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DAILY VOICE | Midcaps can form about one-fourth or one-third of overall portfolio: Harshad Borawake of Mirae Asset Investment Managers

Strong corporate earnings performance in the last 2-3 quarters as well as expectations on future growth and low-interest rates support equity valuations, says Borawake.

July 27, 2021 / 08:31 AM IST

Harshad Borawake, Head - Equity Research at Mirae Asset Investment Managers India, said Nifty companies posted more than 20% earnings growth in FY21, a first in many years. Also Bloomberg consensus estimates indicate 20%+ earnings CAGR between FY21 and FY23 led by cyclical sectors.

Borawake has more than 17 years of experience across industries like financials, oil & gas, logistics and aviation. Prior to joining Mirae, he was with Motilal Oswal Securities as Vice President (Research) and Capmetrics & Risk Solutions as Research Analyst - Equity.

In an interview with Moneycontrol's Kshitij Anand, Borawake said that he feels the recent market performance can be attributed to both fundamentals as well as positive sentiment.

Edited excerpts:

Q) Market hit a fresh record highs in H12021 and the momentum continued at the starting of H22021 as well. What is driving markets?

A) Time and again we have seen that markets act like a voting machine, but over the longer term, markets are a slave to the corporate earnings.

Close

In my view, the recent market performance can be attributed to both fundamentals as well as positive sentiment.

While concerns on the likely third COVID wave still linger, market has remained strong due to economic revival led by monetary and fiscal support across the key economies.

Strong corporate earnings performance in the last 2-3 quarters as well as expectations on future growth and low-interest rates support equity valuations.

Specifically on the earnings, do note that in FY21, Nifty Index companies posted more than 20% earnings growth, a first in many years, and also Bloomberg consensus estimates indicate 20%+ earnings CAGR between FY21 and FY23 led by cyclical sectors and market share gains.

The near-term positives include likely normal monsoon, good progress in vaccination, upcoming festive period, and multi-year low-interest rates supporting economic recovery. The Nifty Index valuations at 18.3x on FY23 earnings seem reasonable in the context of earnings expectations.

Q) Manmohan Singh’s July 24, 1991, budget speech is considered as the harbinger of economic reforms in India. What is your take on that? Do you think the best of the reform years are already behind us and what this means for investors?

A) Any reform, in our view is not a one-time event and is a continuous process. Different reforms are essential at various stages of the economy. The 1991 reforms paved the way for the transition from a protective economy to a more open and private sector-led economy.

These reforms were strengthened subsequently and also with recent reforms like GST, DBT, RERA, corporate tax cut, PLI schemes, and so on. While, some of the difficult reforms are now largely done, others are still in progress like land and labour.

The recent reforms as expected were disruptive in the near term, however, benefits of the same should accrue in subsequent years as the execution and compliance improve.

These reforms will aid India’s journey towards a USD5 trillion GDP economy and in turn, will benefit all the participants including investors.

Q) Small & Midcaps seems to be surging ahead of the benchmark indices and are trading slight premium to largecaps which has not been the case for long. Does that make you cautious on this space? What are your view and what should investors do?

A) While, small and midcap indices have outperformed on a 1 and 2 years basis, however, their performance is largely in line with the Nifty index on a 3-year basis.

In our view, if the risk-adjusted returns between large and midcaps are similar, then one should prefer higher allocation towards large caps, which is the case currently.

On an aggregate basis, while some of the stocks are trading at the highest-ever valuations and one should be careful there, but there are also some unique companies with a strong moat.

Midcaps typically offer opportunities on a bottom-up basis and can form about one-fourth or one-third of overall allocation.

Q) Which sectors are likely to take lead in the second half of the year 2021? Where is the smart money moving?

A) It is always difficult to predict, and more so for the short term. The Indian economy has always done well in the second half of the financial year as it coincides with multiple festivals.

While the resurgence of COVID cases in some countries is a renewed concern. In India, increasing vaccination and falling positivity rates are positive, and expected normal monsoon should give necessary support to the economy.

We are positive on discretionary, financials which would benefit in the recovery period and some relatively stable sectors like Healthcare, IT along with some B-B businesses and few value names.

We believe that India is at the cusp of multi-year growth revival given the multiple drivers which will lead to mean reversion in growth rates.

These include low-interest rates, acceleration in manufacturing exports, buoyancy in the rural sector, consolidation toward stronger players, etc.

Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
Kshitij Anand is the Editor Markets at Moneycontrol.

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