an exclusive interview with CNBC-TV18’s Udayan Mukherjee and Sonia Shenoy, R Venkat Subramanian of Infina Finance, says there is enough steam left.

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Excerpts from Bazaar on CNBC-TV18 Watch the full show » ALSO READ See what other experts are saying about markets See what FIIs are saying about the markets See what Udayan Mukherjee is saying about the markets Nifty BSE | NSE 01/06/12 Are Mutual Funds betting on Nifty? Other Stocks in this news Sujana Towers | Orchid Chemicals and Pharmaceuticals | Unitech |

The buoyancy in the markets doesn't seem to be subsiding anytime soon. With the indices nearing all-time peaks, the bulls surely have enough reasons to rejoice and cheer.

In an exclusive interview with CNBC-TV18's Udayan Mukherjee and Sonia Shenoy, R Venkat Subramanian of Infina Finance, says there is enough steam left.

With foreign investors showing a new level of risk appetite to Indian equities, there is an urgency to take stock of what this will mean to our markets. "This may result in a renewed appetite even from the domestic investors who have been shying away from the market because of the old-peak having been breached. Also a lot of Indian companies will now be able to raise money much faster at higher prices than what they were thinking of even a month ago. And it would also mean that we have set a higher floor for the market."

Further he advices that it is time to invest in tier-II (midcaps and smallcap) companies and not largecaps. "There is not going to be a great profitable investment opportunity in the Nifty stocks for at least another six months. Whenever this run ends, we would have made the highs for the next few months and you should perhaps start looking at second tier companies to make investments going forward."

Below is a verbatim transcript of his interview. Also watch the accompanying video.

Q: Are you surprised with this momentum, do you see this continuing?

A: Surprised yes, continue or not continue that's difficult to predict. Foreign investors have shown a renewed level of risk appetite to Indian equities which is driven by their own circumstances than anything that has happened in our market but it has implications for us. We need to take stock of what it means to us that would include that there will be a renewed appetite even from the domestic investors who have been shying away from the market because of the old peak having being breached.

I would think that some domestic money will start flowing back into the market. It would mean the government will have a much easier time selling off their holdings which they have been planning to do. It would mean that a lot of Indian companies will now be able to raise money much faster at a higher price than what they were thinking of even a month ago and it would mean that we have set a higher floor for the market, across marketcap range.

I would think it will have implications for the second tier companies as well. It is clearly a sort of game changer in terms of where the valuations will be for Indian equities for sometime to come. In my mind, this is not going to be a great profitable investment opportunity in the Nifty stocks for at least another six months. My view that we may have with this run, whenever it ends, we would have made the highs for the next few months and you should perhaps start looking at second tier companies to make investments going forward.

Q: What about somebody who has already invested in this market? You have been a bit cautious about the kind of multiples that this market is been trading with for a while now. Would you suggest booking out of spaces that have already rallied so hard?

A: There are two aspects here - one is the risk appetite that the foreigners have shown towards Indian equities and maybe towards some of the other emerging markets. It just shows that you have to be a little easy on your valuation metrics. It's possible that in a world which is starved for growth, there is premium being paid for any kind of growth.
To that extent, the valuations have to be adjusted.

Right now from a near-term trading point of view, I would be a seller in anything the foreigner in buying. The foreigner is buying because it's a sort of forced asset allocation exercise than any consideration for the valuation of Indian equities. They are acting in a sort of concentrated manner that.

When that eases off, you will find that some of these stocks will have bit of a downside. That doesn't mean there are no opportunities. There are enough opportunities in stocks that are flying under the radar of foreigners. That's where you will find profitable opportunities.

Q: Where is the floor for this market now? Wherever this kind of momentum ends do you think we will hit a meaningful correction or do you think we will still be no worse off than 5,800-6,000 in that fall, in which case you were not buying too much further away from where we are today?

A: I think it is not going to be that small a correction when it happens because it has been such a sharp rally and led by just one group of investors in a very short period of time. As and when they sort of take their foot off the peddle, you can have a reasonable correction.

The floor is much higher, but the floor may not be a 100-200 point correction. When this ends there will be close to a 7-8% kind of correction but whether it will be from 6,300 or 6,100 we do not know. From hereon it is going to look so much frothier than what it has been. It's difficult to say but I think it would be a short fall from wherever it stops.

Q: To drag the point further you made about being circumspect or cautious about those space that foreign institutional investors (FIIs) are buying into. Would you look to sell into spaces like these, be it capital goods, autos or banks that have rallied so hard?

A: It's not so much a sectoral call. It's just the kind of stocks that the FIIs are buying and for good reason - when they want to put in a few billion dollars it is obvious that they will buy the frontline names. While I would not be bearish on capital goods per se but I would rather buy a second tier capital goods company than chase something that the FIIs are buying because its part of the index.

Within the index, capital goods has been somewhat underperformers so to that extent maybe that is less vulnerable but banking yes, I think four-five times book value for any bank leaves very little scope for the bank to surprise in terms of earnings and justify that kind of valuation. At least you need time for that valuation to get digested. I would think HDFC Bank could perhaps go sideways or after a bit of correction for another six months after the FIIs ease off. Those are the kind of names which you do not want to chase because the FIIs are ramping it up.

Q: Would you back the global rally that we are seeing in the commodity space? FIIs have been riding this boom specifically in the Indian markets. Would you support this sector?

A: From a momentum point of view, when there is such a big rally in the index it's quite unlikely that the steel companies would not participate particularly when the domestic demand is quite robust. From a global point of view its bit of an unsettled issue because if there is a problem in the global growth story which is why we are saying in the first place that the overseas investors are pouring money into markets like India, if there is lack of global growth, logically commodities cannot be doing extremely well including oil.

On the other hand, we see the drive towards anything that can store value against the de-basing of currency. There is a huge alternate to currency kind of investment that's going in commodities that is perhaps driving the prices than the demand for their actual use. You do not know at which point that will give up.

From an Indian investor point of view there are much better stories to back for the Indian growth story than buying commodities. I would think participate in the catch-up game that is going on because they are part of the Nifty but beyond that I would stay away from commodities.