Mid and smallcaps to lead the next growth cycle: Yogesh Patil
Yogesh Patil
,
LIC Mutual Fund
.
How are you analyzing the domestic macro tailwinds we currently have, alongside the global headwinds and uncertainties? How do you think the market is balancing both?
Yogesh Patil:
India's domestic macros are definitely in a good place. We have a controlled fiscal deficit, manageable inflation, and a favorable current account deficit. The
RBI
and the government have done a phenomenal job. After three to four years of high growth, India might see slightly sluggish growth this year. From next year, we expect better growth.
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At a sectoral level, we continue to believe that India's growth story is capex-driven—starting with infrastructure and manufacturing, followed by consumption. Manufacturing, in particular, could emerge as a big winner in this global reset of supply chains. Globally, of course, the situation remains uncertain and keeps evolving. But for India, while there may be short-term hiccups, the medium- to long-term story remains strong. We're seeing structural trends emerge—new sectors like defence, EMS, data centers, renewable energy, and railways are witnessing significant capex. Specialty chemicals too are in focus.
We believe that over the next two years, these investments will start reflecting in revenue and profitability. Corporates have also deleveraged, so India Inc. is in a stronger position. There is still headroom for growth through leverage. Rural consumption is also picking up, supported by better monsoons and softening prices. Overall, we think the worst is largely behind us. Over the next two quarters, as global uncertainties like tariffs and conflicts begin to settle, we expect improved and stable growth from India. While India may temporarily enter a low GDP growth phase with high liquidity, specific sectors—particularly market leaders and emerging ones—are driving the growth narrative.
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Sectorally, what is your view on the banking space, especially the public sector banks? We've seen renewed interest recently and a large
QIP
from one of the leaders. How do you see PSU banks right now?
Yogesh Patil:
Broadly, BFSI looks promising, but we need to bifurcate between public and private banks. For consumer banking, we believe private banks are better positioned, though PSU banks are currently attractively valued. So, it depends on whether you're prioritizing valuations with limited growth or are willing to pay a premium for higher growth.
That said, with the current credit growth, both private and PSU banks can grow from here. Valuations across the banking sector look reasonable. The RBI has provided ample liquidity, and we expect a pickup in credit growth in the second half, aided by liquidity and controlled inflation. The base is also resetting.
In terms of your portfolio construct, where are you most overweight by market cap? Are you playing it safe with largecaps, or does the conviction in the broader market continue?
Yogesh Patil:
As a house, different funds have varying allocations across large, mid, and smallcaps. But our core focus is on quality and earnings growth. Currently, the strongest earnings growth is visible in emerging and new sectors, and many of their leaders are found only in the mid- and smallcap space.
So, we are selectively overweight on small- and midcaps. We believe the structural trends in sectors like data centers, defence, exports, and power are irreversible. Most capital goods companies, too, are in the mid- and smallcap segments. So, if you follow earnings growth, your allocation naturally leans towards these segments. Of course, allocation varies from fund to fund, but overall, we are relatively higher on small- and midcaps due to the strong opportunity and earnings visibility.
Given the churn underway across sectors, which sectors do you believe may underperform in this market upcycle?
Yogesh Patil:
It's tough to point out specific sectors, but based on our understanding, the ongoing tariff issues are creating challenges for major exporting countries like China. Commodities and commodity chemicals from countries with surplus capacity could flood other markets.
So, we are currently avoiding sectors where competition is intense and capacity is excessive—especially where global trade boundaries are unclear. This includes not just commodity chemicals or metals, but potentially building materials, polymers, and pipes as well.
The threat of higher imports and falling global prices due to oversupply is real—especially if the US imposes more tariffs on China. China, which exports around $1 trillion worth of goods, will need to reroute that supply. India could be a destination, which creates risk. It's hard to pinpoint exact companies or products since China exports such a wide variety. But one thing is clear: India is steadily growing in specialty chemicals, CDMO, defence exports, and domestic data centers.
Apart from domestic data centers, where are you deploying your monthly fresh inflows?
Yogesh Patil:
We're spreading it across a few themes. The consumer sector, for instance, hasn't done well over the past two to three years, but we are starting to see green shoots in the rural economy, supported by rising real rural wages. So, we expect a pickup in consumer demand in the coming quarters and have slightly increased our allocation there.
We are also gradually increasing our weight in BFSI—selectively in NBFCs and certain banks. After years of underperformance, we're seeing improving ground-level checks and overall sentiment. Plus, RBI has infused ample liquidity to support both consumption and the banking sector. So, BFSI and consumer are areas where we're incrementally deploying capital.
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