So, you talked about premium consumption then, what within that seems like there is still some headroom left on the table because a large part of that trade also has played out and since Covid loads not just now.
Mihir Vora: Certainly. So, durables should continue to do well because there the per capita, etc, the thesis still holds. Within auto, the SUV segment probably will continue to do better. It is already more than 50-60% of the market, but that should continue to do better. We are talking about hotels. We are talking about travel and tourism, airlines, all those kind of segments can do better. Even real estate, you can see the premium real estate doing better.
So, basically the upper end of consumption which is likely to outperform. But at a time when a lot of naysayers are talking about the frothiness in smallcap markets, it has come off and corrected a bit. This is a time when others are saying that there is more safety in largecaps. You guys are coming up with a smallcap fund, explain us the rationale. Would not it be difficult to stock pick at these levels?
Mihir Vora: Absolutely not. The good thing is that market actually has been quite rational. So, while we are seeing a lot of stocks at new highs, there are a lot of stocks which are not at new highs. For example, the whole chemical pack, the whole defence pack, railway pack, a lot of these stocks are actually corrected by 20-30-40%. In fact, the chemical segment is down by 30% after two years after the peak. Even in IT, a lot of stocks have corrected. So, the markets have been churning and the smallcap index, for example, is at a high because when these stocks corrected, pharma, for example, caught up. So, there are a lot of other segments which caught up. So, headline numbers tend to kind of mask a bit of the underlying churn that is going on in the segment, that is one. And whether we like it or not, midcaps and smallcaps are now 40% of the market cap.
Is it?
Mihir Vora: Yes. So, 20 years ago, the top 100 stocks used to account for about 82% of the market cap.Top 100 stocks accounted for 82% of the market cap.
Mihir Vora: The largecap. Today, the number is close to 60%.
But how much of earnings is coming from smallcap as percentage of the market cap?
Mihir Vora: That analysis we can do, but if I look at the price to earnings ratio of the smallcap index, it is exactly similar to that of the largecap index. And the small cap earnings growth and we just consider, exclude the loss making companies from that, the smallcap earnings growth is actually double that of the largecaps.
No, I understand. My point is that, I think I remember reading this data somewhere which said that 40% of the market cap is small and midcap, but only 20% of the earnings are small and midcap.
Mihir Vora: I would not say that because you need to remove some of the large banks and the telecom losses, etc. If you account for that, probably that number would not be that skewed because from the data that we have, the PE ratio two years forward for the largecap is similar to that of the smallcaps, which means that the profit proportion also should not be that different. The midcap, which is the 150 in the middle, so top 100 is largecaps, then the next 150. Those 150, if you look at the aggregate again, I do not like looking at aggregate, but if you look at the aggregates, there the PE ratio is much higher, about 27 compared to 20 for the large and smallcaps.
You talked about value on the table when it comes to chemicals, defence and railways. Let us pick up on defence and railways because they as well much like the index have gone through their fair share of chop and churn from the top. But that means structurally you still have conviction on these two sectors.
Mihir Vora: Absolutely. These are long term themes that we have identified. We talked about it during our flexicap, so that is not going to change in like six months. The whole thesis being that for the first time the private sector is coming in the defence sector and now that they are there, we have shown out industry after industry, for example, in pharmaceuticals, we started from scratch, private sector came in, we are world leaders. Same for IT services, same for auto and auto components.
So, why not defence?
Mihir Vora: Because for the first time, the private sector is coming in, so the runway of growth can be very long.
So, the defence story is big, but within that there are two ways to look at it. Look at government backed companies, which get order or nomination and it is granted that it will go to them, sophistication and security or one looks at private companies, which will be sizable in terms of their defence business, which is a better idea?
Mihir Vora: Both actually. There are not like 50 stocks to choose from in any case. So, I think we can have both. There are only a few government companies and they will continue to be the nodal agencies because ultimately, the government will trust its own public sector unit.
So, whole manufacturing sector and the ecosystem will get a bit of a push. But would you recommend start increasing allocation to IT now or still wait for a couple more quarters?
Mihir Vora: See, largecap IT, I consider them as boring companies. We are talking about growth rate between 6% to 9%. I think we are back to pre-COVID level kind of growth. So, whatever stock picking needs to be done is frankly in the smaller companies in IT.
Are you saying that about private banks as well, boring old companies or still have some hope?
Mihir Vora: No, private sector banks still have the scope to take market share away from PSU. PSUs are still large. So, it is not that boring so to say.