Everybody is curious to know whether the party in mid and smallcap stocks is over and is this like 2018 because the selling in the last couple of days is a scary reminder of what happened five-six years ago?

Porinju Veliyath: I am 100% sure it is not a repeat of 2018 which I have gone through and suffered very badly with huge underperformance to the market. I think that experience will make it more valuable from my point of view. Everyone, every expert or fund managers or researchers coming on your channel and talking to you in the last many months, have all been questioning about the froth in the market. So, that was almost sure kind of thing, but because of the technical factors of too much money flowing into the market, too many companies were trying to raise funds by QIP, and a lot of stocks were being managed by some investors or maybe some small operators.

It was a sure thing which was expected and it happened. But this time, of course, I understand the last three days were too much and there was a really big fall. It was almost like 2018. But here things have changed., I was just going through the Edelweiss report in the morning. In one of their reports, they are talking about comparing the smallcap and midcap indices two years ago and today’s. Two years ago in early 2022, it was around the price earning multiples for both smallcap and midcap was 26 and surprisingly, the earnings of these companies in the indices, have gone up by something like 60-65% in the two years, which is very unusual and the outlook is also equally good and promising.

Also, just for information, the PE ratio of two years ago of these smallcap indices and midcap indices, have come down by around 1% or 1.5%. This will be a big surprise to somebody who is not following those indices and its valuations. But at the same time it is 100% sure there was froth especially in many pockets and overall the number of new investors coming to the market was very huge. They did not have that experience, so they are not seasoned investors or traders. Too many people entered into trading by opening an account.

The market breadth has significantly changed in the last few years since the Covid. So, this is not going to be a repeat of 2018. Those who warned about or cautioned about the smallcap investing or the forth in the smallcaps, have also been talking about structural changes happening in India, the massive scale up of the economy and its growth. So, all those positives are definitely there and earnings growth is much-much bigger than the prior period of 2018.

We have all the reasons to remain bullish. But this was very much required for a healthy kind of stock market functioning. I appreciate regulators who are doing things like an Indian parent, when they see too much froth and manipulations, especially in the SME stocks. It is a wonderful thing that they have done. It will give a very healthy kind of a consolidation in the market in the coming weeks.

For the investable quality companies, which have got good fundamentals and value stocks, the correction is almost done, there can be another 5-10% up or down but this is the time to look for cherry picking of value stocks. With this correction, I am expecting confidence to come back and I am not saying that these small midcaps which have fallen will go up or rebound in a few days or a few weeks’ time; there will be consolidation. It is very positive for long-term investors.

So, let us understand why the correction has happened. The correction happened because the market had become frothy, a lot of weak players had kicked in. Another layer which in a sense spooked the market was a comment from the regulator that be careful, be cautious, mutual funds need to understand and manage risk and mutual funds have stopped accepting inflows into small and midcap schemes. When you hear this kind of an indication from the regulator, isn’t that an indication that the small and midcap space has neared the top?
Porinju Veliyath: No, in India, these stocks can never be the top. If the so-called economic growth and the expansion in our economy continues in the next many decades, this top may be for the time being, it can be there, that top may not be broken for the next few months. There will be a consolidation. But India never has a top in the Nifty or Sensex or in a smallcap index or midcap index. The top for a short or medium period is possible. We are on a growth path and we all are very excited about India’s economic growth. It is really deep rooted and strong. We cannot underplay this kind of event. This once in a thousand years’ kind of thing is happening in the next one-two decades. Let us forget about the Amrit Kaal vision or $30-40 trillion economy; let us not discuss at least during the bad times. It is good to discuss during the exciting bull time.

By 2030, we are talking about a $6-7 trillion economy. I do not think there will be much disagreement over this. Not only are we aspiring, we have got a very logical kind of argument towards this. Not just because we are patriots, we all wish good things to happen in India, not just because of that, this is a very logical conclusion, we will be a $6 to $7 trillion economy in next seven-eight years.

So, using the word top for the market is not relevant for India. The price earning multiples have come down in the last two years. As of yesterday, it was at the peak, it has come down to a two-year ago price earning multiple for the smallcap index and midcap index. That is a comforting space. At the same time, during the budget day, we were talking about that froth again and many people were focusing on that. There are a lot of small companies where prices are being managed, if not manipulated.

Do not forget that it is a truth, price being managed, manipulated maybe to a stronger word for many companies. Sometimes price is managed for QIPs or preferential allotment kind of things, especially in the small and midcaps. Hundreds of companies have raised funds. But this fundraising has made this company’s fundamentals strong. There is a macro tailwind with the economic growth projected and things happening on ground in terms of manufacturing, or Make in India theme or railways or every segment of the economy is booming and it looks like it has just began, it is not at the peak of growth if you take in railway, in aerospace, or in defence manufacturing or in generally the Make in India theme, it is only at the beginning of that growth period.

I strongly believe this correction and consolidation is an excellent opportunity for investors to do value investing, cherry picking the stocks or doing bargain hunting in some of those small and midcaps going forward. There is no hurry to buy today, tomorrow.