Putting recent earnings performance into perspective, Chandan highlighted the sharp outperformance of small caps but cautioned on sustainability, saying, “This quarter, the small caps have delivered much better earnings growth… So large caps have so far given about 12% kind of profit growth. For mid-caps, it’s about 14% and small caps is 30% plus or so. However, you should also look at the basis of how they were last year.”
Overall, he said, we are in a better position compared to the last 12 months with a pickup on the consumption side. There are also hopes of better exports as India signs more free trade agreements (FTAs). The cost of capital has come down over the past year, and that is also helping businesses.
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“….from whatever interactions we’ve had with companies, sentiment is getting better… I don’t think this 30% kind of growth can continue, but there is a lot to play within this small cap space now, where quality businesses are seeing some revival in growth and valuations are attractive,” he noted.Explaining where his fund is finding opportunities, Chandan said, “We’ve seen selectively now within different pockets… materials, we are seeing good amount of action in cement, metals and even some of the chemicals companies… within consumer discretionary, now, we are seeing an improvement in demand… within industrial… capital goods, even within power, we are seeing many companies giving good numbers… except for maybe the IT sector, which is again, a top down kind of a negative view that we have.”
Detailing how he is positioned for the economic upcycle, he said, “If you see in our portfolio, what we have done is we have added cement across the space… whether it is large cap… and then there are a couple of good mid cap companies… and a couple of small caps there… ”
In metals, for ferrous and nonferrous, there are clear leaders in the space, and we go with the largest companies in this area. We have added more weightage among BFSI to private banks… So these three sectors, if you see industrials, materials and financials, these are the sectors you play with the up move or the economic upcycle.”
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On the information technology sector, Chandan said weak sentiment is likely to persist, even though a sharp fall is unlikely, stating, “If sentimental negative will carry for some time… every few months probably you will see… because every company is working towards productivity gains… I think this hangover will continue for some time, and it will weigh on the valuations… But the cash flows, the return on capital ratios, the dividend payments or even buybacks… may not lead to a severe fall in the IT sector. They may be confined to a trading range. I don’t think there’ll be a lead sector to contribute to the up move.”
For the entire interview, watch the accompanying video
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