IT sector's real growth a few quarters away; valuation risk in select mid-and small-cap stocks, says Anand Shah, ICICI Prudential AMC
We are overweight on the manufacturing sector as India's commitment to manufacturing, driven by initiatives like Production Linked Incentives and Make in India, coupled with state-level competitiveness, is viewed positively.
"If the factored-in growth does not pan out in the mid-and small-cap, then there is a risk to the valuations at which some stocks are trading. On a bottom-up basis, we continue to see few pockets where earnings growth and valuation seem to be sustainable and reasonable," says Anand Shah, Head - PMS and AIF Investments, ICICI Prudential AMC, in an exclusive interaction with Zee Business' Sirali Gupta.
With over two decades of fund management experience in the asset management industry, Anand Shah most recently served as the CEO of NJ Asset Management. Shah holds a Post Graduate Diploma in Management from the Indian Institute of Management Lucknow and a B.E. degree from Regional Engineering College, Surat.
Edited excerpts:
Should investors go big on the robust Indian economic growth theme on Dalal Street or wait until the outcome of the upcoming Lok Sabha elections?
The general election will be a significant event to watch out for anyone who is investing with a very short-term objective. There could be short-term volatility in the equity market owing to elections.
However, for an investor with a medium to long-term perspective, we believe the election will largely be a non-event as we believe there will be a spirit of continuity in economic policies which is an important factor when it comes to corporates and global investors.
Given the robust fundamentals that the Indian market is enjoying at present, investors should be cognizant of the valuations at which they are investing in the current market conditions.
There have been concerns around valuations seen in the mid and small-cap segments calling in for caution. Do you agree with this perspective?
At an aggregate level, the rally seen in small and mid-cap segments has raised concerns given that the current valuations are at a considerable premium when compared to long-term historical averages. However, a large part of this run-up was backed by earnings growth.
Going forward, if the factored-in growth does not pan out in the mid-and small-cap, then there is a risk to the valuations at which some stocks are trading. On a bottom-up basis, we continue to see few pockets where earnings growth and valuation seem to be sustainable and reasonable.
We remain positive on select manufacturing and manufacturing allied businesses, which are largely found among small and midcaps.
What is your view on the Information Technology (IT) space?
We have been underweight IT for most of the last two years. While tech stocks may have seen a rally recently, we believe the sector’s growth expectation needs a reset. The real growth in this space may still be a few quarters away.
Where do you see growth opportunities emerging going forward?
We are overweight on the manufacturing sector as India's commitment to manufacturing, driven by initiatives like Production Linked Incentives and Make in India, coupled with state-level competitiveness, is viewed positively.
Furthermore, the manufacturing sector benefits from improved balance sheets and a robust banking sector, creating a favorable environment for investments. The manufacturing and manufacturing allied sectors, particularly within the mid and small-cap segments, stand to benefit from the existing surge in demand fueled by the ongoing capex cycle.
We also see growth opportunities in pockets like consumption, healthcare, hospitality, and financial services as the Indian consumer landscape evolves.
In light of the upcoming events, have you made any changes in your portfolio?
We have not made any significant changes in the portfolio over the past few months. Given the various pockets of expensive valuation within the Indian equity universe, we believe stock picking becomes very crucial. We use an in-house Business-Management-Valuation (BMV) framework when analysing individual businesses.
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