'Mid, smallcaps expensive, but smart stock picking can generate alpha'

With Dussehra and Diwali in October 2025, followed by the wedding season, we expect the benefits of pent-up demand to be fully captured during Q3FY26, says Agrawal

Midcaps and smallcaps aren’t cheap, but the right stock in the right sector can still deliver strong alpha, says Sunny Agrawal, head of fundamental equity research at SBICAPS Securities. In an email interview with Devanshu Singla, he discusses how GST reforms and festive demand could boost consumption, and why stock picking matters in a pricey midcap market. Edited excerpts:

 

When do you expect the real impact of GST reforms to reflect in earnings, particularly for consumption-driven and midcap-heavy sectors?

 

Rationalised GST will be applicable from September 22, 2025, and hence some benefit is likely to flow through during the July to September quarter of the financial year 2025-26 (Q2FY26). With Dussehra and Diwali in October 2025, followed by the wedding season, we expect the benefits of pent-up demand to be fully captured during Q3FY26. Having said that, GST rationalisation coupled with other measures like tax benefits and rate cuts is likely to structurally propel consumption and augur well for the consumption-driven sector in the medium to long term. Sectors where earnings are likely to be upgraded are Auto, Auto Ancillary (indirect beneficiary), Hotels, Consumer Durables, EMS (indirect beneficiary), etc    

 

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Is now a good time for investors to increase their exposure to midcap and smallcap stocks?

 

Midcaps and smallcaps are not available at deep bargains and are trading at relatively expensive valuations. Mid and small companies which are likely to report healthy earnings growth for the next few years are likely to sustain premium valuations and have the potential to outperform the market. Investors are advised to follow a bottom-up stock-specific approach and not focus much on the Nifty50/Sensex levels. Aligning the portfolio towards the right sector and stock can help investors generate decent alpha in medium to long term.  

 

Given global macro uncertainties and a range-bound Nifty, where do you see tactical opportunities in the Indian market over the next 6 to 12 months?

 

We believe winners will emerge from following pockets (1) Auto OEMs and Auto Anc, (2) Cement, (3) NBFCs particularly with focus on MSME, Housing, Gold etc (4) Capital market play like wealth managers and AMCs, (5) Select Banks, (6) EMS, (7) Recycling, (8) New age businesses, (9) Pharma - CDMO, (10) Structural Steel Tubes, (11) Office leasing (12) Hotels, (13) Hospitals, (14) Manufacturing (PEB, Defence, Aerospace Engineering, Railway Wagons, Power Equipment including BESS, Pharma ancillary etc), (15) Metals/Mining

 

Are there any companies in the tech or AI space you would recommend, and how do you see these sectors evolving?

 

Sectors like Semiconductor, Datacentre, AI, etc, are likely to evolve rapidly over the next 2-3 years and will be adopted by the majority of the sectors either to improve productivity or offer better low-cost product/services to customers. A few companies which are adopting AI and are likely to benefit are Tata Elxsi, Persistent, Bosch, etc

 

Any emerging themes or sectors (beyond tech and AI) that investors should watch for in the next 12 months?

 

Themes which are not discussed widely on the street are Robots/Humanoid and SATCOM. We expect these sectors to witness rapid progress over the next 12-36 months. Investors are recommended to track development in these sectors. I am sure a few multi-baggers will emerge from this sunrise sector.

 

How do you assess the current IPO pipeline in terms of valuation and investor interest?

 

IPOs of Urban Company, Dev Accelerator and Shringar House of Mangalsutra received strong interest from retail investors as the retail portion got subscribed 41.5x/164.9x/27.3x, respectively. Nowadays, a select few issues leave value on the table for incoming investors. Businesses with strong moats and growth trajectory are getting phenomenal response with the hope that investors will be rewarded in the medium to long term. Domestic institutions are flush with liquidity, and that can be one reason for the robust supply of paper in the primary markets. Looking at the pipeline of companies waiting to hit the street, we expect the next 2-4 months to be a very busy period for primary market activities.