Rally in small-cap space is still a while away: Nitasha Shankar

Market


The equity markets have again turned volatile in view of a fresh spike in inflation globally. Nitasha Shankar, head-premium research service (PRS) equity research at Yes Securities, spoke to Mint about the outlook of Indian markets, foreign institutional investors (FIIs) inflows, and where she sees value in this market. Edited excerpts:

The equity markets have remained largely buoyant despite rising interest rates and sticky inflation. Do you think investors are wrong in ignoring the negatives cues?

Investors need to be a little more focused on where the country and the economy are headed in the long term, and long-term trends are positive. We think that the markets will continue their upward journey. Yes, you will have moments of gyrations and volatility, but as long as there is earnings growth, which we think is happening, at least in certain pockets, also, as long as growth remains strong, there is absolutely no reason as to why the markets would not continue their upward journey.

Do you have any targets for Sensex or Nifty?

We do not have any short-term targets, but we do expect Sensex to grow at a compounded annual growth rate (CAGR) of about 20% over the next three to four years.

There has been a complete change in fortune for public sector undertaking (PSU) and information technology (IT) sectors. What are your views on these two packs from a three- to five-year perspective?

You have to look at the PSU stocks from the perspective that the valuations over there are extremely attractive. In fact, they have been attractive for a very long time. Earlier the reason behind the low valuation was concerns related, especially on the PSU banking front, asset quality and whether they will ever participate in the credit growth story. But now, we believe that the asset quality has improved, all the negatives that were to happen on the NPA front have happened, and things are improving. There are huge opportunities available here from a valuation perspective, which is why we are seeing that interest coming in as far as the PSU stocks are concerned.

On the other hand, tech as a space had become extremely overvalued. The benefit that it had seen on the Ebitda margins, or even on the Ebit margins front was due to covid-19 savings, and people thought that that would continue forever. Margins are now just going back to the pre-covid levels. What would drive growth in this sector is a healthy deal pipeline and healthy deal wins. The deal pipeline is still quite strong, however, deal wins are not as strong so as to justify these kinds of valuations. So once valuations come back to the levels at which they used to operate at pre-covid levels, we think that tech will come back with a bang. So, probably next year or the latter half of the next year, we should start seeing tech stocks outperforming. Again, the caveat here is that the US does not sink into a very deep recession.

Any other pockets where you see value?

We see a lot of value in the specialty chemical sector even today. We also see opportunities in the auto and auto ancillary front. There has been an uptick in demand for autos. Earlier there was a buzz around electric vehicles. Incremental numbers now look very attractive on a low base, but that trend is going to catch on, and that would help not just the original equipment manufacturers, but also auto ancillaries. The third space is discretionary consumption such as white goods. We believe that the propensity to consume has gone up, and that would drive demand. So, there’s a huge pent-up demand, plus the increased propensity to consume, and both the factors would boost the white goods sector.

FIIs recently started coming back to India. How much headroom is left before valuations become expensive for them?

The reason why FIIs are coming back right now is that the dollar-adjusted returns for them are still not positive. Right now, we are seeing that they are coming into the BFSI space, which is largely because they understand that space better as compared to the other sectors, but this would have a trickledown effect. Eventually, we’ll see FIIs in flows into rest of the sectors, which are outside the headline indexes. Eventually, yes, it would lead to higher valuations. Having said that FII flows are still way off from their peak. We are anywhere close to the peak flows even today. So, there is huge scope.

Small caps continue to lag large-caps and mid-caps. Can this change in the near term?

I think it has now become a stock pickers market. If you’re looking at mid-caps, as well as small caps, people who typically look at or employ bottoms up approach, they can still find a lot of value over there. But a rally in the small-cap space is still a while away. It will take at least three-six months for that to happen.

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