Daily Voice | This smallcase manager is more bullish on mid-caps and small-caps than bluechips

Are you cautious about Indian macro set-up as we are going into next year?

We are taking cognisance of the key macro developments happening across the globe. As we enter 2023, we envisage the economy to witness lots of after effects of liquidity tightening, rise in interest rates, change in supply chain, change in risk appetite, reallocation of funds, geo political re-alignment and change in business strategies.

We have seen a K shaped recovery and the wealth divide should rise in 2023. All these change in macros will impact businesses for sure.

The blessing in disguise in this situation is the comfortable broader market valuation, most of these factors being priced in and the resilience of Indian economy considering high domestic consumption, strong business fundamentals and high conviction of foreign capital towards India.

Most global investment experts have an 'overweight' on banks. Where do you stand?

We have seen a clean-up in the balance sheets of banks over the last few years. The valuations, specially in the case of PSU Banks had gone really comfortable. The margins have risen over the last few quarters and the NPAs are considerably down.

If you look at the leverage on balance sheets, it’s at a decadal low whereas the capex is at a decadal high, which will positively impact the wholesale credit for banks. Also, the retail credit is currently showing a positive trend. However the cost of funds is increasing for the Banks and it’s difficult to attract CASA currently.

Some value opportunities in this sector will attract capital. We are positive on this sector but are also closely watching the macro developments as this sector has a high correlation to the macro developments.

Do you believe the IT sector is going to see healthy run-up in the coming year?

No, we believe that this sector will still go through some consolidation in the coming year. The attrition in this sector should fall going forward, however the salaries are still high.

We should also see fall in order flows for the sector in the coming year as we see squeeze in liquidity and recessionary environment in some developed economies. However, next year will see lots of value opportunities being created for investing in this sector for the next 3-5 years.

What are the themes among small-caps that are expected to become mid-cap and large-cap in the coming decade?

We are in an environment where value opportunities giving 10-15 percent growth in business and available at reasonable valuations will be preferred by investors.

We like the traditional sectors like Pharma, Chemicals, Capital Goods, and Auto components. Manufacturing, PLI (production linked incentive), China Plus One, and Capex will be the theme that will make lots of wealth for investors in this decade.

Our High Quality Right Price smallcase and Smallcap Compounders smallcase have stocks from these segments of the markets. We are very bullish on these smallcases as the valuations of the portfolio are really comfortable (PE of 13 and PB of 1.5 times for the portfolio) while the business fundamentals are strong along with a strong management pedigree. So, there is a cushion for investors investing at these levels.

With the easing lot of concerns, is it better to turn positive on big laggards?

We have seen a Q2FY23 where many of the companies saw a fall in revenues as well as margins. However, the commentaries of management are in general positive going into the second half of the FY. The commodity prices have corrected over the last few months which will help the margins going forward.

Yes, most of the bad news is priced in for now. However, it will not be a 2021 market where everything will run. It will rather be a stock pickers market and few of value and growth opportunities will do well.

Rather than turning positive on big laggards, you will have to look at individual business fundamentals and valuations.

Will it (2023) be a much better year for Indian equities, compared to 2022?

We are cautiously bullish going into 2023. Rather than the Bluechips, we see more run up in the broader markets (midcaps and smallcaps) in 2023. Considering the valuations in this segment of the market, we see definitely this segment will do better than in 2022.

We should also see a revival of IPO markets in 2023 as we see capital flowing in from retail, DII and FPI requiring fresh issuances.

Do you still think the geopolitical situation can play spoilsport for the improving equity market sentiment in the coming months?

In the short run, yes, the geopolitical developments are something very hard to predict and can impact the markets in the short run.

You have to look at the long-term impact of these developments on your business and not take decisions basis the short-term volatility caused by these developments.

Also, there is no evidence that the markets will closely correlate to the macro developments. Ideally markets move 3-6 months ahead of fundamentals.

So, we suggest the investors to keep invested for a longer term.

One consensus that all experts have is that this decade belongs to India.

Do you see a major shift in money flow from India to China if the Chinese economy reopens?

There is a lot of conversation on this topic. We see that some of the trends like increase in allocation of FDI and FPI money towards India a long-term sustaining trend.

Yes, it’s difficult to replicate China infrastructure overnight or take over a major part of business from China, but we are surely going to gain export market share in many of the key PLI sectors in this decade.

Most of the large investors are still conservative on China policies. Valuation is not the only factor that will decide capital flowing to China and flowing out of India.

India is going to attract all-time high FDI and FPI flows in the coming years.

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