Avoid expensive themes, focus on valuations and stock picking: Samit Vartak

Indian equities have staged an impressive recovery from their March lows, with benchmark indices as well as mid- and small-cap stocks bouncing back sharply. Cooling crude oil prices, easing volatility across commodities and cryptocurrencies, and resilient corporate earnings have all contributed to the market's recovery. Yet, investor confidence remains measured as geopolitical uncertainties continue to dominate headlines.

Speaking to ET Now, Samit Vartak, from SageOne Investment Managers, said that while markets have recovered significantly, sentiment has not yet turned outright bullish.

"Yes, I mean, sentiments, they are still jittery because there is so much uncertainty. Things change on a daily basis. We have rebounded from the lows, but if you look at our highs, Nifty is still 9-10% away from where we had reached, maybe in September 2024. So, in that respect, the sentiments are nowhere close to what we can call bullish," he said.


He believes that one of the biggest overhangs for India—crude oil prices—has eased considerably, although geopolitical developments remain unpredictable.

"I do believe that the drag for India, which was mainly the crude, the worst-case scenario is probably behind us. We do not even know, hopefully things will get better, but there is no certainty of that given Trump in the leading position and then with Iran, where things change very, very quickly," he said.

Strong earnings provide confidence
Despite lingering uncertainties, Vartak believes corporate earnings continue to paint an encouraging picture for investors.

According to him, small-cap companies delivered median earnings growth of nearly 25% during the previous quarter, while mid-cap companies reported growth of around 22-23%. Even large-cap companies posted healthy earnings growth of about 18-19%.

While higher crude prices could temporarily affect profitability, he expects investors to look beyond short-term disruptions.

"There could be some drag because of crude price inflation, but again investors would know that this will be a transitory phase and probably it may have an impact for a quarter or two, but investors would always look 6, 9, 10, 12 months beyond that," he said.

He also pointed out that several businesses could actually benefit once raw material costs decline, particularly those that have already implemented price hikes during periods of elevated commodity prices.

"A lot of companies may make a pretty significant improvement in margins going forward... We have seen the same thing play out during post-COVID times when commodity prices went up and companies took price hikes, but when things cooled down, no one really took prices down," he said.

Why he remains optimistic on small-caps
Vartak recalled that he had turned positive on the mid- and small-cap segment when valuations corrected sharply earlier this year. The key trigger, he said, was valuation comfort rather than sentiment.

He noted that the price-to-book ratio of the small-cap index had slipped below the 25th percentile of its five-year historical range, a rare occurrence previously seen only during the COVID market crash.

Unlike the price-to-earnings ratio, which can fluctuate significantly depending on earnings cycles, Vartak prefers price-to-book as a more stable valuation metric.

Using global semiconductor companies as examples, he explained that elevated earnings can sometimes make PE ratios appear inexpensive even when valuations are stretched.

"For me, price-to-book is a much better multiple compared to the PE multiple. PE multiple tends to be very volatile," he said.

He added that India's small-cap valuations remain below their historical median while earnings momentum continues to strengthen.

"I do believe that price-to-book for small-caps is pretty reasonable. They are definitely below the median of the last five-six years and, more importantly, the earnings growth has picked up," he said.

AI acquisitions remain a high-risk bet
The discussion also turned to India's IT sector, where companies have increasingly been pursuing acquisitions to strengthen artificial intelligence capabilities.

While acknowledging the strategic intent behind such deals, Vartak cautioned investors against assuming successful outcomes.

According to him, acquisitions involve considerable execution and integration risks, particularly when companies are entering unfamiliar growth areas.

"Companies do try multiple things and it may not be something which is highly predictable. Acquisitions are highly uncertain because the integration... it is a new growth avenue for them," he said.

He advised investors to remain cautious.

"I would definitely take these acquisitions with a pinch of salt. These are high risk. If it plays out, yes, it can really give you big delta, but I am not so sure about this," he said.

Stock selection matters more than sector selection
Although several themes such as defence, power equipment and power ancillaries continue to attract investor interest, Vartak believes many of these sectors have become excessively expensive.

He noted that several frontline defence companies now trade at valuation multiples far above their historical averages, leaving limited room for error. Instead of chasing popular themes, he recommends identifying businesses where both growth and valuations remain favourable.

Among the areas he currently likes are export-oriented industries, including textiles, specialty chemicals and contract development and manufacturing organisations (CDMOs). He is also positive on export-focused defence companies, gold financing businesses and select non-banking financial companies capable of delivering sustainable growth of over 20%.

Interestingly, he believes the best opportunities are often found outside the well-known market leaders.

"Picking the right theme or space is not good enough. Picking the valuation within that is also important," he said.

He highlighted that several newly listed companies in power ancillaries and specialty chemicals continue to trade at significantly lower valuations than their established peers despite offering attractive growth prospects.

"The reason I am positive about small-caps is because that is the space where you do have the growth as well as valuation kind of a combination, which is not really available in the frontline kind of names which are pretty well known to everyone," he said.