Nippon India MF’s Bhan suggests shifting focus to large caps

Investors looking to bet on mid- and small-cap Indian stocks should be cautious, and should reallocate a part of their portfolio to bellwether large caps, says Sailesh Raj Bhan, deputy chief investment officer for equity investments at Nippon India Mutual Fund.

Bhan, a 25-year veteran in the banking and financial services industry, thinks that large caps offer a better risk-reward opportunity to an investorgiven their relative underperformance versus mid- and small-cap stocks.

Moreover, if post-lockdown recovery expectations are not met, mid- and small-cap shares could see their valuations come under pressure, he said in an interview with Moneycontrol.

Most promising sectors

Bhan thinks that manufacturing and capital goods, large banks, insurance and credit sub-sectors, power utilities and consumer discretionary sectors appear to be the most promising. 
Yet another sector, which has seen headwinds even as the Sensex has zoomed past the 56,000-mark, is auto, which could see some disruption, especially in the electric vehicle segment, Bhan thinks. 

Near-term correction

Bhan says that while earnings are becoming broad-based and are being supported by a global growth, “near-term corrections on account of global factors or the occurrence of further disruption will test the resilience”.   

“Also, market euphoria is visible in the mid- and small-cap space which can see a material impact in case rising expectations are not met,” he adds. 

Focus on large caps

Bhan thinks that large-cap companies have the ability to deliver market share gains in difficult operating circumstances, and that is precisely what seems to be playing out in the market right now. These companies are also doing most of the heavylifting and supporting earnings recovery. 

He says that the top 50 stocks, which make up the Nifty 50, have seen “material consolidation with top players gaining significant market shares like in telecom, banks, steel sector, etc.”
“Sectors which were suffering in the last few years like metals, pharmaceuticals, IT services, etc. have seen a material uptick in the earnings growth in the last 12 months and have contributed to market rerating,” he adds. 

Bhan says that given the sharp underperformance of large cap indices vs mid and small-cap space over the last 12 months, the case of large caps investing is favourable.
“Recent market shifts where largecaps have started outperforming lately over mid and small caps do reflect the shift in sentiment and focus on investors in reducing overall portfolio risk and choosing the large cap space,” he adds. 

Undervalued sectors

Bhan says that his fund benefited from focussing on undervalued sectors including engineering, large metals and pharmaceuticals in the last one year. 

“A differentiated portfolio created out of high conviction investing has been a key factor of our Nippon Large Cap Strategy. The fund focused on areas where growth was strong, while valuations were relatively attractive,” he says.