Jonathan Schiessl, Deputy CIO, Westminster Asset, says “a correction was probably overdue in mid and smallcaps. Also, we have seen some of the larger cap indices, the Nifty, being at new all-time highs. I guess that is also a reflection of a bit of switching out of the small and midcaps into the largecaps. Index money continues to push up a little bit into the larger cap stuff as well.”

How do you see this shakeout of the broader markets, regulatory nudge, the SEBI, AMFI calling the broader markets frothy and then, of course, the valuation which were higher than the long-term averages? Do you think it is a welcome correction which is playing out?
Jonathan Schiessl: Yes, as you mentioned, it has been long coming. A lot of people have been suggesting small and midcaps have performed extremely well and as you mentioned, valuations are certainly no longer cheap. So, a correction was probably overdue in that space. And then,, we have seen some of the larger cap indices, the Nifty, being at new all-time high today. I guess that is also a reflection of a bit of switching out of the small and midcaps into the largecaps. But also index money continues to push up a little bit into the larger cap stuff as well.IIFL Finance is in the eye of the storm right now. You have worked closely with them. I am asking this question solely because of this but as a market observer, a good quality management may have erred on the side of processes and hence the rap on the knuckles from the regulator. But would you be a buyer if the stock continues to fall from here? We have seen some clarifications from top management that remedial action is already underway.
Jonathan Schiessl: Yes, when you have a business which has a good franchise and generally an interesting product or service and an issue like this arises, an investor has to be careful because these problems can carry on for a little while. Generally speaking, when we have in the past owned a business where there has been some sort of regulatory issue, there are two ways you can react to it. You can immediately sell and reappraise after you got some more information or you can just try and sort of live with it and just work through the volatility.

In the Indian market we have not had that kind of experience but we have had experiences like that outside of India where generally we are a bit quicker to exit the position until the uncertainty is resolved. These things can carry on for some time. Seeing how management reacts to the regulatory news is extremely important for investors and yes, it is one where generally we place a lot of work on governance and how companies operate from that perspective and if there are any doubts around that, it does make us very concerned and we would generally look to see some reassurance from management on these factors.

Of course, quite often it turns out that the issues or perceived issues are dealt with very rapidly and then things carry on back to normal, but in summary, there is some caution that comes from these sort of events, but yes, one needs a bit more time to assess the overall impact.

Is there anything in the specialty chemical space that you like? Has the time come for high margin performance chemical names to start doing well?
Jonathan Schiessl: Yes, India offers some very interesting listed specialty chemical companies. Currently, we do not have any play in that sort of area. Previously, I have had some exposure. But currently we do not. Obviously, there is an element of cyclicality around that space which we tend to avoid in our new process. As I said, there are some very good names there but yes, we have not got anything specific.

Obviously, the whole EV story in some sections of that story is quite pressured at the moment with some of the raw material prices coming off and clearly a bit of overcapacity coming in place certainly within mainland China as well. It is a very good growth story on the EV side for the specialty chemicals but it is also one that is under a little bit of pressure in certain sections at the moment.