Have you started buying pharma yet because that too is showing sparks that perhaps worst should be over, especially for generic exporters, pricing pressure and big demand for medicine in US.
So there are sort of two buckets in which we have divided pharma. So there will be negative impact of lower chemical prices, especially the API prices have gone down. So within pharma which are very API driven is something we are not looking at but pharma where the exposure is more towards US generic, their prices have stabilised. The price erosion, normally what we are seeing this year, we are seeing much lesser price erosion. So within pharma, we like companies which are exposed more towards US generic and avoiding where the exposure is more towards APIs.
In the auto, auto ancillary space, where all have you been looking for value? Anything which got you occupied there?
So within auto, we are not into auto but especially auto ancillaries. So a couple of factors have played out in auto ancillary. Some of the auto ancillaries who are supplying to Europe, the cost of Europe auto ancillary manufacturers have gone down a lot, both tier-1 and tier-2. And that is where some of our, let us say forging companies have done very well.
So within auto, that is the space we like. We participated a bit in the two wheelers but now we think the valuations are full on the two wheeler side. So auto ancillary, especially where there is some exposure to Europe, is we think a good place to be.
Part of the market or theme which you are following, which is the most undervalued, market is completely ignoring what lies 6, 8, 12 months ahead and offers the best margin of safety in your view?
There is little margin of safety in most sectors but what we like a lot right now is NBFCs. They have not participated to the extent other sectors have, generally in a reducing rate cycle and that starts pretty soon in our view, you are better off in NBFCs than in banks. So we want to be somewhere which is domestically driven rather than export driven and where the macro tailwinds are favourable. We think NBFC is a good place to be.
What kind of NBFCs are you buying? Are you buying microfinance? Are you buying the likes of Poonawalla, Bajaj finance variety? There is so much variety there or pure commodity, housing finance. What exactly are you buying in NBFCs, auto NBFCs?
So within NBFCs we like housing finance and also MFIs. In both the places we think the room to surprise is much higher especially the smaller housing finance companies. You can still see high I mean 15% to 20% growth and with overall NPAs coming down. Similarly MFIs have been ignored for long but MFIs follow a cycle so if you get the cycle right the upside can be big. So MFIs and mortgage or housing finances within NBFCs where we are currently investing.
A quick word on the small cap, absolutely small and midcap side of the market. Do you see any early signs of froth or not yet or stock specific call but the cycle is still supportive of that basket?
So a couple of things. In March we really saw a meltdown in small caps for maybe tax reasons or people were too busy with insurance etc. but since the 28th March almost 9% or 10% of companies who have a market cap of more than Rs 500 crores are up 80%. So clearly there is froth in certain segments but you also have to remember that it is coming off a low base and the other thing is a lot of money is chasing very few small caps.
If you look at the mutual fund data, small cap as a sector or the segment got the highest inflows last month of 5500 crores. So there is definitely froth in part of the small cap basket.