markets: 5 themes Prateek Agrawal is bullish on from midcap space

“On valuations whereas we’re at a excessive when you examine the 2 highs, this one and the one which we reached final 12 months someday in October. On valuations we’re nonetheless 4-5% cheaper as a result of within the interim we now have seen lots of compounding of EPS and that makes valuations a tad cheaper on the massive cap index,” says Prateek Agrawal, Motilal Oswal AMC.Allow us to start by speaking concerning the catch up play inside the heavyweights. The likes of Reliance Trade or the HDFC twins as an example have undoubtedly began performing however good now. How a lot of help do you consider that they’re prone to lend the markets of their transfer upwards?On valuations whereas we’re at a excessive when you examine the 2 highs, this one and the one which we reached final 12 months someday in October. On valuations we’re nonetheless 4-5% cheaper as a result of within the interim we now have seen lots of compounding of EPS and that makes valuations a tad cheaper on the massive cap index. Now we’re seeing robust inflows from in every single place and which implies we’re seeing one area after the opposite comply with up and there’s some quantity of rotation which is occurring.

Till the flows proceed on this method I believe this must be anticipated. Now by way of which a part of the market is anticipated to do higher, my ideas listed here are barely totally different.

Many of the themes that we’re speaking of lie within the mid cap area, consider something, China plus one, PLI, Make in India, no matter.

Many of the beneficiaries, many of the finest exponents of the theme are within the mid cap area.

Second, when you have a look at the massive cap indices and also you phase the indices into names which can be going through some points, sure, flows of cash can take every part up but when the bigger caps are going through points, we consider a number of the largest caps within the nation are going through points of 1 selection or the opposite, I believe the second half of the index is the place we are going to discover alpha alternatives moreover that within the mid cap area so probably not wanting on the tremendous massive caps to drive index in any significant method. Index is ok, we’re nearly double digit form of returns to the fiscal 12 months finish which implies once more, returns from the highest finish must be anticipated to be muted to my thoughts.I urge to vary. Because you talked about tremendous massive caps, have a look at Bajaj Finance. That inventory alone is up virtually about 6% odd. I imply, how do they do what they do? Q1 new loans are up 34%. Bajaj Finance is up virtually 7.5% proper now and AUM progress one of the best in 14 quarters?After I mentioned tremendous massive cap, it was by weight within the index. So this isn’t up there. However anyway, so sure, good set of numbers. And if they’ve achieved this, then one ought to count on one thing comparable with different companies on this area. People who find themselves lending, making the most of the know-how, I believe one ought to count on comparable progress from all of them.

What concerning the outlook in the case of the competitors that’s heating up inside the two-wheeler area with all of those new launches, the most recent after all being Hero. How are you sensing gamers actually protruding and persevering with to carry on to market share? And what’s your outlook about a number of the challenges? Do you assume that now they appear to be out of the best way?I might be a celebration pooper right here however let me do it. I see two-wheeler market as having saturated. Most households in India have a automobile. So the play is both that you simply premiumise or the winner or web worth creator could be a brand new entrant within the EV area.

Someone who’s doing very effectively on the ICE facet will simply change when you transfer to the EV facet. You don’t add worth. And that is a matter that I see within the two-wheeler area.

In my thoughts, it’s a web zero form of a state of affairs for many of the bigger guys.

For guys who’re succesful, have a great platform, good R&D facility however for some purpose didn’t succeed as a lot within the ICE area, have this disruption to again them as much as acquire market share within the EV area.

We see that taking place each within the two-wheelers and within the passenger automobile area. I actually don’t see the fellows who’re tremendous massive within the ICE area including a lot worth, particularly if the valuations are at present peak-ish.

What’s that first signal or what are the primary alerts which you’d look, which is able to persuade you that we’re nearing a brief time period peak?Like I mentioned, valuations are one thing that are actuality, which act as gravity. So sure, flows can take the market larger versus actuality however one ought to at all times control valuations.

And therefore, when the bigger cap index query got here, I mentioned, if we work with 18, 18.5 occasions one 12 months ahead earnings because the assemble, then we’re nearly 8, 10% away from the place the index must be.

Now, index has its personal life. It could go surpass that, come again, underperform and rise. So the monitor that one can take will be totally different. However that’s how it’s. Within the mid cap area, once more, the identical factor is true. There, the indices are literally 10% larger than the sooner peaks.

The traction by way of earnings for these areas that are in focus has been larger. So it’s sustainable as but. I don’t assume it’s moving into unsustainable territory however more and more, we’re beginning to see concepts not centered on earnings, extra centered on sum of half form of tales. To start with, it’s okay. You’ll nonetheless have some runway however that’s the first signal of issues getting a bit exuberant.

It’s within the second half the place you will note that alpha era from inside the broader finish of the market. Inform me what midcap pockets are wanting fascinating and are they to be purchased proper now?Sure, so lots of midcap pockets are wanting fascinating. I are inclined to see the market by way of themes. So, what occurs is all people at present seems at two-year therefore form of earnings, undertaking and by foundation what’s wanting higher on valuations high quality form of a combination.

And therefore to my thoughts, doing that isn’t going to end in any important alpha. It must be progress sustaining past these two years of projection interval which is the place longevity of the theme is available in. I believe there are areas the place progress of order larger than that of the index are many at present and that’s what makes me consider that is time for alpha for managers.

So, areas might be, whereas occasions will not be good for chemical corporations, however perhaps good time to build up, the expansion story is tremendous robust in quantity phrases so that’s one.

Second EMS corporations, firm after firm that you’d wish to have a look at on this area is benefitting from PLI, is benefitting from make in India, benefitting from international guys wanting to maneuver away some little bit of provide chains into another nation.

In case you are retail banks, now it is a area the place you’ll nonetheless recover from 20% form of retail AUM progress, the half that you simply wish to purchase, the half that we wish to purchase versus the financial institution who wish to do every part, company and retail the place the expansion could also be 14-15%.

And there are different areas engineering is one thing the place we see lots of traction, defence continues to see traction and momentum as we go ahead. Luxurious and retailing is one thing that one ought to have as a core of the portfolio.