We believe that individual stock specific opportunities continue and midcaps in general should continue to do well, says Unmesh Sharma, Head Of Institutional Equities, HDFC Securities
Will midcaps continue to outperform? If economic growth continues, if money supply continues, will the delta for earnings growth will be much higher in midcaps?
Unfortunately, I cannot give a very generic answer to that but broadly the answer is yes. The way in which our research team constructs its model portfolio is market cap agnostic. So we do not look at midcaps as some kind of a different asset class. For example, the IT sector valuations seem to suggest that large caps are better than midcaps. Having said that, whenever we see an uptick in the economy where liquidity conditions are good, we believe that individual stock specific opportunities continue and midcaps in general should continue to do well.
While there will be specific sectors like healthcare and IT, where largecaps can catch up because of a relative valuation game but broadly the answer is yes, we continue to remain quite constructive on the midcap space for stock specific opportunities.
You were just talking about IT, do not you think a lot of midcap companies have gone into largecap space and it is difficult to justify their valuations? Why are valuations of some midcap IT companies so steep?
We are very constructive on the space. We also believe that this earnings season will be good for the IT space in general. Having said that, we continue to believe that in the very long term, for the IT sector, the largecaps on a relative basis continue to offer a little bit of relative value as compared to the midcaps. In our model portfolio, for the last three months we have been slowly cutting our weights in midcap IT even though on some names like Tata Elxsi, we were long term believers. But at some point in time, on a relative sense, the larger caps like TCS,
offer better value today.
What is happening within the entire life insurance space? While these stocks from a long term basis are a must have in the portfolio, where is it that you would suggest nibbling into if someone has completely missed out on life insurance in their portfolio?
We are very positive on the entire insurance space. We believe within the whole financial bucket, insurance is definitely one segment with the most amount of legs both structurally as well as tactically. We cannot comment on group companies but in our model portfolio, we have a heavy overweight position on SBI Life, on Max Financial as well.
So purely from a stock specific perspective that is the one that we are recommending in our model portfolio. But within the financial space, we like large banks, life insurance, capital markets amongst the sub sectors. This is definitely one of our top overweights in the model portfolio.
Where within auto are you comfortable buying afresh? Or should one skip it?
There are too many things going on there. While revenge consumption is going on in the market, auto should have been actually on the forefront of that, especially the two-wheelers. Unfortunately what has happened is that in the immediate term, we have had the semiconductor shortages and on top of that is this overlay of EVs.
EVs are a classic case of something which is not imminent but also very topical and much like what we see in say coal power. You will get phases where the market starts to believe that there is a doubt on the terminal value of the sector, but in the interim, you could make money from it.
We believe that completely indigenous manufacturers are relatively better off. We like Maruti. Mahindra & Mahindra and Tata while we are not very bullish on them. It is a very interesting space to watch because these traditional four-wheeler manufacturers were written off because of their product portfolio. We believe that in pockets, they might start to make a comeback.
In the auto space, the rule of thumb is that if in any sub-segment, the manufacturers are in the top three, when it comes to recall it tends to lead to market share gains as well. So while at this point in time we have an add rating on both Mahindra as well as on buy on
, but specifically for this play, we will look for a little bit more evidence.
For long-term play on EVs, Tata Motors seems to be taking a little bit of lead amongst the Indian manufacturers but we believe that once we start to see little bit more evidence of this revenge consumption coming through in the festive season and the supply constraints go away, Maruti would be the first one. One could play the same theme through the ancillaries which may be the other way to look at it.
Thumb rule is that the top two-three players gain but Tesla has completely changed that. What is the risk of that for any of these markets in auto where anyone like Ola scooter, Xiaomi could just come and disrupt the market and take significant market from existing players?
That is the topical risk. But to be very honest, one can look at all the evidence and look at the size of the market. We believe that at the margin, the relatively easier to disrupt would be the two-wheelers. I do not want to go into too many specifics but the relative weight of the vehicle and the range for which usually the vehicle is used -- the technology on the batteries and the range is already there.
On the four-wheelers it is somewhere in the interim. There are two schools of thought, straight EV or whether it will go through the hybrid model. We believe that that is something that will play out over a little bit longer period of time. We are a bit sceptical on that.
How would you rate some of these names like IRCTC, Zomato, Info Edge? Do you think it will be an interesting space where there is value de-rating or value creation over the next 12 to 15 months?
IRCTC, Zomato all these are very different companies. I will not comment on each one of them individually. I have seen a few sectors emerge. Whenever a new sector which is very exciting emerges -- whether it was infrastructure 20 years ago or real estate around 12-13 years ago or new age tech companies coming onboard now -- we have to acknowledge that technology as an overlay on top of disruption within sectors is something which is a given.
We have to accept the fact that within three to five years, a lot of these companies will be in the index. Now how do you play that because as we have seen in the case of the real estate sector is that it is very tough to value because it is a completely new sector. We believe the markets are better positioned to value these companies given the fact that there are very many cues available in the global market as well in the private markets. Also, the flow of capital is very similar.
So from the perspective of a loss-making company’s sales multiples, looking at the run way of growth, when the profitability will come through seems like the logical way to go. Now when you cannot make sense of valuations too much the simple way and also that there will be mortality which means some of these companies may cease to exist five years from now.
The way to do this is that you have a portfolio of 10 companies. You put your fingers in each of them and if you get down markets, then you add and as your conviction goes up in the scalability of the business model on the visibility on profitability you keep scaling up and leaving out the ones which will be left behind eventually finding the three to five names which will make it to the indices and that is where I think the game is.
The best way to do this is to take a portfolio approach, take two or three of the leaders, use the network effect as those try to build up and then start to get closer to profitability and keep adding.