For the past 2 years Chirag has been saying that one must be very cautious on small and midcaps as valuations were overstretched.
Now, after 18 months of time and price correction across the SMID space, valuations which were 40-50% above long term averages have moderated to around 15-20%. This is a market where he is comfortable building SMID portfolios that are valued close to long term averages.
This is now a market where while one still should not expect any re-rating upwards, one can expect earnings growth to be rewarded in the SMID space. Portfolios built bottom up with growth and valuation focus can do reasonably well going forward.
He says that while SIPs must surely be continued, its time to start considering some lumpsums into the SMID space as well. Don’t go all in – but for those who have been waiting for an entry, this may be a good time to start entering in a calibrated manner.
HDFC Small Cap Fund’s portfolio is expected to deliver earnings growth of around 16% into FY27 and FY28, with ROEs around the same levels, for which the portfolio is valued at 21xFY27 and 18xFY28 earnings, which Chirag feels is in reasonable valuation zone – not cheap/attractive, but reasonable.
He feels that while the EU and US trade deals are a stepin the right direction, they alone are unlikely to create significant earnings delta from a market perspective.
He likes the financials space as the growth-valuationdynamic is very reasonable across select names in private banks, PSU banks,NBFCs, insurance companies etc.
Select IT companies in the SMID space with differentiated business models are now beginning to look interesting in the current AI fears driven sell-off.
He continues to like auto ancillaries where he sees manysecular growth stories.
He is selective in the pharma space, in consumer staplesand in consumer durables.
He is wary of capital goods by and large due to valuation concerns.