Daily Voice: This portfolio manager sees strong economic growth in Q3FY25, further correction in mid-smallcaps

Ashwini Shami is the Executive Vice President and Portfolio Manager at OmniScience Capital

"Various leading indicators suggest strong economic growth during the third quarter of the current financial year," Ashwini Shami, Executive Vice President and Portfolio Manager at OmniScience Capital said in an interview to Moneycontrol.

"The index of industrial production has grown consistently since August 2024. GST collections for the first nine months grew at 9.1% YoY and the direct taxes grew by 15% till November 2024. The composite PMI index rose to 59.2 in November 2024 indicating strong growth momentum," he reasoned.

According to him, the midcap and smallcap segments are trading at significantly higher levels than their respective 5-year averages. Therefore, there is higher likelihood of further correction in the mid and smallcap segments, said Ashwini Shami with more than 2 decades of experience in the financial services industry.

We expect continued focus on capital expenditure, primarily in infrastructure-related sectors. Over the last five years the government has done a significant expenditures of more than Rs 50 lakh crore on capital account, including the grants-in-aid for creation of capital assets. We expect the total capital expenditure over the next five years to rise to up to Rs 100 lakh crore. The direct tax collection for the current year, up to November 2024, has shown a growth of 15 percent, indicating that the government will have a meaningful flexibility to implement fiscal measures that may include higher capex or measures to promote consumption, while maintaining the fiscal deficit target for the next year.

We believe that Indian equities are a favourable space for foreign investors, as India remains the fastest growing economy among the top ten economies in the world for 2024 and for the next two years, according to global forecasts. Large Caps stocks, the main primary allocation for foreign investors, is reasonably priced at 21 TTM Price to Earnings (PE) multiple. The FII selling seen in the past can be attributed more to US-specific factors and less to a perceived lack of confidence in the Indian economy.

The Nifty 50 index, which has fallen more than 10% from its peak, is reasonably priced at a PE multiple of 21x which is below the 5-year average of 25 for the index. However, the midcap and smallcap segments are trading at significantly higher levels than their respective 5-year averages. Therefore, there is higher likelihood of further correction in the mid and smallcap segments. In fact, we expect largecaps, especially, financial services, power and infra names to deliver higher earnings growth and be rerated in the near to medium term.

The consumer spending in Q3 FY25 grew by 6% YoY. The UPI transactions grew by 10% to 48.8 billion transactions in Q3FY25 from 44.4 billion transactions in Q2FY25. The overall consumption has remained strong as indicated by other indicators mentioned above. However, the slowdown seen in FMCG companies and other consumer sector names may persist, as they are being impacted by niche players, ecommerce and changing consumption trends. We believe the current growth challenge faced by the consumer names will lead to further derating in the sector, eventually clearing the valuation froth.

Various leading indicators suggest strong economic growth during the third quarter of the current financial year. The index of industrial production has grown consistently since August 2024. GST collections for the first nine months grew at 9.1% YoY and the direct taxes grew by 15% till November 2024. The composite PMI index rose to 59.2 in November 2024 indicating strong growth momentum. The government fiscal expenditure, which was hit in the first half of the year, has also increased consistently in the third quarter. Therefore, we expect earnings estimates to be revised upwards for selected sectors.

Quick commerce is an exciting space from the growth perspective, as it is disrupting and taking market share from both established traditional retailers and new-age online retailers. However, one needs to remain cautious on the valuation front. On one hand, the traditional valuation metrics may be difficult to apply to quick commerce, while on the other hand, from a benchmarking perspective, traditional retailers are significantly overvalued. As a result, quick commerce players are likely to be mispriced on the higher side.