Mid- and small-cap stocks continue to offer attractive opportunities, but investors need to be highly selective, according to Ajay Khandelwal, Head of Equities at Motilal Oswal Asset Management Company.
In an exclusive email interview with Tanmay Tiwary of NDTV Profit, Khandelwal said the recent correction has created opportunities in businesses where earnings growth, balance-sheet quality and market-share gains remain intact.
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“We would continue to favour mid- and small-caps, but with a strong emphasis on selectivity,” Khandelwal said.
His stance comes even as Indian equities remain richly valued, with the Nifty trading at around 20-21 times trailing earnings. Khandelwal acknowledged that valuations are not cheap, but said they need to be considered alongside the earnings outlook.
“At around 20–21x, valuations are certainly not cheap, but we believe they need to be seen in the context of earnings,” he said.
Healthy corporate balance sheets, improved return on capital employed and a supportive macroeconomic environment could help sustain earnings growth. If earnings deliver sustained double-digit growth, Khandelwal believes current valuations can be absorbed over time.
However, he stressed that his approach is not to chase momentum.
“Our approach is not to chase momentum, but to identify QGLP companies where the earnings runway can justify the valuation,” he said.
Over the next six to 12 months, Khandelwal prefers financials, domestic consumption, power and select industrials, where he sees a favourable combination of growth and earnings visibility.
The QGLP approach remains central to his investment strategy, with a focus on quality, growth and longevity while remaining mindful of price.
Khandelwal also sees support from the current interest-rate environment. With the RBI repo rate at 5.25%, he expects stable rates to provide visibility on the cost of capital, while improving government and private capex and comfortable liquidity could support growth.
He favours rate-sensitive domestic sectors such as financials, automobiles and select consumption.
For mid- and small-cap investors, however, the emphasis remains on selectivity rather than broad-based exposure. Khandelwal's preference is for businesses where earnings growth, balance-sheet strength and market-share gains remain intact and where the longer-term earnings runway can justify current valuations.
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