ETMarkets Fund Manager Talk : Despite a cautious outlook for IT sector, this smallcase manager is betting on mid-tier stocks

What’s your overall view on equities after 2 months of strong run?
There is a sense of optimism across the markets globally. Corporate earnings have caught up with long-term median valuations of broader indices (Nifty P/E is at 21x currently compared to a long-term median of 20.5x), supply chain issues due to the Russia-Ukraine war are no longer hindering logistic movements, crude oil prices have corrected by more than 30%, and inflation is softening globally as interest rates have climbed up.

Hence, a gradual uptrend or in the form of a burst mode of up moves with each passing quarterly earnings may be observed in the markets parallel to the increase in corporate earnings, which are expected to be 11-12% kind of growth for this year.

Has your small case managed to give alpha returns in the last 1 year despite volatility?
Both our portfolios – Flagship and Multiplier – have given stellar returns over the last one year. The Flagship portfolio, a sector-agnostic multi-cap portfolio, has given 30.7% returns against the Nifty 500 index, which has given 13% returns over the last one year.

Similarly, the Multiplier portfolio, also a sector-agnostic portfolio, has given 24.9% against Nifty Small Cap 100, which has given 14.2% returns over the last one year.

What are your current top holdings? Have you rejigged your portfolio significantly in the last 6 months?
We have a very diversified portfolio with more or less equal weightage for all the stocks in our portfolios. The Flagship portfolio comprises 18 stocks, while the Multiplier has 16 stocks. We generally maintain a 6-7% of average monthly churn of the portfolio, i.e. in +1.5 years approximately, the entire portfolio churns.

Post the March quarter earnings, which sectors are you seeing growth prospects, while which ones can remain under pressure?
The infrastructure, capital goods, banking sector, especially PSU banks, HFCs and real estate sector will remain bullish throughout this year, and FMCG, consumer durables, and agri commodity stocks will see seasonal and quarterly performance-based price movements.

While IT sector stocks have bounced back to some extent this year, we are yet to see a turnaround in their earnings and margins. Similarly, the chemicals sector, especially the export business there, isn’t witnessing the growth it had seen over the last 4-5 years. So, these two sectors will remain a question mark depending upon the scenario as it develops.

Smallcaps have seen a good correction over the last 1 year when compared to the large caps. Which pockets in this segment offer favourable risk-reward, according to you?
This is a general phenomenon of small caps that are more volatile in comparison to large caps. So, while the large caps remained range-bound over the last 20 months or so, after October 2021, small caps were more hammered.

And while the benchmark indices are near 1-2% off their all-time highs, we see high volume buying in the small caps.

There are some small and mid cap companies in the IT services sector on which we are very bullish on. The reason is their ability to grow despite the macro demand environment not conducive for their growth as large caps are also struggling to grow. And, to add to that, the margin loss they are compromising is relatively similar to the kind of margin loss the large caps have gone through in the last one and a half years.

So, from a risk-reward scenario, the risk on these stocks will be commensurate to the rewards they can yield in the medium to long term.

What kind of portfolio allocation would you recommend for FY24?
Well, we are mostly positive for the markets. However, for the current fiscal year, we recommend infrastructure, capital goods, PSU banks, real estate, electrical equipment, automobiles & auto ancillary, tyres, hospitality, mid-sized IT services and FMCG sector companies.

Also, avoiding the pharmaceutical sector for some more time would be better.

The recent steps by SEBI show that the regulator is coming down heavily on finfluencers. What’s your thought on it?
Definitely better regulations have been imposed by SEBI, especially considering the kind of fraud and false advertising done by the finfluencers on social media platforms.

Influencers giving investment advice are equivalent to a nurse prescribing cardio medicines to a heart patient.

With no regulatory or fiduciary responsibility, finfluencers have already massively duped retail investors by luring them to invest in cryptocurrencies and look at what has happened to many crypto companies and the real money people lost investing in smaller and newer cryptos.

We believe that finfluencers’ use should be limited to the advertisement of financial products or financial companies.

SEBI’s actions against unregistered finfluencers posing as advisors, giving stocks or F&O segment advice is just, as the regulator has to think from the angle of protecting investors’ capital.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)