In a market where banks and IT giants are losing steam, mid- and small-cap stocks are quietly powering ahead. Alok Agarwal, Head - Quant and Fund Manager at Alchemy Capital, believes the real growth lies outside the Nifty 50 — in sectors like cement, chemicals, and capital markets. In an interview with Moneycontrol, he explained why valuation fears around midcaps may be overblown, where the fund is rotating capital, and why India’s premium over global markets remains justified.
Alchemy Capital is one of the oldest PMS/AIF manager in the country with asset under management of ~Rs 10,640 crore. Fund managed by Alok – Alchemy Smart Alpha 250 PMS Strategy – has delivered an annualised return of 1.9 percent and 28.4 percent since inception (2023).
Edited excerpts
Being a mid- and small-cap focused fund, how has the year been for you so far?
June was quite good — we participated in the recovery meaningfully. The broader market saw a sharp correction in Jan-Feb’25 and a recovery between March’25 and June’25. But if you look at the full six months, the net movement hasn’t been very significant. That’s why valuations haven’t fundamentally reset — they’ve just rotated.
Have you been cutting exposure to small-caps?
Not really. In fact, the broader market is where we’re finding stronger and more sustainable growth. For instance, in Q4 FY25, Nifty 50 earnings grew just 3.5 percent, while the bottom 450 companies (Nifty 500 minus the top 50) grew earnings by over 20 percent.
We follow a 'growth at a reasonable price' framework, so our allocations naturally tilt toward stocks delivering superior growth — and that’s happening more in the mid- and small-cap space.
Also, sectors that dominate large indices — banking, oil & gas, IT and FMCG — are struggling to grow beyond nominal GDP. In contrast, segments like EMS, chemicals, cement, capital markets, and even aerospace are doing well, yet remain underrepresented in the indices.
How would you describe your comfort around valuations currently?
India’s valuation premium compared to the rest of the world is somewhat justified. In our view, very few economies offer the kind of long-term visibility India does — double-digit nominal GDP and solid earnings growth for over a decade. That certainty deserves a premium.
Specifically, the Nifty 50 is trading at 21x one-year forward earnings, with 10 percent projected growth. It’s not cheap, but it’s not wildly expensive either.
How about mid-caps?
Mid-caps currently trade at a 35 percent premium of Nifty Midcap 150 over Nifty 50 is broadly in line with the 5-year average of 35 percent and significantly below recent highs of 70 percent premium. The premium is not unreasonable especially when you consider their earnings growth is projected at 20 percent over next two years versus Nifty 50’s 10 percent.
While valuations are elevated, they’re still reasonable on a relative basis. We prefer using PEG ratios (Price/Earnings to Growth) rather than just P/E. The Nifty Midcap 150 index is at 1.3x PEG, which isn’t alarming. As they say: price is what you pay, growth is what you get — PEG balances both.
How have earnings expectations shifted this year?
Earnings momentum hasn’t shifted drastically this calendar year. While the September'24 and December'24 quarters saw muted growth, the March 2025 quarter clocked about 12 percent growth, which was a positive surprise.
We expect another low double-digit earnings print for the June'25 quarter, which could further support sentiment.
Despite the mid-year softness, FY25 earnings grew 11 percent, taking India’s profit-to-GDP ratio to a 17-year high.
Which sectors have disappointed so far?
In our view, banking and IT have been the two major disappointments. In banking, we expected growth to pick up, but its share of overall profits has actually declined. Even private banks, though high quality, have underwhelmed on growth.
The same applies to technology — it hasn’t bounced back meaningfully despite coming off a low base.
What changes have you made to your portfolio over the last six months?
In the Alchemy Smart Alpha 250 PMS Strategy, we’ve made some decisive shifts:
We have trimmed consumer discretionary from 26 percent in December'24 to 12 percent in June'25 — mainly via profit booking in autos and retail, where valuations got ahead of earnings visibility.
We increased weight in sectors with better earnings traction:
Industrials: ramped up to 27 percent, led by building materials, capex plays, and manufacturing.
Materials (cement and chemicals): Increased from 6 percent to 13 percent.
Healthcare: increased from 8 percent to 11 to 12 percent, with selective bets where earnings are stabilising.
Financials: skewed more towards capital market players and NBFCs, not banks.
Overall, we have reduced exposure to large-cap during this six-month period.
Where are you increasingly turning bullish?
In the Alchemy Smart Alpha 250 PMS strategy, we’re watching capital markets and industrials closely — both are showing strong fundamentals and momentum.
Cement and chemicals also remain attractive with good visibility.
We’re still cautious on banks. Within private banks, the better-run institutions are doing relatively well, but profit growth overall is underwhelming, so we’re being selective.
READ MORE: High valuations? No worries, says Prashant Jain
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