Sanjiv Bhasin, Director, IIFL Securities, says: “I still think midcap IT and other select midcaps will outperform. The rest will be part momentum, part trading, which is going on in the market. However, it is the time for the largecaps to outperform. They can also play a catch-up, because we are very bullish, given that FII selling is now seeing exhaustion. And with stability in yields and the Fed no longer going to raise rates, there can be a steady flow of money into India, particularly in largecaps and midcaps.”
Why do you think we are seeing this kind of traction in the smallcap stocks? Typically, there is more risk associated with them. Price fluctuations are much higher. The information, of course, on most of these counters is generally much less compared to the largecaps or even the midcaps. So, explain to us this phenomenon that is currently playing out in the market?
It is a tale of two cities. We are sitting in a bull market that has never been seen in the last five years and who is complaining? The big boys, Reliance and HDFC Bank, are over-owned on the index which is not letting the index do much. So, it is a tale of two cities, like I told you. The impact cost of midcaps and smallcaps to the ownership pattern, mutual funds are underexposed. Also, there is the turnaround in sentiment and earnings.
Suzlon, Zomato, REC, PFC, ONGC, these are pedigree stocks, not just run-of-the-mill stocks. It tells us about the mutual fund inflow and how the retail investor is putting his money where his mouth is. He wants a taste of the broader market which is truly outperforming.
The index fell 6%, 7%, and the midcap index fell 7%, but the recovery, the index is up 3%, midcap is up 10%. It tells us that the retail flavour is driving this market. The three reasons for the FII outflows are purely higher bond yields in the US, strength in the dollar, and the global geopolitical situation. Now, all that means ETF flows which are predominantly in the likes of Reliance, HDFC, and the banks, are seeing selling pressure, whereas the broader market is outperforming and that may continue into the New Year.
Are fund managers late to the party when it comes to the broader markets? Will the momentum in that space sustain or not at these levels because these are historic highs? Are we likely to see the midcap index move up even higher from this point? If so, which are the pockets and the stocks you think that will lead the charge, both in the midcaps and the small caps?
It is a case of glass half-full, half-empty. I will not stick my neck out. Whether they are very cheap or not, there will always be inevitable corrections. But for the last six months, people have all been doubting that the midcaps are over-bloated and overpriced. Whether it is defence, railways or the PSU basket as a whole, everyone felt it was overbought.
We have seen some corrections but the pullback has been amazing. In my 30 years, I have never seen such strong momentum. Like you said, the smart fund managers, mutual funds are underperforming the Nifty or the midcap index. And that is telling you that they did not have the prowess to invest more wholeheartedly in the midcap universe. That is catching steam on any decline.
Providentially, there will be corrections which are part and parcel. But as long as earnings and the circumstances remain good, who thought that power will be in the best position ever. NTPC, ONGC, REC, PFC, all are hitting new highs and that tells us that the power structure or the power bonds which they have, given that the sovereign bonds will be in action from the next year, will mean that sovereign debt bonds, particularly REC, PFC, NTPC, Tata Power, they will be in a very sweet spot.
I still think midcap IT and other select midcaps will outperform. The rest will be part momentum, part trading, which is going on in the market. However, it is the time for the largecaps to outperform. They can also play a catch-up, because we are very bullish, given that FII selling is now seeing exhaustion. And with stability in yields and the Fed no longer going to raise rates, there can be a steady flow of money into India, particularly in largecaps and midcaps.
If that is the reality that we are going to see more of those fund flows into the large caps now, because they have a lot of catch-up to do. If you are making a portfolio strategy with a keen view on all the moving pieces in the markets, especially with the risks emanating from the global setup, how would you place the smallcaps against largecaps and midcaps right now?
Firstly, you have to hold the midcaps because they add the delta on your portfolio. And let me tell you, the trading part of the market has made money so select people are exposed to midcaps which have done very well. If I can name a few stocks, I would like to put it on record. We have ownership in those, and we think they are turnaround stocks for whatever reason. First among them would be Idea. We think Idea has undergone a lot of catastrophe because of the interest payments and so on. 33% of Idea is now owned by the Government of India.
Idea has never defaulted on any bank loan. ARPUs are steady at 142. It has stopped losing its user-subscriber base, and the parents are ready to put capital into it. They have just received the capital from HDFC Bank. Idea can be a very strong turnaround given that data is doing extremely well and ARPUs are rising. A disclosure, this is one stock which has been in our portfolio, and this is very big or can be an outperformer.
Second is TTML, on which we are again bullish. It is the consumer-facing arm for the Tata Group on the ice. That is the internet communication telecom space, and at Rs 85, it has a very good risk reward for outperformance.
Third play would be a quality stock like Devyani International which owns the brands of Pizza Hut, Kentucky Fried, and Costa Coffee, and which came out with reasonable results, but EBITDA margins have fallen because of cost increases. We think these are three-four stocks which you can play on largecaps. We like the Bank Nifty itself. We think ICICI and Axis are going to lead from the front, and that would be part and parcel of the index because large caps would be definitely bought by foreigners.
When you are increasing your exposure to the broader markets, how should you go about hedging your risks right now because you did mention valuations at this point in time, and you did say you did not want to stick your neck out.
So hedging is a part and parcel of how you can play on the option side. That is a strategy which keeps coming and going, and you have to try and hedge yourselves when the markets look like they have reached a crescendo and so on, which was the case when we hit 20,000. But we have weathered that storm well. Midcaps have shown their mettle and they are showing a lot of outperformance.
So select midcap banks, select IT midcaps are the ones which you play. You can hedge yourself on the index or on the Bank Nifty because index and Bank Nifty have provision of over-ownership by FIIs, and when they sell, they will sell what they have, and that is mainly in financials.
Power is one sector which has been re-rated and can see further re-rating, but we also think some of the midcap banks, like AU Bank, look very good. There was a merger with a small financial bank which has seen some sort of weakness, but given the grass root lending which they have and their expansion, AU Bank is one stock which you must own in this carnage on the banks.
Looking ahead at all the possibilities in the markets, in the kind of bullish trends that we are seeing, what are the potential risks that one should pencil in to form a proper strategy?
Well, firstly the risk is of being under-invested. There is nothing called timing the market. It is time spent in the market, and for one year, people have been crying for corrections only to be left out and are feeling left out. Why do you think the index or the midcap or the small cap index is hitting all-time highs? It is because of under-ownership.
So please do not underestimate the power of the economy. The demographic premium is evident for you, whether it is airplanes, it is hotels or it is consumer spending, and that has miles to go. Also, oil has been on a fall and from $95, it is at $78.5, which is a blessing in disguise for India. The dollar has started to weaken which means emerging markets will be in a very sweet spot.
I am looking for a sparkling Diwali, and I would say build up your portfolio. Do not look at the next three weeks, look at the next three years. There can be a little uncertainty when the elections come, but we still think that we will go to new highs by the end of the year.