ETMarkets Smart Talk| Largecaps look attractive, but selective mid and smallcaps still offer opportunities: Chandraprakash Padiyar of Tata MF

After a year of midcap and smallcap outperformance, largecap stocks are beginning to look more attractive as earnings growth is expected to improve and valuations remain at or below historical averages.

However, the opportunity in the broader market is far from over, with selective midcap and smallcap companies continuing to offer potential for long-term investors.

In an interview with Kshitij Anand of ETMarkets, Chandraprakash Padiyar, Senior Fund Manager at Tata Asset Management, says investors should focus on bottom-up stock selection rather than making investment decisions based solely on market capitalisation.


He also highlights manufacturing as a promising wealth-creation theme, backed by improving cost competitiveness, strong balance sheets and ambitions to scale up globally.

Padiyar explains why earnings visibility, cash-flow generation, return on capital and reasonable valuations remain critical to identifying sustainable wealth creators amid global uncertainties. Edited Excerpts –

Q) Thank you for taking the time out. Mid-and smallcap funds have outperformed largecaps over the past year, but valuations appear to favour largecaps. Is this a potential turning point in market leadership?

A) Earnings growth for the large cap segment of the market may potentially move higher (Bloomberg consensus) post a slower past 2 years relative to mid-cap and small cap segment of the markets. With valuations at/below averages, the large cap segment of the market does have better risk-reward.

However, we also believe that selectively there are good opportunities to be picked in the mid cap and the small cap segment of the market. Bottom-up stock picking with higher concentration is the way to go in the foreseeable future.

Q) Small-cap funds attracted ₹9,039 crore, while mid-cap funds received ₹7,835 crore in September. Given the strong investor interest, are valuations in these segments justified by earnings growth?

A) Selectively we think earnings growth environment remains positive for this segment of the market. One should not take a general view on any segment of the market. There are both expensive and attractively valued companies in all market cap ie Large/Mid/Small.

We at Tata Asset Management do not focus too much on flows. Our focus is more on the earnings/cash flow delivery by corporate India and at the current moment we aim to find attractive candidates for our portfolio across market capitalisation.

Q) Should investors continue their SIPs in small- and mid-cap funds at current valuations, or consider redirecting incremental investments towards large-caps and diversified equity funds?

A) Asset allocation is very important, and each investor should ideally consult with an expert basis his/her ability & willingness to take risk. On a long-term basis larger allocation should always be through diversified funds.

Thematic/Sector/Market cap specific funds one needs to play tactical depending on the market environment. Selectively we do find interesting opportunities in the small cap segment of the market.

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Q) You track small & midcaps very closely - how much of the future earnings growth of mid- and smallcap companies is already priced in? What would it take for these stocks to justify their current valuations?

A) As things stand today earnings growth outlook for most companies we track remains strong. However, global backdrop with energy prices shooting up and remaining higher for longer along with logistical challenges keep up cautious since experience suggests such events in the past have led to global growth slowdown.

Valuations in pockets are expensive and in pockets attractive as well. One needs to be selective.

Q) For an investor starting a fresh SIP today, should largecaps form the core of the portfolio, with mid- and smallcaps playing a complementary role?

A) Stock selection is the way to go rather than taking a market cap-based view. We think there are enough opportunities in all market caps for the long term.

Q) Should investors rebalance towards largecaps after years of mid- and smallcap outperformance, or could that mean exiting too early?

A) As mentioned above market cap based investing may not be the right way to go ahead. Investing on each business merit i.e. sustainable earnings growth with free cash generation and reasonable valuations should be the key criteria on choosing the business.

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Q) Where could India's next generation of small- and midcap wealth creators emerge from: manufacturing, capital expenditure, financialisation, healthcare or emerging technology businesses?

A) We are seeing interesting opportunities in almost all the themes mentioned above. One specific area where we are seeing early leaders emerging is manufacturing.

We are increasingly hearing comments by some management teams in the manufacturing space claiming to have cost structures equal to or lower than China.

In my 26 years of equity research this is the first time Indian entrepreneurs are as excited given the competitiveness and we do come across companies planning for the global scale up in terms of large capital expenditure and importantly balance sheet for these companies are strong enough to help them scale on a sustainable basis.

Q) How important are return on capital, cash-flow generation and balance-sheet strength when evaluating small- and midcap companies? Which financial warning signs would make you avoid a stock despite its growth potential?

A) ROCE (Return On Capital Employed) and cash flow generation are very important from our perspective. Experience suggests that high leverage in the balance sheets forces managements to cut corners during desperate times. We tend to avoid companies with high leverage.

Disclaimer: The views expressed in this article are personal in nature and in is no way trying to predict the markets or to time them. The views expressed are for information purpose only and do not construe to be any investment, legal or taxation advice. Any action taken by you on the basis of the information contained herein is your responsibility alone and Tata Asset Management Pvt. Ltd. will not be liable in any manner for the consequences of such action taken by you. Please consult your Mutual Fund Distributor before investing. The views expressed in this article may not reflect in the scheme portfolios of Tata Mutual Fund. The view expressed are based on the current market scenario and the same is subject to change. There are no guaranteed or assured returns under any of the scheme of Tata mutual Fund.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.

(Disclaimer: Recommendations, suggestions, views, and opinions given by experts are their own. These do not represent the views of the Economic Times)