Exercise caution while approaching mid, small-caps: Karthikraj Lakshmanan

Large-caps have become relatively more attractive and there are some opportunities to pick good businesses at attractive valuations, he said

As the March 2025 quarter (Q4-FY25) earnings season gets busier, KARTHIKRAJ LAKSHMANAN, senior vice-president and fund manager for equity at UTI AMC, tells Puneet Wadhwa in an email interview that considering the near-term uncertainties, there is a possibility of few percentage points cut in earnings growth for fiscal 2025-26 (FY26) versus the current expectations. Edited excerpts:

 

What’s your interpretation of March 2024 quarter earnings of India Inc.?

 

This quarter being the year-end numbers, the results announcements are spread over a longer period and only few companies have reported so far. While some large IT companies’ results have been weaker, mid-sized ones have fared better. Financials have been broadly in-line while staples have been weaker on growth. 

 

Overall, the expectations are for single digit topline and Ebitda growth in this quarter. Profit margins have been moving up in the last few years, which may be at risk of decline in some of the sectors. Considering the near-term uncertainties, there is a possibility of a few percentage points cut in earnings growth for fiscal 2025-26 (FY26) versus the current expectations. That said, as long as the growth is in double digits, markets should take it positively. Interest rate cuts and improvement in system liquidity could be positive for the corporates. 

 

Is it a good time for investors to start cherry picking?

 

It is difficult to time the market and catch the bottom from investing perspective. However, large-caps have become relatively more attractive and there are some opportunities to pick good businesses at attractive valuations. Within the large-caps, private banks and insurance, information technology (IT), consumer durables and retail, and the telecom sector are some of our preferred sectors.

 

What’s your view on the mid, small caps? Your multicap new fund offer is also skewed towards these two segments.

 

Mid-and-small caps are relatively less expensive now. Valuations are getting closer to the fair zone, though not as attractive as the large-caps yet. One needs to exercise caution while approaching mid-and-small caps. Having said that, individual stocks are down on an average by 25-30 per cent from their 52-week peaks in these two segments; hence, there are bottom-up opportunities in this category as well where valuations are reasonable.

 

What’s the average cash level across your portfolios?

 

Our investment strategy doesn’t change with the market movement. The style for UTI large-cap fund, for instance, has been competitive franchises available at reasonable valuations for the growth in the business. We have been overweight on quality franchises, measured by higher return on capital employed (ROCE), compared to the benchmark. With the markets correcting, some fundamentally strong businesses have become more attractive. We have added those names. We generally don’t take cash calls, and the cash level in the fund tends to be lower than 5 per cent; that holds true now as well. 

 

Do you see consumption picking up in the months ahead, and are the related stocks factoring in the possibility?

 

Domestic consumption may be relatively better off with expectations of normal monsoons, lower inflation and income-tax relief for the middle class, interest rate cuts and correction in the commodity prices, especially crude. We have been positive on discretionary (durables and retail) over staples as the growth prospects are relatively better in discretionary compared to staples. However, there are some bottom-up opportunities in staples as well that have become less expensive post last few years’ underperformance.