What do you make of this recent valuation surge, especially in the midcap and the smallcap side of the market? Do you think we are getting into a bubble zone or the earnings recovery will make valuations look cheaper in hindsight?
I firmly believe that we are getting into a bubble zone, at least in half of the smallcap and midcap stocks. If you look at the pre-pandemic level of January 2020, Sensex has gone up roughly by about 27% whereas the smallcap index is up by nearly 80%. Now look back at the last 17 years, ever since the smallcap index was constituted by BSE, this kind of outperformance has got corrected. Do not just go by history, it is also logical because the valuations are stretched. There are many smallcaps trading at 30-35 PEs and 10 times EV to sales. I believe it is not sustainable. Of course, there are pockets of opportunity. The right thing is to do a bottom-up approach. Otherwise, reduce the overall exposure to smallcaps. Have at least 30-50% exposure to institutional stocks with above Rs 4,000 crore market cap. But do not zero your exposure to smallcaps. Have 30-40% exposure in high-quality smallcaps and follow the bottom-up approach.
A lot of midcaps are getting benefitted from the increase in commodity prices. Do you these companies would do well in the near term?
If you look at the commodity space, it is all cyclicals. One should never have a linear approach to make wealth in commodity stocks because they are cyclicals. So bad luck will come. You have to play the cycle smartly. Now the time has come for most of the commodities to correct. Even though consumption went down, commodity prices went up because of supply controls. The stocks also went up. This is not sustainable and one should be very cautious in the commodity space.
What is your outlook on steel stocks given their debt reduction
Debt reduction is good but it is already in price. Some steel stocks have gone up even four times within a year. Look for another 5-10% fall and see who has reduced the maximum debt. You can be ready with your analysis for making second round (of investment), but it is not the right time to buy now. I still believe that there is an opportunity for a minimum 10% fall in these stocks because of what is happening in China. Also look at the GDP growth. We are coming back to what it was in 2020. The absolute GDP in FY22 could be the same as what was in FY20. This is something new for us. We have to wait and see how long it is going to impact the demand for metals. So I would wait for at least a few weeks or even a few months for a 10% correction in the metal space.
Where should one invest now? MNC stocks, IT stocks or FMCG?
Investors with an average risk profile should invest a minimum of 30% in stocks like
and . is an exception because it gets 42% of profit from silver which is like other metals. It also gives excellent dividend.
is going to be a growth story. It (telecom) is almost a duopoly market.
Although I have expressed my fear on smallcaps, I firmly believe that the next 2-3 years is going to be a phenomenal story for making wealth in smallcaps. That is why you should have a bottom-up approach because of the kind of money coming in from private equity venture funds who are buying even listed stocks. So there are ample opportunities in the listed space in smallcaps. You can choose from mid-sized IT and small pharma companies. Choose carefully based on four-five parameters – good management, good balance sheet, no working capital crisis and listing in the market for at least 5 to 10 years and then also look for a decent valuation. So you can put 30-40% in such quality smallcaps.
