Kotak AMC's Top Picks As Small And Mid Caps Enter 'Greed Zone'
It is a bottom-up market with pockets of opportunities, says Pankaj Tibrewal.
Small and mid caps are expensive and in the "greed zone", while large caps are moving towards consolidation, according to Kotak AMC's Pankaj Tibrewal.
He sees it as a bottom-up market with pockets of opportunities, Tibrewal, senior executive vice president and fund manager-equity at Kotak AMC, told BQ Prime's Niraj Shah.
Where Do You Make Money?
The opportunities lie in pharmaceuticals, auto, auto ancillary, IT, banking and financial sectors, he said.
Pharmaceuticals, which traversed through declining profitability over the last 7-8 quarters, emerged as a cohort in the first quarter of this fiscal delivering a 24% growth in earnings, said Tibrewal.
In the next two-three quarters, information technology could be a positive investing space, according to Tibrewal. "We believe the downgrade cycle will probably get over by September or December quarters," said Tibrewal, adding that it will be interesting to bag opportunities in the large-cap IT space at that point in time.
The banking and financial services space could be a segment where investors could generate good returns or alpha, he said. The valuations in this space are not that expensive today, according to him.
From a medium-term perspective, Kotak AMC is "extremely positive" on the manufacturing side. "The valuations are not that cheap, but we believe the tailwind in the sector is extremely strong and probably this time, it is not a false alarm."
However, in the near term, this sector may consolidate because valuations are no longer as cheap as they were two years ago, he said.
Outlook On Small And Mid Caps
In the mid-cap and small-cap space today, there are certain indicators emerging that make the asset management company a little cautious. "Greed is there in the street right now, especially in the mid and small-cap space," he said.
"We need to be a little careful ... because, as a practitioner in the space, I am extremely bullish over this space over the 5-10 year period."
Tibrewal advised investors to not go down the quality curve in this market and make sure that quality anchoring is intact. "Otherwise, mistakes made during these phases hurt over the 2-3 year period," he said.
According to him, the market will consolidate as earnings have caught up with the margin expansion.
Most companies in the Nifty 500 index have reported good earnings, he said. In terms of non-banking financial companies, this will be a lower top-line growth and higher margin year for NBFCs. Banking profitability over the next three quarters will be normalised because there will be pressure on the margin, Tibrewal said.
"So, the 40-50% earnings growth that we were seeing in the banking sector may not get repeated again. It will get more normalised, at 15-20% kind of an earnings growth."
Defence, Railways, Construction: Misleading Macro?
The macro narrative of defence, railways, and construction sectors seems to be extremely strong, but one needs to be careful, cautioned Tibrewal.
From a bottom-up approach, the valuations are not that attractive at this moment in these spaces.
The growth trajectory over the next few years looks very strong, Tibrewal said. However, historically, very few companies have created the right to win in this space, he said.
Book-to-bill ratio looks extremely good, but this is driven by cash flows, he said. Highlighting the 2003-2008 cycle, Tibrewal said that markets got excited by the book-to-bill ratio, but many companies faltered on balance sheets and cash flows.
"We need to be very careful on the companies we are banking on, because cash flow discipline, balance sheet discipline, and execution discipline make a whole lot of difference."
There haven’t been major winners in India creating a huge market cap in this space, especially the infra space, due to challenges in execution on the back of time overrun and land acquisition, among other factors, he said.
