#39;As economy gets better, mid- and small-cap stocks will have an edge over largecaps#39;

Market Outlook

Lohchab said he is positive on large banks, echoing many others including those at Morgan Stanley that rerated the entire banking sector earlier this week. He said he prefers ICICI Bank, Axis Bank and SBI among them. He is also positive on NBFCs like Chola Finance.

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The rally in the recent month has been broad-based. In fact, many pockets of the broader market have performed a lot better than the largecaps. However, this hasn’t come as a surprise for analysts.

Varun Lohchab, head of institutional research at HDFC Securities, is one of those analysts who believe the rally in the broader market may continue given the recovery in the Indian economy.

Mid- and small-caps are more exposed to how the economy does. As things get better on the economic front, we believe mid- and small-caps will do well. Even in terms of valuations, we are seeing better opportunities in select mid- and small-caps compared to large-caps,” said Lohchab, speaking with CNBC TV-18 on September 8.

He added that HDFC Securities is positive on the Indian economy from a 12 to 18 month view.

His optimism comes at a time when major western economies are likely to enter a recession due to the fallout of war in Ukraine. The market in those countries has already sensed the doom and the selling has deepened. Meanwhile, the Indian market has outperformed them by a wide margin.

However, this unchecked rally has made headline indices more expensive than others. Nifty currently trades at a trailing PE of 22 times and 1-year forward PE of 20.56. This is about double of how Hong Kong and Taiwan trade. It is also significantly more expensive than Jakarta, US and Japan that trade in the range of 15-17 times their 1-year forward PE.

“At an index level we don’t see a runaway sort of opportunity given the fact it’s already trading at 21-22 times,” said Lohchab, highlighting his concerns that the index may not rise much from hereon.

Lohchab said he is positive on large banks, echoing many others including those at Morgan Stanley that rerated the entire banking sector earlier this week. He said he prefers ICICI Bank, Axis Bank and SBI among them. He is also positive on NBFCs like Chola Finance.

Lohchab is also banking on private capex that he believes will likely grow and surprise on the positive side through FY25. “So from that perspective, we are positive on Siemens, GR Infra, KNR Constructions and NCC,” he said.

He believes mild recession in other parts should work in India’s favour but a deeper recession will mean lower export and may be detrimental for the country’s economy. Among Sectors, he sees IT being impacted along with pharma to a small degree.

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