Why investors should not ignore largecaps despite the smallcap rush: Canara Robeco CIO Shridatta Bhandwaldar

Investors chasing the strong recent performance of small- and mid-cap stocks risk overlooking the valuation cushion emerging in large caps, according to Shridatta Bhandwaldar, chief investment officer-equities at Canara Robeco Asset Management Company.

While large caps offer a stronger margin of safety, any meaningful rerating will require earnings acceleration in heavyweight sectors such as banking, information technology, FMCG and oil and gas, he said. Bhandwaldar remains constructive on equities after Nifty 500 earnings growth exceeded 15% in the first quarter of FY27, marking a revival after an 18-month earnings downcycle.

Edited excerpts from a chat:


How do you assess the Indian equity market’s risk-reward equation over the next 12–18 months, particularly considering current valuations and the trajectory of corporate earnings?

We are looking at the next 12-18 months from a two perspective, corporate earnings growth and impact of geopolitics through higher energy prices on the Indian market. From the corporate earnings perspective we are fairly constructive. After 1.5 years of earnings downcycle, the earnings cycle has been reviving from 2HFY26. Earnings have improved to more than 15% YoY growth for the 1QFY27 for Nifty 500 Index. Large, Mid and Small caps, all have shown delivery of double digit in the last quarter. Consensus is expecting lower double digit earnings CAGR (Compounded Annual Growth Rate) and it seems like we are tracking that as of now. So, corporate earnings are revving driven by several factors including strong credit growth and surplus liquidity in the system. Second aspect of geopolitics and its impact on macroeconomics, corporates etc. are a risk to markets. Thankfully, we as an economy have entered this event with strong macros and thus, we don't expect any major macro / micro challenges. Although higher energy prices, if sustained for longer periods will mean increase in strain on macros as well as earnings downgrades. As of now, we are working with a base case whereby, energy prices remain below 90 dollars per barrel on average and thus limited earnings downgrades for FY27E/28E.

Do you believe large caps currently offer better value than mid-caps? If so, which sectors or themes present the most compelling opportunities?

Value in markets is available in all parts of the market today if one takes a 2–3-year view. This is a far more bottom-up market as against sectoral. From a margin of safety perspective, large caps are clearly better placed. But lot of them lack earnings acceleration. We are currently agnostic to market cap and focused on individual ideas. From a sectoral perspective, Financials, Automobile, Consumer discretionary, Quick commerce platform companies and few retail companies, Hotels, Telecom, Aviation, Pharma may offer good opportunity. Manufacturing and Industrials while may be good, long-term stories need to be carefully evaluated given limited margin of safety in valuations.

Recent inflow data suggests that investors favoured small-cap funds over large-cap funds. However, with large caps appearing relatively inexpensive, do you see them as better positioned for a recovery, and what could trigger a rerating?

Investors almost always chase recent returns. Small and mid-caps have sizably outperformed large caps over last 3 years and thus those categories have been receiving larger flows. There is a strong merit in not ignoring large caps given the margin of safety they offer today. The challenge is that a few large cap sectors like large banks, IT, FMCG, O&G (Oil and Gas) have lacked earnings acceleration over last few quarters. That needs to change.

Canara Robeco Large and Mid Cap Fund currently has about 46% of its portfolio in large caps, 40% in mid caps and 11% in small caps. What drives this allocation, and what conditions would prompt a meaningful shift between market-cap segments?

Canara Robeco Large and MidCap Fund (“the Scheme”) fundamentally focuses on identifying companies with strong competitive position in good business, having quality management and balance sheet quality. The Scheme is focused on finding opportunities across market caps and the portfolio mix would be an outcome rather than top-down view. The allocation to Midcaps would be in line of the asset allocation pattern i.e. within the range of 35% to 65% of total assets of the Scheme.

Mid-cap valuations have expanded considerably in recent years. Where do you still see sustainable earnings growth, and which pockets appear vulnerable to valuation compression?

True that the valuations have expanded in mid-caps in past 5 years, but they have also been backed by a relatively stronger earnings growth. There are structural and contextual opportunities in mid-caps today. Consumer tech and platforms, auto ancillaries, capital market plays, NBFCs (Non-Banking Financial Companies), Hotels, Hospitals, EMS (Emergency Medical Services), power equipment value chain offers a structural runway in terms of sectors.

Banks, retailing, leisure services and finance are among the fund’s largest sector exposures. What is the investment thesis behind these allocations, and what developments could invalidate it?

The Scheme is predominantly placed in domestic themes like consumer discretionary and consumer services, financials, and hospitality. In each of these theme the underlying thesis is around superior business models, management, and most importantly superior earnings growth profile of the individual companies. Very high energy prices, hospitality disruptions, very high inflation and interest rates can impact near term for the Scheme.

Read more: ETMarkets Smart Talk | India enters earnings-led phase; Anil Rego favours financials, autos, industrials

Over 21 years, a monthly SIP of ₹10,000, representing a cumulative investment of ₹25.7 lakh, would have grown to ₹2.09 crore, generating an XIRR of 16.81%. What does this illustrate about the value of remaining invested through multiple market cycles, and what return expectations should SIP investors realistically have over the next decade?

Long-term past track record is there for investors to see. The Scheme aims to deliver risk adjusted outcomes through cycles. To achieve this objective, as a strategy, we are focused on quality and growth longevity of underlying businesses that we own. It may be noted that past performance may or may not be sustained in future.