Daily Voice: For mid, smallcaps, time corrections could be very painful, says Jitendra Gohil of Kotak

The policy was in line with market expectations. The governor has been emphasising on maintaining financial stability and he reiterated it. There seems to be a nice jugalbandi between the RBI and the government. While the RBI is focusing on financial stability and has been extremely vigilant, the government has taken several measures to control food and energy inflation.

The major saving grace has been the robust tax collection despite the nominal GDP growth surprising on the downside. Apart from oil shocks,  risks could also emerge from sharp revival in China, which could be inflationary and/or if China decides to devalue its’ currency to promote exports, that could hurt the INR as well in our view.

Which are the segments you are bullish on? You have been positive on the healthcare space. What is your view on the auto sector?

We continue to like domestic focused cyclical names. Capital goods, industrials, real estate and select banking stocks, including PSUs, have done well for us. We remain constructive on the healthcare sector and prefer domestic pharma companies for their structural appeal. Valuations have run up a bit but hospital-related stocks and diagnostic chains have seen some valuation correction.

Hence, we maintain overweight stance on the healthcare sector.

Within the defensive sectors, we prefer pharmaceuticals over consumer staples and IT. In the auto sector, we favour auto ancillary companies due to the focus on manufacturing, exports, and the premiumisation trend. Some profit taking in two-wheeler stocks may be prudent after their significant rally and stretched valuations.

Have you spotted new themes for FY25 or continuing with the FY24 themes? 

The surprising global growth and China's recovery potential present opportunities. While we are unsure about China's sustained growth, some beaten-down export-oriented chemical stocks appear attractive at current prices. Additionally, cost-of-living crisis and higher inflation in the developed markets could benefit export-driven Indian companies.

We are also evaluating potential beneficiaries of ongoing free-trade agreement negotiations with the UK and Europe. The post-election budget will be crucial, as it will determine the government's commitment to reviving consumption, increase tax net, reforms, etc. This could significantly impact sector dynamics, as investment-driven sectors currently trade at very high and sometimes, irrational valuations warrant sector rotation.

Do you think the upward journey in mid and smallcap space looks unstoppable in FY25, especially after sharp recovery following the March correction?

India’s economic structure is changing fast, with manufacturing, exports, infrastructure, defence, travel and tourism, renewables, and new-age tech platforms being increasingly represented in the mid and smallcap space. Naturally, there is a mad rush to buy these stocks but the problem is that most of these usual stocks now trade at absurd valuations and especially where there is low free-float.

It is very difficult to say when this party is going to end but when it ends, it could be very ugly as the time corrections could be very painful. We currently recommend having 75 percent weights in largecaps and 25 percent in mid and smallcaps.

Do you expect employment and agriculture reforms after the general elections?

The government has significant political capital and to some extent, it is using it to drive investment led growth, which may not generate immediate jobs. The goal is to shift employment from agriculture and government sectors to self-employment, private businesses, and manufacturing. This is a painstaking multi-year process but it is the right thing to do.

Nevertheless, the trend growth for India is still behind pre-covid level and we have over 8 to 10 million people joining workforce every year. There is a massive amount of disguised unemployment in rural areas. Hence, it is important to quicken reforms and take concrete steps to fix near-term job problems before it becomes unmanageable.

Do you expect strong earnings growth in FY25, too? Which are the sectors in the driver's seat?

India’s nominal growth has undershot expectations and export market, including IT, has suffered significant growth slowdown as well. Overall consumption has remained weak in FY24 and the tight liquidity condition has led to margin compression for the banking sector.

Despite all these challenges, earnings growth remained very healthy supported by good performance on profitability front. With this lower base on the top-line growth and potentially liquidity easing, the earnings have good potential to surprise positively in coming quarters.

We expect banking and financials will contribute maximum towards earnings growth, while capital goods, industrials and government infra-led segment is factoring in peak profitability where there could be some disappointments but overall, earnings and cash flows to improve as the recovery gains further momentum.

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