Largecaps look more attractive after midcap, smallcap rally: HDFC AMC’s Rahul Baijal

Large-cap stocks are emerging as the more compelling segment of India’s equity market after the sharp rally in mid- and small-cap shares, according to Rahul Baijal, Senior Fund Manager – Equities, HDFC AMC. While valuations across the broader market have moderated from their September 2024 peaks, Baijal sees blue-chip companies offering a stronger mix of earnings visibility, governance and relative valuation comfort.

Edited excerpts from a chat:

Given the recent rally in mid and small-cap stocks, how do you view the current risk-reward profile of the large-cap segment, and are we seeing a sustainable rotation back to quality blue chips?
At current levels, largecap category remains more attractive on relative valuations, in my view. The broader market indices (both midcap 150 and small cap 250) have seen a positive rally CYTD, and the headline indices are trading at a premium vs their long-term history, but the premium has significantly moderated from the highs of September 2024 levels. In the current environment, a bottom-up stock selection approach across the market cap curve is likely to be rewarded well, with quality blue chips offering a more favourable combination of earnings visibility, governance, and relative valuation comfort.


In managing the HDFC Large Cap Fund, what strategy is being followed and what specific valuation metrics are you prioritizing right now to ensure that the portfolio doesn't overpay for "growth at any price"?
The HDFC Large Cap Fund follows an investing style that is a blend of GARP (growth at reasonable price) and value. Portfolio construction is done from a medium to long term perspective with a bottom-up approach to stock picking blended with top-down sector and macro trends. While doing bottom-up stock selection a lot of attention is paid to companies positioning and trends in the business, sector and valuation cycles. The strategy has a strong risk management framework overlay, which aims for optimal diversification with active positions being taken in a controlled manner. In my view, the large cap valuations look reasonable vs their own history and versus premium to other emerging markets. In some cases, where valuations look a bit stretched, I am comfortable holding on to core positions as long as conviction exists in strong visibility of quality of earnings growth. In the last 12-18 months, the quality bias and growth mix of stocks in the fund has increased significantly.

Can you explain the strategy and investment approach of HDFC Business Cycle Fund?
The fund looks to identify and invest in companies likely on the cusp/midst of favourable business cycle while avoiding companies about to enter/in a business downcycle. The strategy follows a blend of Top down and Bottom-up approach, and then identifying appropriate stocks based on reasonable valuations. Investments are across the market cap curve and the fund offers optimal diversification while remaining focussed on a few themes.

How do you distinguish between a structural multi-year theme and a shorter-term business cycle when deciding to increase exposure in the HDFC Business Cycle Fund?
There are portions invested into both multi-year themes and relatively shorter-term business cycles. When evaluating companies, sector and themes, confidence in their sustainability and visibility of earnings growth during up and downcycles is monitored. Most business cycles run in multiple years; stock investment decisions are taken accordingly but tactical opportunities with relatively shorter business cycles at reasonable valuation are also considered.

With global macro factors like the US Federal Reserve policy and fluctuating oil prices, how much of your investment thesis is driven by top-down macro indicators versus bottom-up stock selection?
Currently there are two main global macro risks monitorable for India, in my view. Firstly, where does the oil price settle in the short term due to ongoing West Asia situation. High oil prices impact India’s macro stability indicators like fiscal deficit, current account deficit, inflation, currency etc negatively, A mild increase in prices can be absorbed but a material & prolonged increase in prices has potential to create some macroeconomic imbalance. Secondly, India has long been considered an “anti-AI trade” in emerging markets by many FPI investors and has missed out on inflows to other emerging markets like Korea, Taiwan & to other AI linked companies in Asia -especially over last 1.5 years. Any “fatigue”/” cool-off”/” rebalancing “of AI trade could help India’s relative positioning within emerging markets to attract FPI inflows- These are the 2 key monitorable, in my view.

Which investment themes are you most bullish on from a five-year perspective?
From a long-term investment perspective, certain business cycles and subsectors can potentially provide ample opportunity in the medium term. Some of the themes in which the funds managed are positioned in the following spaces. Within financial services – private lenders, affordable housing NBFCs, capital markets play; in consumption – modern format retailing & quick commerce retailing, select autos; in pharma – hospitals and domestic formulations and in exports – contract manufacturing plays across different sub-sectors.

Nifty's underperformance is largely due to poor performance from large private banks and IT stocks. In such a situation, how are you positioning your portfolio? Are you buying the dip in IT and banks or cutting weights?
The call on IT has worked for both the funds. We have maintained very low /almost zero allocation in IT services based on the sector outlook and current AI play. The position has helped relative performance. While IT stocks have corrected a lot – I think many headwinds related to AI linked pricing deflation in IT contract renewals, slower decision making and higher competitive intensity than before will continue to pose headwinds to growth and thus continue to remain cautious on the sector. On private banks and NBFCS, we continue to maintain our positive view.