Investors should be cautious, as the rally in mid- and small-cap stocks is largely over, according to Piper Serica Pvt.'s Abhay Agarwal.
The mid- and small-cap stocks have finally caught up in the recent rally after having underperformed for the last five years, said Agarwal, founder at Piper Serica Pvt. “We have had a phenomenal rally in the last six months, where these stocks have risen by about 40% in absolute terms.”
The rally was largely fueled by inflows received by domestic mutual funds, focusing on mid- and small-cap space, and the change in retail investors' attitudes away from large companies, he said.
The space will do very well in the next 3–5 years, but he advised caution in the near term, he said. “It is a place where you need to have a holding period of 3-5 years, although the valuations currently are looking unfavourable."
Pockets Of Opportunities
Agrochemical companies and companies largely in the agriculture space are looking attractive, according to Agarwal. Companies in the areas of speciality chemicals, fertilisers, and farm equipment “that make farmers more efficient” are providing interesting opportunities, he said.
This sector has been neglected by the markets for a long time, and the recent emphasis by the government on developing the rural economy has made it more attractive, he said.
Agarwal is bullish on IT companies, focusing on products rather than traditional software server providers, as the former can have potential for better growth over the next five to 10 years.
“The large and small-cap companies in IT services are struggling, largely because they are dependent on services like coding and app development. They are experiencing low growth due to the lack of innovative products that can provide efficient solutions to their clients.”
The guidance given by the IT companies will not improve for another year unless there is some basic restructuring in their business models, according to Agarwal.
Indian Tyre Companies To Become Global Leaders
The tyre manufacturing companies are another pocket of opportunity, according to Agarwal. “There are interesting uses of technologies used in the manufacturing of tyres." We are seeing signs of these innovations being incorporated by certain domestic companies, he said.
Indian tyre companies can become global leaders based on the current innovations as international companies are currently experiencing a slowdown, Agarwal said.
Watch the full interview here:
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