There are a lot of themes in this market, solar, EV, defence. They are called narrative stocks. Where are these strong narratives moving because that is where a lot of fresh money is moved into defence stocks, railway stocks, solar stocks and EV stocks?
Anand Radhakrishnan: Yes, currently there are multiple themes in the market. One is on the sustainability theme where not only in India, but globally, there has been a concerted effort to push towards decarbonization, alternate energy, electrification, recycling, etc. In India also, some of the companies which have been engaged in these spaces generally have got some tailwind. Though at the margin we have seen some moderation in the global push towards sustainability because of various policy issues globally, we have seen that in the domestic market there is a reasonable continued tailwind on that.
There are other themes also which have been currently focused. One is on the manufacturing side; we have seen defence being a subset of the Atmanirbhar or Make for India theme. We have seen reasonable strength. The companies have been declaring good numbers on the manufacturing side, be it the industrial goods companies as well as defence manufacturing companies. Some of the companies that supply ancillaries and equipment to railways, have been declaring good numbers and have healthy order books. That theme continues to remain fairly strong.
The third theme which we feel is gaining a little bit momentum is the so-called premiumization trend. As the income levels go up, the demand for goods and services especially on the premium end of the market has been going up – be it in automobiles, financial services, wealth management, apparel, retailing system, in short multiple sectors. The companies that are engaged in the manufacturing and the delivery of premium goods and premium services have been trending at a faster growth rate and that is why the companies are less volatile, their earnings more resilient and provide very good multi-year growth opportunities.
Finally, the fourth trend which we see in the market is the technology-based disruption companies, like Eternal, Swiggy, Policybazaar, etc. We also expect more companies in logistics, delivery systems, e-commerce, fintech, food tech and healthcare technology. Though some of these new-age companies tend to be more volatile, there is a lot of uncertainty around their profitability, the business models are nascent and evolving but some of them are pretty strong and have established a moat and footprint in the marketplace. So, we would remain very constructive. A combination of all these four themes, sustainability, premiumization, manufacturing, and technology-based disruption look pretty interesting as the markets stand today.
The valuations for the broader end of the market continues to remain higher than their historical averages and barring the last couple of trading sessions, we have seen outperformance from the SMID basket. Where do you believe the broader end is placed in terms of valuations and what is your outlook on large versus the SMID stocks?
Anand Radhakrishnan: Clearly the earnings growth is little healthier as we go down the cap curve and largecap companies declared earnings growth are less than the mid and small-sized earnings growth. So, to that extent, one can justify a growth-led premium as we go down the cap curve. But growth is not the only reason why stock should value, there are stabilities, qualities, capital efficiency, transparency, there are many issues where we still have to justify why we should pay a significant premium to small companies. As we go down, while the growth gets more interesting, the valuations make it a very tight rope walk for us and therefore, we need to trade off between good growth companies which are valued very richly and moderate growth companies that are valued a lot more moderately in the marketplace. Yes, we are sacrificing growth for some margin of safety, but from a portfolio perspective, that is a very tricky trade off fund managers have to make while they are investing down the cap curve. Within the largecap, we do see pockets of dull growth. For example, IT companies have been growing at low single digits and the visibility seems to be still very challenging for them. Some of the commodity companies continue to be volatile in earnings and there is no clear trend on global commodity prices which makes it tough for one to allocate big money. Similarly, the utility companies are little bit low growth. So, within the basket of largecaps, the proportion of moderately growing companies is very high whereas in the mid and small-sized stocks, we see the breadth being pretty healthy, etc.
One more point on valuation is growth-led valuation, and the other is liquidity-led valuation. As we speak today, the mid and smalls-sized companies seem to be predominantly supported by the domestic investors, not so much by the foreign institutional investors per se. We need to be a little careful and watchful of the domestic liquidity conditions.
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