Largecaps are most vulnerable as investors chase mid, smallcaps: Bhansali

Sushant Bhansali, chief executive officer of Ambit Asset Management discusses where the value is and how he runs a microcap book

Largecap stocks are the most vulnerable as global investors stay away and domestic investors keep chasing mid and smallcaps amid a market downtrend. According to Sushant Bhansali, chief executive officer of Ambit Asset Management, which manages about ₹3,500 crore, India is likely to attract foreign capital once the artificial intelligence (AI) trade settles. In an interview with Shilpa Rangarajan and Pravin Palande in Mumbai, he discusses where the value is and how he runs a microcap book. Edited excerpts:

 

The market has fallen for eight to nine weeks in a row. Why are global investors staying away?

 

Largecaps, I think, are the most vulnerable right now, because they need large doses of capital, and that is provided by global investors. They have no affection towards India at this point, because they are getting good opportunities in other countries. All other markets, including a few emerging markets, are doing quite well. So why should they bet more on India? There is no point in taking a risk on a country like India when US yields are at 5 per cent plus. That's why they are staying away. But I am sure that with every passing week, India is getting more attractive and juicier. At some point, especially when the AI trade nosedives, I think India will look better. 

 

It's not that AI will go out of business. But the sensation around it — that revenue will double every quarter — I think that sensation will someday go away, when people realise that it has to happen at a reasonable cost.

 

In past global risk-offs, foreign portfolio investors (FPIs) sold emerging markets indiscriminately. Why should India benefit this time?

 

Historically, global risk-off episodes have witnessed FPI sell-offs. This time, given the differentiated growth coupled with compelling valuations, we expect a global sell-off led by AI-related businesses might be an opportunity for Indian markets, as we are well positioned as an anti-AI trade.

 

If largecaps turn, which pockets would lead?

 

Even many bank stocks are trading at their lifetime-low multiples, with decent growth. Credit growth has reached 18-20 per cent. Then, there are a few buckets where earnings have not gone bad, but the long-term outlook, let's say in IT (information technology), has many doubts in people's minds. If that doesn't play out the way people apprehend right now — that everything will go for a toss — then, given what they have been delivering in the last two to three years, there is big money to be made in that sector in the next two to three years.

 

Then, I would say consumer discretionary and consumer staples, where most of the companies have not participated, because consumption has been weak post-2022. But whatever the government has done to get it back on track in 2025-26 is already leading to results. So a good Diwali, a good festival season, and a good marriage season in the next six months can change the game for consumer businesses as well. And then, definitely, there are a few which will continue, like capital goods and energy. They have been doing well, apart from the market correction of late. I think that momentum should continue in those sectors for the next couple of years at least.

 

Mid and smallcaps have rallied 20-30 per cent since March, while Nifty 50 is flat. What explains the appetite?

 

If money is made, more money comes in. It's as simple as that. Nothing works more than returns, and people will happily forget that they didn't make money, or lost money, in the past, as long as short-term returns are good and exciting. Those who invested before, know how much they lost, but those who are new, seeing 25 per cent up, I think they are getting very happy. They are getting into either flexi caps, where people are increasingly playing mid and small caps, or into specific mutual fund schemes in the small and midcap space.

 

The multiples of small caps are overall just above average, but in many pockets they are very expensive, and in many they are very cheap as well. I think in the last year and a half or so, returns have become very lopsided. Stocks are down 20, 30, 40, 60, 80 per cent from their lifetime highs. There are stocks which are at lifetime highs as well.

 

Gains are concentrated in a narrow set of names. How do you separate earnings-led performance from flow-led, and what gives first if systematic investment plan (SIP) flows slow?

 

Given the tough economic environment — with rising inflation, increasing interest rates, and volatile geopolitics — the earnings trajectory is expected to be concentrated, not broad-based, as we have witnessed over the last one year. This bodes well for stock pickers and concentrated portfolios compared to diversified portfolios. Muted flows might be a damper for index returns, but not necessarily for individual stocks as we have seen currently in the largecap segment, which has witnessed massive FPI outflows in the last two years.

 

Did the recent fall test the Korean, Taiwanese and Japanese money? What do Daiwa's and the broader East Asian high net-worth individual (HNI) investors demand that Indian HNIs don't?

 

The recent global AI-related sell-off resulted in a significant FPI sell-off in Southeast Asian markets, after they witnessed massive inflows for a few quarters. Global investors are sophisticated and like to invest in diversified strategies and their needs do not change with volatility.

 

Micro Marvels returned about 47 per cent in five months. What drove it?

 

I would say it is just getting the right set of companies with earnings growth. The earnings growth of the portfolio in the last three quarters has been 30 per cent plus. So it's a high-growth portfolio. I would say very, very unique businesses, which you don't find in the Nifty Midcap index.

 

There is a company based out of Ahmedabad. They have over 30 per cent market share in providing solutions for the large stores of quick-commerce companies. Then there is a company which makes bearings that the larger bearing players cannot make. Two to three years back, they had some 10-12 customers; now they have 25. Then, there is a company which makes wires for tyres. There are just two or three producers in the country.

 

We meet the company, we meet their suppliers, we meet their customers, we meet their distributors, and we do a lot of hard work. Because there is no sell-side, there will be no research on them. We write it on our own.

 

You cap the strategy at ₹1,000 crore-2,000 crore because of liquidity. How does stress redemption play out?

 

Given the PMS construct, redemptions are easier to manage due to both diversified portfolios and the ticket sizes. Having said that, during stressed markets when liquidity is low, especially in the micro-cap segment, the price impact is high. However, the PMS structure allows for client and advisor conversations, helping clients sail through the volatility without necessarily redeeming their investments. Historically we have advised clients to use low-liquidity situations to their advantage by increasing allocations through top-ups.

 

Where do FPI flows go from here?

 

As the AI trade settles, India will be well positioned to offer non-AI earnings growth and, thus, should attract capital from FPIs. The Indian economy is among the fastest growing globally. Corporate leverage is at historical lows, and the private capex cycle has gained good momentum over the past few years, which is expected to continue. In addition, barring a few stocks, Indian equity markets have underperformed, making valuations compelling for FPIs. MSCI India's premium to MSCI Emerging Markets is at a historical low. Thus, mean reversion for FPI flows seems nearby.