I want to get a sense of the market considering the valuations across market caps. What is your view in terms of valuations, especially in small and midcaps? How do you think the global headwinds might impact our markets? I am talking of a time frame of a quarter or two.
Nilesh Shetty: Our valuations are expensive. I do not think there is enough for safety in terms of risk-reward right now. Largecaps are still better placed relative to small and midcaps. Earnings have slowed down. If you look at Q4 numbers and commentary coming from Q1 from corporates and in that environment, markets are within touching distance of their all-time highs.
There could be earnings disappointment for a lot of companies in the near term in terms of the financial results. So, investors need to be careful. In terms of geopolitics, India remains relatively isolated from what is happening in West Asia barring the second order effects of impact on crude oil prices which India imports. But apart from that, it does not directly impact India.
Of course, the tariff question and what India negotiates with Donald Trump will be keenly watched. Our sense is India is still relatively better placed than most other economies. We may be able to end up signing a better deal than other economies. By and large, it may not have a material impact on valuations, but it may impact sentiments in the near term.
In this scenario, as the July 9th deadline is looming, there may not be much impact, but what should one do? Should one focus on largecaps or look at midcaps and smallcaps?
Nilesh Shetty: Midcaps and smallcaps remain very expensive. You might have stock specific opportunities there. But by and large, I expect that sector to not… or that segment to not do well over the next 12 to 18 months. The largecaps are relatively better placed and you still have large pockets of opportunity there for you to allocate to the portfolio. At least our portfolio is heavily tilted towards larger cap names now where we find safety in terms of valuations.
Let us talk about a time frame of six to eight months. How are you looking at the second half of this calendar year? In terms of your focus on consumption, where are you looking at, in terms of pockets driving factors which are going to be dominant in the next six months? In terms of themes, what is going to play out and what is out of flavour according to you now?
Nilesh Shetty: Our portfolio style is value and so our focus remains on valuations. Even though consumption per se may pick up over the next six to eight months, the stocks that we have are where there is a significant margin of safety in terms of valuations. We have a significant allocation to two-wheeler space in the portfolio. We added a consumer durable company which underperformed over the last two years, but now offers reasonable valuation. We continue to have large allocation in private sector banks where there is a significant valuation comfort relative to their own two-year history, which is a large part of the portfolio. We also have names in the insurance space in the portfolio where valuations have derated materially and where there is a significant margin of safety. We continue to believe IT services offer reasonable valuations. They have missed the entire rally over the last 12 months and if there is any kind of uptick in IT discretionary spending in the western world, you will see these companies rerate and that is where investors should be allocated to. That is where we have allocated. It is where we think fundamentals offer much better margin of safety in terms of valuations.