Stocks: 'It makes sense to be more cautious'

'Pockets of mid and small-cap indices are showing exuberance and are discounting even FY23 valuations now.'

As TCS kicked off the June 2021 quarter earnings season, Gautam Duggad, head of research at Motilal Oswal Institutional Equities, tells Saloni Goel expectations of a strong financial year 2021-22 are now well entrenched and the second wave of the pandemic has not done much damage to those expectations yet.

Can the second half of 2021 be rewarding for investors? What kind of returns are you pencilling in?

It will depend on how earnings progress from hereon.

Expectations of a strong financial year 2021-22 are now well entrenched and the second wave has not done much damage to those expectations yet.

It is tough to give return expectations for a short-term period of three-six months, but suffice to say that it will track earnings delivery, barring any untoward global event.

What's behind the underperformance in the banking space? Are you bullish on any names from within the sector?

We like the space and believe it offers tremendous long term opportunities, especially large-cap banks like HDFC Bank, ICICI Bank, Axis Bank and SBI.

Underperformance is owing to the uncertain impact of the second Covid wave on growth and asset quality.

However, FY21 performance of large-cap banks has been very robust with strong earnings growth coupled with good asset quality, high PCR ratios and decade-high capital adequacy levels.

We are overweight on this sector. The recent underperformance has corrected the valuations and offers a good entry opportunity now.

Broader markets have seen a spectacular run over the past year. Can this trend last?

Mid and small-cap indices have had a tremendous run, of late.

In fact, NSE Midcap 100 index has posted a record 13 consecutive months of positive performance.

Rolling 12 months returns gap between Nifty and Nifty Mid-cap 100 and Nifty Small-cap 100 is at 30 per cent and 58 per cent, which historically has not sustained often.

However, pockets of mid and small-cap indices are showing exuberance and are discounting even FY23 valuations now.

It makes sense to be more cautious and await better entry opportunities.

That said, if earnings growth meets the elevated expectations and results in further upgrades, then buoyancy in these segments can continue.

Which sectors can throw the next wealth compounders?

Private financials (including non-lending financials), consumption and IT are the sectors where earnings -- and in turn wealth compounding in the long term -- is a very strong possibility.

Besides this, new-age tech disruptive opportunities offer interesting multi-year compounding play.

Is there more steam left in the IT space after the recent rally ahead of earnings seasons?

We have been positive on IT for almost two years now and are running an overweight stance as digital transformation, automation and cloud are very potent themes.

COVID-19 has also acted as a tailwind for global IT spends, and Indian IT companies are clear beneficiaries of the same.

Given the sharp run-up in valuations, our bias is towards large-caps now.

Infosys and HCL Technologies are our preferred ideas in the large-cap space, and Zensar and Mphasis in the mid-cap segment.

Feature Presentation: Aslam Hunani/Rediff.com