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Daily Voice | This CIO thinks small-cap is set for a big leap to beat Nifty, but performance will be stock-specific

We believe a lot of companies in the small and mid-cap space are ready to outperform, given that they’ve completed or are close to completing their capacity expansions, are sitting on lean balance sheets, generating healthy cash flows and are trading at reasonable valuations post the correction.

August 07, 2022 / 07:44 AM IST

Pawan Bharaddia of Equitree Capital thinks that the recent comments by the Reserve Bank of India (RBI) have been less hawkish and the projected inflation trajectory seems well within its comfort zone.

With a good amount of heavy lifting done upfront, Equitree is hoping to see a slower rate hike, especially because of the impact of lower crude oil prices and softening of commodity prices, says the Equitree co-founder and CIO in an interview to Moneycontrol.

Banking on his over two decades of investment experience, Bharaddia expects that even after a smart recovery from the June lows, the small-cap space is on track to outperform the benchmark Nifty, but the performance will be more stock-specific from here on.

He recommends investing in companies following a ground-up approach, instead of following a top-down approach. Excerpts from the interaction:

Do you still fret over earnings downgrade in FY23 and FY24?

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Our initial impression of this earnings season is that companies have weathered the raw material hikes better than initially anticipated. Barring a few sectors like IT, chemicals and pharma, which reported subdued numbers, companies across sectors like manufacturing, engineering, infrastructure have reported decent growth in revenues which made up for the loss in margins.

Also readSBI Q1 earnings: Net profit of Rs 6,068 crore, misses street estimates

Despite anticipated slowdown in US and Europe, most companies are expecting a better second half of FY23 as they gain market share in exports from global competitors (China+1 impact) and / or benefit from the buoyant domestic markets. As we stand, consensus earnings estimate for Nifty companies for FY23 and FY24 have seen a slight downward revision and are now expected to grow at 14 percent for both years, however, we believe the broader market should perform well over the next two years.

Softening commodity prices and lower crude should also help in recouping some of the lost margins. Overall, we believe FY23 and FY24 should both result in good growth, if the geopolitical supply side pressures ease out.

The Nifty50 rallied 14 percent from June lows. Do you expect the market to hit record highs by end of this fiscal?

As expected, the return of FII buying has propelled a super-fast recovery in the market posting 14 percent gains since the June lows, outperforming most emerging markets. Given India's political and economic strength, we believe India should continue to emerge as one of the most favourable investment destination for FIIs and as we experience growth we should indeed see markets making record highs in times to come.

Also read - 63 small-cap stocks rise 10-66% as market ends a volatile week with 1% gain

Having said that, one must bear in mind that the journey is likely to be volatile and not a smooth ride. With the recent run up, Nifty valuation is back at ~20x FY23 and 17.5x FY24, which we feel is reasonable given the volatile geopolitical environment. At this stage, we may see some time correction as well as absolute correction, before we start seeing a structural uptrend again.

Lot of midcaps and small-caps have come back in action now. Do you think the mid-cap and small-cap space to outperform large-caps from here on?

The Nifty50 at current levels is 7 percent below its highs, while the Nifty Small Cap 100 is almost 30 percent below its highs. We believe a lot of companies in the small and mid-cap space are ready to outperform, given that they’ve completed or are close to completing their capacity expansions, are sitting on lean balance sheets, generating healthy cash flows and are trading at reasonable valuations post the correction.

Also readDaily Voice | Second half of 2022 could be more cheerful for market than 1H, says the founder of a PMS firm

Broadly we expect the small-cap space to outperform the Nifty, but we expect performance to be more stock-specific here on. Hence, we recommend investing in companies following a ground-up approach instead of following a top-down approach.

What are the key negative factors that can keep the market away from record highs in next couple of quarters?

All the current issues of high inflation levels globally, liquidity squeeze due to quantitative tightening and rising interest rate regime, potential slowdown / recession impounding in most developed countries, continued geopolitical issues like the Russia-Ukraine stand-off and now China-Taiwan, budding Asian financial crises due to depreciating currencies etc continue to bring about uncertainties in the market and are expected to keep investors on their toes.

While all the short term issues are likely to keep global investors on the edge, nevertheless, as mentioned earlier India seem to be emerging as an oasis of hope amidst all the pandemonium world over. As the consensus candidate for one of the fastest growing economy, we believe that India would continue to attract global investors and continues to be in a structural bull phase.

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Do you think the RBI will slow down its rate hikes in the upcoming policy meetings, especially after a cool-down in commodity prices?

Recent comments by the RBI have been less hawkish and the projected inflation trajectory seem well within the comfort zone. With a good amount of heavy lifting done up front, we are hoping to see a slower rate hike going forward especially as we experience the impact of lower crude and softening commodity prices on inflation going ahead.

Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
Sunil Shankar Matkar
first published: Aug 7, 2022 07:44 am
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