Aniruddha Sarkar, CIO & Portfolio Manager, Quest Investment, says “we are looking at where the earnings can be in the next 18-24 months and that is where I am getting a lot of comfort in several good quality midcap and smallcap companies. I would say that even at these levels of the headline index, investors can pick up some good quality companies at reasonable valuations.”
You are a midcap stock picker. Are you finding it difficult to look for new ideas in midcaps and smallcaps or do you think that we should not generalise and there are still ample opportunities in midcaps and smallaps which are okay on earnings visibility and valuations?
I would say that this whole debate about valuation is something that has started in the last six months. Ever since we crossed the 18,500 level, people have been talking whether India is looking expensive or if there is enough room on upside? At the same time, we saw the midcaps and smallcaps catching up.
What is attributing to the outperformance of the midcaps and smallcaps is that the earnings growth of many of the good quality midcaps and smallcaps is far outperforming the largecap earnings growth. In fact, in several companies which we are tracking, if I look at the last 12-18 months’ earnings and then look at the valuation, it would not be the right thing. We are looking at where the earnings can be in the next 18-24 months and that is where I am getting a lot of comfort in several good quality mid and smallcap companies. I would say that even at these levels of the headline index, investors can pick up some good quality companies at reasonable valuations.
What are the top two stocks in the midcap side? We only talk about the business model, we are not talking about whether to buy or sell the stock; just for understanding.
In fact, it is very difficult to say that whether it is a midcap or sentimentally by numbers it might look like a largecap but within the domestic consumption space, organised retail is a very good space where we have a decent allocation and organised retail shows no impact of what is happening outside India. I would say the whole domestic consumption is very immune to slowdown in Europe, upcoming recession in the US or the housing sales going down in the US.
This is one part, organised retail where I would say investors can look at good companies at good valuations. When I talk about valuations in organised retail, you should not compare it to the broader market because most of the companies there might be quoting at 40-50 PE, but we need to see where growth is coming from and in many of these companies, in fact, without naming the company.
One of the organised retail companies we have in our portfolio is quoting at pretty high valuations of around 60-70, but when I look at the last quarter numbers, they had almost 60% earnings growth. If you are getting a 60% earnings growth on a YoY basis, definitely a company like that commands a high premium in an environment where earnings are not happening.
The second space within the consumption space where there is valuation comfort is in the hotel space, the hotel industry and that again is to do with a lot of organised consumption and domestic consumption. That is the space wherein domestic travellers have been booking across all seasons. Typically we used to find an off season, but now, we do not find any off season in the hotel industry and that is another space where a good amount of valuation comfort is there, along with good names which are available.
I also saw a name from the wires and cable side in your portfolio, Polycab, but I will not talk about the company, I want to talk about the space. There are two-three parts to it; the urban infrastructure/real estate story and the wholesale, ultra-high voltage segment, which is seeing massive growth due to government focus and export opportunity. Will wires and cable do well for the next two-three years? Do you have that kind of visibility and comfort?
We have booked out of Polycab, but yes, I would say if I look at where the beneficiaries of Polycab will be, it is the real estate space where again we are very bullish on and if you are talking about the wires and cables industry, the two major areas where they get consumed, one is the industrials and second is the real estate space and in both of these spaces, we are very bullish.
I do not see a reason why most of the wire and cable companies, whether it is the name which you mentioned or any other peers in that space will continue to show a mid-teens to high-teens double-digit kind of an earnings growth for the next 18 to 24 months because we are seeing a lot of activity on the ground whether in the real estate space or in the industrial capex space. In fact, private capex is picking up and most of the private capex is being postponed till the election outcome happens. But I think that is going to be a big kind of boom which will be seen in most of the wires and cables industry.
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