Go for bottom-up stories in SMIDs; IT stocks look good in medium-term: Shibani Sircar Kurian
Kurian further says mid and small-cap stocks are currently valued higher than their historical averages, making earnings performance a critical factor for market direction. While first-quarter earnings are projected to grow in the mid-single digits, expectations for FY26 anticipate near double-digit growth. Improvement in corporate earnings, particularly in the second half of the year, will be essential to justify current valuations.
How do you analyse the markets right now because of late, the markets have been consolidating at higher levels, waiting for some more clarity on what could happen on the tariff front and the earning season is also in full swing. What factors are at play for the markets and what sentiment are you catching hold of right now?
Shibani Sircar Kurian: Over the last year or so, Indian markets have been fairly resilient in the backdrop of what is happening globally with all the tariff related uncertainty and geopolitical tension. Having said that, if you look at calendar year to date, on a relative basis, Indian markets have somewhat underperformed the emerging market pack. In that context, macro and policy factors continue to remain fairly buoyant, and policy has been supportive. We have been seeing improvement especially as far as rural consumption trajectory goes with improving income.
However, the biggest factor to watch out from our market perspective, apart from the global factors, is what happens to corporate earnings. All of last year we saw muted trends in terms of corporate earnings delivery with low single-digit earnings growth for FY25 and we were also seeing earnings downgrades every quarter and that has led to our markets today trading at valuation, which if you look at Nifty at over 22 times one year forward earnings, is close to fair value range. The midcaps are trading at slight premium to their long-term history and the smallcaps are trading at a significant premium to long-term history. For our markets from here on, earnings delivery becomes crucial. In this quarter, which is the first quarter, expectations are of mid-single-digit earnings growth. But when you look at the full year as a whole which is FY26, at this point in time expectations are of improvement of close to double-digit earnings growth for the year as a whole. Therefore, delivery of earnings in this context of valuations becomes important and hopefully from here on, in the second half of the year, we should start seeing improvement as far as corporate earnings goes.
I am taking a look at your weightage on equities. Like you just mentioned, you are marginally underweighting on midcap and underweight on the entire smallcap space. But recently, the trend in the market is that every time there is a little bit of an upsurge, it is the broader end of the market that is doing much better compared to the benchmarks. What could be a trigger other than valuations? Could it be earnings or could it be some other factors that could lead to you resetting your view or your weightage on the SMIDs basket?
Shibani Sircar Kurian: So, as far as the SMIDs are concerned, it is not that we have been completely avoiding the space. It has been more bottom up in nature looking at companies where there is visibility in terms of earnings delivery.
In terms of valuation, especially the smallcap index is trading at a much higher premium as compared to its long-term history and therefore, a lot of the movement that we have seen in that segment has been on the back of multiple re-rating. Earnings delivery has played a role in some cases. However, a lot more multiple re-rating has resulted in the movement in the broader market space and therefore, from here on, earnings growth becomes important. Even last quarter or the full year of last year, coming to earnings delivery, smallcaps specifically as an overall basket, saw disappointment and therefore, multiples just kept re-rating without the earnings playing through. Therefore, our overall strategy where the small and midcaps have been to look at stocks that are more bottom up in nature, look at companies with strong balance sheets, and companies where there is earnings delivery but trading at reasonable multiples. Therefore, our view is that if earnings growth picks up and there is a more broad-basing of earnings, then the segment will start getting more attractive because then the valuation will multiply. Does it make sense to look at bottom-up stories or would you say stick where there is earnings visibility, case in point being IT? Should one be looking at that sector right now?
Shibani Sircar Kurian: Yes, absolutely. Bottom-up stories do make sense especially when you are looking at the small and midcap segment, where you have to be a lot more stock specific rather than look at the entire basket. Our view is that there are near-term headwinds primarily because of uncertainty on discretionary tech spend where large geographies such as Europe and North America are concerned. However, when you look at the commentary of some of the companies that have already reported earnings for this quarter, it seems to suggest that A) the macro environment is not worsening. B) in large verticals such as BFSI, we are seeing steady improvement especially where North America BFSI is concerned. Therefore, our belief is that as and when we get closer to some sort of settlement where all the trade related tensions are concerned, some amount of discretionary tech spend, which has been missing in action for so long, possibly would come back leading to earnings and revenue growth normalising in line with their long-term trajectory. The second aspect is that within the sector there are pockets where valuations are fairly reasonable.The third aspect is from a slightly longer term perspective, if you look at what is happening in AI and adoption of AI by enterprises globally, our view is over a period of time it will lead to considerable amount of work for the Indian IT services space, specifically for those companies who are able to evolve and build talent and capabilities to cater to that demand. IT, in the near term, will possibly see some headwinds but with a medium-term, our view on the sector remains fairly constructive.
Of late, the consumption basket seems to be picking up, especially the case of staples that is garnering some bit of an investor interest. After those decent Q1 updates coming in from select companies, what is your view on the consumption basket? Have you made any adjustment with respect to the staple basket or the allocation over there or within consumer discretionary? Are you liking any particular pocket at this point in time?
Shibani Sircar Kurian: The overall consumption space has been a laggard for the last couple of years. Within the segment, our preference has been for the discretionary basket over staples. In staples, there are some segments where valuations are looking relatively attractive, especially the long-term averages. There are a couple of things on the consumption side; one, the monsoons have been progressing well. Foodgrain sowing data seems to suggest that the output on food grains and crops should be good for this year. Secondly, real rural wages, after a long period of time, seem to be on an uptick and, inflation, especially food inflation, being under control is helping there. The third aspect has been the policy support – both in terms of the budget and the tax benefits that have come through for the middle-income segment as well as the rate cuts that have been announced by RBI. Our belief is that mass or the middle-income segment is where the consumption basket should start to improve as we progress through the year. Then, of course, the festive season and the like which is more time-bound and cyclical in nature come through. Therefore, if you look at our preference within the consumption basket, our preference has been for discretionary consumption, especially that end of discretionary consumption which is more mass or middle income in segment. For instance, two-wheelers, some parts of consumer durables, airlines, retail are the segments where the trajectory in terms of growth and earnings should improve given that there are initial and nascent signs of consumption coming back.
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