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Hemang Jani, Independent Market Expert, says: “While we are all enjoying this midcap party, there will be periods of sharp corrections and it would make sense to take some money off the table and take advantage of the sectoral rotation from midcaps to largecaps. Within largecaps, banks are catching up. One can take a relook at the portfolio composition as we approach March end.”

There has been a large deal in Airtel and that stock has been doing quite well for itself of late. Yesterday, as well, in a weak market they managed to hold out quite well. What is your view on the telecom sector and Airtel specifically?
Hemang Jani: Clearly, the performance this quarter has been good. We have had Mr Sunil Bharti Mittal giving some ideas about the possible ARPU and the entire 5G rollout; the investment is largely behind them. So, we have a positive view and we think that the ARPU growth story along with the leverage will kick in in a big way. In Voda Idea, you may have been hearing about the capital infusion, but one does not really know the timing and the market share gains for the incumbents will continue to play out. Airtel would be the stock to have as a part of your core portfolio even at this point of time.What are your thoughts on small and midcap corrections? I was just looking at this week’s data and smallcaps have fallen quite hard. We have not realised that, but it is an over 3% fall in the smallcap index alone. Would you say it is a profit take?
Hemang Jani: When we look at the broader market, the midcaps and the smallcaps, the universe is too wide. At the index level, we feel that the valuations are stretched and the market is probably not factoring in the regulatory action and the corporate governance issues that many of these companies are grappling with. While we are all enjoying this midcap party, there will be periods of sharp corrections and it would make sense to take some money off the table and take advantage of the sectoral rotation, from midcaps to largecaps.

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Within largecaps, banks are catching up now. You are going through a bit of a lull when it comes to many other pockets, particularly commodities, PSUs, etc. So, I think it is a good time to kind of re-look at the portfolio composition and do that exercise while we are approaching March end.

What is your view on manufacturing and defence manufacturing at that? HAL has upped the overall order value of one of the big orders. There was a UBS upgrade in terms of the target price for Bharat Electronics as well. What names in defence still look like in the buy zone?
Hemang Jani: I think the good news in terms of order inflows continues and some companies will continue to basically report very strong growth, though the stocks have re-rated, they have really gone up big time in the last one year, but it will be good to have some exposure to names like Bharat Electronics, HAL, Bharat Dynamics. But we should not become too greedy and have too many defence stocks in the portfolio just because the sector has done so well.

So have a meaningful exposure of about 5% to 8% and have one or two good names. That will be a sensible strategy to have.

What are your thoughts on the two-wheeler pack right now? Would you stick to TVS which has a proven track record, although the stock has done very well in the last year-and-a-half?
Hemang Jani: The two-wheeler space in the last six months has done pretty well, whether you look at the stock price performance, whether you look at the management outlook or in terms of the monthly numbers, we continue to see traction and that may continue. In terms of valuations, Hero Motor looks far more attractive versus a Bajaj or a TVS at this point of time.

Also, we have to reckon that when the two-wheeler space is doing so well, some of the auto ancillary companies, particularly two-wheeler focused auto ancillary companies would also stand to benefit. So, we would watch out for something like Endurance Technologies. Overall, valuations are not out of whack. Definitely have some exposure to the two-wheeler companies.

Do you track Pidilite or Varun Beverages?
Hemang Jani: Varun Beverages has been under coverage and we have a positive view there. The valuations are not by our side, let us say about 60-62 times.We have to understand how many companies are there in India where you will have volume growth in excess of 15% to 18%. EBITDA margin is more than 15% and earnings growth of more than 30%. Within midcap though valuations are higher, given growth visibility and track record, Varun Beverages will keep on performing even from current valuations and price points. When it comes to Pidilite, it has been one of the blue chip names. My only concern over here is that earnings growth is less than 15% while valuation is in excess of 55 times. I do not think the market is going to give that kind of credibility or comfort to the investors when you are trying to invest at this point. Yes, it has been a great company in trying to expand its product portfolio but valuations-wise, I am not comfortable entering into it.

What is the outlook on this underperformance within the broader markets? Is it likely to continue?
Hemang Jani: Yes, the underperformance is likely to continue. Within the broader market, there will be some pockets which will hold out. But at the broader level, it looks difficult, given the fact that the valuation comfort and the new money which is coming into the market, will find largecaps in certain pockets. Within largecaps, banks are far more attractive versus the broader market. We also have this regulatory issue. We also have to reckon that the broader market companies are having corporate governance issues also. So, it makes more sense to have slightly overweight position in terms of largecaps.

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