Smallcaps and midcaps should catch up with largecaps now: Nischal Maheshwari

“When the markets start trading new highs, there is going to be euphoria and the retail money will continue to keep coming in. Smallcaps as well as midcaps have been lagging behind and should catch up with the largecaps,” says Nischal Maheshwari, CEO, Centrum Broking

Markets did manage to hit an all-time high and crude oil prices are in our favour. Let us talk about some of those crude derivatives because they are in the spotlight. The tyre stocks did see a reaction while standing to be the biggest beneficiaries of the crude price drop. What are you looking at by way of a basket of crude oil derivative sectors that stand to gain?
Two or three sectors were obviously painted as a big derivative of the crude sector. Paints is one and the second one is packaging across the sectors – whether it is FMCG or any company which spends a good amount of money as far as packing is concerned.

All those sectors are going to be positively impacted. A couple of them are already aligned and are big beneficiaries of that. These are the sectors which will be beneficiaries and across the sector, as the cost of transport goes down, cement is one of the bigger beneficiaries because cement transportation is a big cost.There are a lot of second and third level derivatives as oil eases and the benefits get passed on.

For Reliance, there is a whole issue of windfall tax which pegs the earnings down. When the world was going through an extraordinary reboot of uptick in commodities and high GRMs, the profit Reliance generated in a sense was taken out via windfall taxes. What is the way forward for Reliance given that crude prices are down and if windfall taxes are taken out?
Let us look at sector by sector. In telecom, there is the possibility of upside because Bharti has already taken price hikes in a couple of states. They have taken out the Rs 99 minimum package which was available and that ticket size has now gone up to Rs 159. So there is a very clear scope that the whole sector gets rerated with this price hike.

Coming to its main bread and butter, which is the oil, the upstream is going to get impacted a bit but it is not going on upstream but rather downstream basically with GRMs which have started going up. Last we checked, GRMs are at around $11-$12 and that is where the second part of the business should start kicking in.

As far as retail is concerned, it is chugging along and there is nothing at the moment basically which starts impacting or is a major beneficiary except for maybe oil derivatives. There also, it could help it a bit but retail is anyway on a roll across all companies. Reliance has also been a beneficiary of that. Now we have a fourth business which is maybe a bit of a surprise actually. It is the finance company and as and when it gets bifurcated and listed separately, that could also be a major trigger for Reliance as we go along.

Reliance is on a very strong footing. People have to be patient with it because being a conglomerate, positives and negatives balance out at certain points of time but on the whole Reliance looks a good bet.

Is it logical to assume that smallcaps will now catch up?
Definitely. When the markets start trading new highs, there is going to be euphoria and the retail money will continue to keep coming in. Smallcaps as well as midcaps have been lagging behind and should catch up with the largecaps.

The aggregate earnings were slashed by about 8-9% post the earnings season and markets are going higher. So for an expensive market, earnings are getting slashed and PE multiples are expanding. How long will this last? Logically for an expensive market, if earnings are slashed, then prices should be lower?
Right now, it is the macros which are playing a bigger part than the earnings at the moment and on December 15-16 when the Fed meet happens, we are expecting a 50 bps rate hike by Fed and possibly a 25 bps and subsequently we may see 25-25 bps more hikes by Fed before it starts looking for a pause.

There has been around 14-15% hike in the US in the last three decades and this has happened three or four times. That is getting played out right now. Macros are much more prevalent out here and we are possibly seeing the impact of a pause in the rate hikes and their impact happening on the rupee strengthening again.

These are all things the market has started factoring in, seeing growth which had become a bit lazy at the moment can once again revive. Earnings have been cut and India has always remained expensive and I continue to believe India will remain expensive but if you see the chaos around the world, I do not think it is very difficult to believe that India is expensive and continues to remain expensive. In China and other emerging markets or the world, there is a huge amount of chaos. So maybe a TINA (There is No Alternative) factor is also playing there.

While we wait for the momentum in the smallcaps as well as the midcaps, where are you expecting that rally to come in from? In one of your interviews, you talked a lot about Balrampur Chini as well as Crompton Greaves?
We continue to like them, both are midcaps. We like Balrampur Chini because sugar prices are going stronger and by 2024, 50% of its earnings are going to come from sugar and 50% from ethanol. So it would not be so cyclical and we believe the stock is ripe for rerating.

Similarly there are other stocks, like UPL, where after the split, there will be four very clear companies dealing with domestic agrochemicals, international agrochemicals, seed company and manufacturing. In three of these companies, foreign investors are coming in and some amount of corporate governance issues seen historically are going to get addressed. These are some of the areas where the stock is still cheap at 10 or 11 times FY24 numbers. So, there are a lot of places where there is value in the market and one can definitely look at that.