We are extremely positive on smallcaps: Varun Saboo

Varun Saboo, Head-Equities, Anand Rathi Shares, says “we remain very bullish on real estate going forward as well. Till we see concerns around excess supply, we do not think there is any stopping it. ”

Saboo further says: “Remain extremely positive on the smallcap space. Markets are going to track earnings growth and that will keep coming. The economy is doing exceptionally well. We are very hopeful on this one.”

New year new high, but what led on Monday was the mid and smallcaps. The smallcap side, especially, saw a very good run-up. What is the view coming on the Nifty Smallcap or any of the smallcap names, anything that is looking interesting?

Varun Saboo: We talked 7-10 days ago and at that time also, we were speaking about smallcaps. People were concerned about the news around the froth in the segment. We had clearly mentioned that the good part about markets is that we track earnings growth. So, I had also given a view that in the next couple of years, by FY26, we are seeing at least a 35% odd earnings growth.

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The consensus that is building is also similar and we were assigning about 26-27 times multiple which is the middle of the range in which smallcap index trades. So, from 22x to 29x is the range in which they have been trading. If you take both the things into account, we were seeing at least a 44% upside on the smallcap index. So, we have just scratched the surface. Still, we are extremely positive on the smallcap space. Markets are going to track earnings growth and that will keep coming. The economy is doing exceptionally well. We are very hopeful on this one.

What does one do with the realty names? Just when you think that the realty index is going to pause a bit, look at DLF; it went up another 6% on Monday. Is the bull market in this particular sector here to stay?

Varun Saboo: Again, the same thing. We spoke about this last time also. The same perspective we had was that we are seeing so much demand on the ground and it is not anymore a situation of oversupply.

When does the real estate sector halt? It happens when we see on the ground supplies being much more, which is not the case right now. In fact, it takes some years. So, at least two-three years for it to really happen if real estate companies go extremely aggressive in building those kinds of supplies, which is not the case right now.

I think there was a downturn of about a decade in real estate. It has been about two-three odd years or max three-and-a-half, four years that we have seen some kind of sanity prevailing in this sector and that is where the reactions in the stocks are coming. Personally, we remain very bullish on real estate going forward as well. Till we see concerns around excess supply, we do not think there is any stopping it.

What is the word coming in on pharma? Do you still see some interest? YTD, pharma has given a decent performance. Could we look at something in the pharma pack?

Varun Saboo: US pharma side, where we used to keep hearing about price erosions across the drugs which were being supplied there, has changed. We met seven-eight companies a month back and this was something of a consensus there that now the US, the dealers, distributors do not talk about price cuts. Their focus is that supply disruption should not be there. So, till the time your supplies are consistent, they are okay paying the price. If for the next couple of years, the view is that no price erosion is going to happen, then any pharma company which has a higher exposure towards US pharma will start doing well.

So, names like Sun Pharma, Dr Reddy’s, Lupin, would look very good. Even for that matter, Granules India looks well. All of these are looking pretty attractive despite the run-up.

We have been discussing a whole host of pockets, but what is it that you think is the best way to cash in on this bull market and some of the market-linked stocks? I know the big one is the impending NSE IPO. But options are quite a few there in terms of getting a market exposure via listed entities.

Varun Saboo: I agree with you. If you have to talk holistically about what ideas are looking good, how we are seeing it, we are looking at companies which are showing a good earnings growth trajectory in the near term itself. By near term, I mean the next 6 to 12 months. We believe that two-wheelers as a theme has been doing very well. They have just come out of a downturn about a year back. This was a long downturn that two-wheelers were in.

We are seeing that trajectory changing. So, we are very bullish on two-wheelers which we have been mentioning all throughout, names like TVS, Hero Moto, all look very good to us. So, these are great buys over here as well. Till the time that business strength is there, they will do well.

Secondly, we believe that with continuity, how it has been in terms of policies overall, we believe all these PSU themes should continue doing well, particularly when we see the power theme overall, within that the transmission companies should do very well. So that is another space we are very bullish on.

Defence is another theme which we like. So, overall, wherever we see earnings trajectory for the next one, two, three, five years to be good is where our focus lies.

What is the view on textiles because overall we have seen a good amount of gains? Fundamentally speaking, what is your latest view on the textile sector?

Varun Saboo: Textiles again has been under pressure for a while. Things are changing. Their margins had gone for a toss. These companies were under a lot of pressure because of dumping by China. Post some initiatives by the government, hopefully the dumping will reduce. We are expecting things to reverse for these textile companies going forward. We should see a much better FY25 and FY26 for them. These are great companies to own right now.

I do not know if you had the chance to look at the auto sales numbers which have trickled in. While tractors continue to be a weak link, on the overall sales, not many of the majors have managed to even match up to the street expectations, forget beating that.

Varun Saboo: Yes, absolutely. It was expected that PVs would not be doing too well. The reason is that if you compare it with the highs of 2019, four-wheelers had crossed that at the end of 2023 itself, so they are already running at a very-very large base. Why I say I am very bullish on two-wheelers is because we are still a long way away from the base which was hit in FY19 for two-wheelers. So, we still have a lot of scope for the peak to be achieved first and then we will see growth over it, which has not happened in two-wheelers yet.

Tractors have been under pressure because they had a great run before that for a good two-three years which we had seen. We saw a slowdown this year. Most corporate commentaries also were not very bullish on tractors sales but in a couple of quarters from here, tractors should start doing well because there is already a low base that you will be running in after two quarters from here. So, yes, in terms of autos right now, if there is a clear cut play, it is clearly two-wheelers and others we should just wait it out on.

Do you sense that FMCG will continue to be the weak link for the market?

Varun Saboo: It has been a long time that FMCG has done well. We have seen these companies underperform for good three years plus, if I am not wrong. Obviously, there will be somewhere where we will start seeing the rural pickup happening, where every time we hear bites that there is something happening and it is not happening. But I would certainly think that at these levels, in Hindustan Unilever, downsides are protected.

I do not see any immediate triggers for upsides, honestly and so cannot really say it is a great buy right now but do not see downsides from current levels. I think in pockets, some companies will do well, like Godrej Consumer which has done well recently. We see a lot of promise for the next two years plus in terms of overall growth and earnings growth as well, so that is one company which one can keep in mind which should do well going forward.

Soone has to choose the pockets in consumer stocks that are doing okay right now, where there is a little bit of promise visible and where there is some bit of confusion and we are waiting for clarity to emerge. We will just wait it out.

In terms of fresh buy calls, what are you working on or looking out for?

Varun Saboo: There are some companies which we keep working on, particularly the smallcap space, some of them which I have recently met. I met one of these companies named Himadri Chemicals. They are looking pretty promising in terms of the business they are doing, etc. We are yet to formalise a view on it. I am just giving a caveat, I do not have coverage yet on it.

But yes, they look very promising. Business per se, doing a lot of things correctly. So that is one name which can be evaluated. There is another company, Praveg, which was making a lot of noise around when Ayodhya opening, was happening. So that is another idea which is looking interesting in terms of doing some work around it. We are yet to have coverage on these two names. As you are asking me for newer ideas, I am just mentioning them as spaces where we are doing some work, which we are still evaluating. If someone wants to do some work, they can look at these.

Harry Byrne

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