Is it time to go for midcaps & smallcaps?

The next leg of the rally has to be in the mid and smallcaps where movements have started and from the lows of March, stocks have become 2X, 3X, 4X, says Neeraj Dewan, Director, Quantum Securities.

Do you sense that one needs to make higher allocation to the mid and smallcaps now?
This is what we are looking at now because after this sort of a runup, a lot of the quality midcaps and largecaps have become quite expensive. The next leg has to be in the mid and smallcaps where movements have started and from the lows of March, stocks have become 2X, 3X, 4X. So a lot of movement has happened there also. The challenge now is to find stocks or companies which are going to benefit once the economy picks up.

Whatever indications you are getting -- be it CV sales, general pick up in the economy or GST collection -- it all points towards some sort of economic revival. One needs to be positioned in stocks where the valuation is still attractive. Midcaps and small caps are where the value is for the next one, one and a half years.

What is the outlook when it comes to the auto sales numbers that have trickled in? Where do you see CV demand and passenger vehicle sales headed?
They were pretty encouraging whether it was Maruti or even Tata Motors in the commercial vehicle space as well as Ashok Leyland. So, improvement is visible there. As far as passenger vehicles are concerned, earlier there was pent up demand but now it is coming back into actual growth. If this actual growth is going to continue, then even after the runup, stocks like Maruti still look attractive as a portfolio bet but the bigger picture can be in the commercial vehicles.

In December 2019, we saw a slowdown in commercial vehicle sales and that slowdown was anyways impacting companies. Those companies got hit badly with Covid as well. These are the kind of companies which can recover once demand is coming back. So more than the OEMs, I am looking at the auto ancillary play there. Auto ancillaries which are feeding into commercial vehicles, which are feeding into passenger vehicles is where they were looking at a slowdown. Post Covid, their sales were hit badly. So if the improvement which we are seeing now continues, they are the ones which will come back in a big way.

What kind of reading are you taking away from some of the financials?
As far as the real estate or the housing sector is concerned, some pickup is happening there. DLF also launched new projects. I am looking more towards the housing finance companies (HFCs) like HDFC which is also seeing decent demand coming back.

So, the housing finance sector is one where there is a lot of momentum which can now happen in pick up going ahead in the next six months to nine months. I am looking at companies like Can Fin Homes which have a very decent stable asset quality, very good capital adequacy ratio, very good names and once demand returns, they can show very good numbers going ahead.

I am looking at the housing finance sector as far as financials is concerned and even in the NBFC space, the corporate backed NBFCs is where I am seeing some new traction going ahead.

Where do you stand on telecom companies? Is VI going to be able to withstand Reliance Jio and Bharti Airtel?
A successful fundraise will be a sign of relief for some of the lenders to this company because it has a huge debt. If they are able to raise this fund and if it is followed by a tariff hike sometime next month or the following month, it is going to be a very positive thing for Vodafone Idea. We are also looking towards that because though news keeps on coming regarding their fundraise, they have not been able to successfully do something considerable there.

So, if this happens, it would a positive for the stock and we have already seen some runups happening based on the news coming or some expectation of this news coming. You may see some more trading up moves happening in this company. But as far as being positioned in telecom, I still prefer Bharti Airtel, I think that company is very well positioned and we saw a good consolidation correction in that company. It has again started moving up.

Number wise also, Bharti has been improving its subscriber base and I would stick to something like Bharti as far as the portfolio is concerned. Vodafone Idea is more like a trading bet for me and not a long term portfolio stock.

What is your outlook on the midcap IT space? There’s quite a bit of potential within the largecaps, where do you stand on midcap IT?
We have seen a lot of improvement happening as far as numbers are concerned even in the midcap IT. We have seen numbers showing in the price movement also. When we are talking to some of these IT companies, the midcap ones are all saying that even this quarter is going to be the best quarter so far for them.

After this sort of a move and the numbers piling up, if they are going to live up to the expectations going ahead is something which we are trying to figure out, but even keeping that aside, there are very good quality names even in the second rung IT with something like a Tata Elxsi which has shown brilliant performance and very good results.

There is another company we have been looking at -- Sonata Software. The numbers and the operating parameters have been improving and these companies still have that valuation comfort which may not be there with some of the largecaps because they have already moved up.

So much of foreign money is getting pumped in. So, the top three, four names get the majority of the inflows. Anyways the movement has been pretty sharp. One needs to be very careful. If you are investing today, you should be prepared for some consolidation because even the way rupee has improved, some impact is going to come going ahead.

If you are investing today, there can be a shake out, there can be a consolidation but looking at the whole space I think next even three, four quarters look very good for the IT space in general. If one is a long-term investor, it is fine but if you are a short-term investor, be careful when investing at these levels.