Mumbai: Mid-cap stocks have emerged favourites this year with the broader indices outperforming their larger rivals. Over the past month, the Bombay Stock Exchange’s Mid-cap Index has risen 9.67%, compared with 4.01% for the benchmark Sensex. Mint spoke to Kenneth Andrade, head of investments at IDFC Asset Management Co. Ltd on what’s driving these shares and which sectors will outperform. Edited excerpts:
How do you make the case for mid-cap stocks?
They’ve outperformed in recent times, but if you look over two years, a lot of these guys are playing catch-up. In 2008, you had mid-cap indices plunge to depths significantly lower than what large-caps did. That was a time when some of them were trading at bankruptcy valuations. They are making up for a lot of the lost time (since) the latter part of 2009. But I wouldn’t say they are leading the market, just playing catch-up.
So is there still some growth left in this space?
In the mid-cap space, the bounceback that has happened isn’t complete. Profitability across the entire spectrum hasn’t come back. For example, in the real estate and commodities sectors, the profitability that led the previous rally hasn’t come back to the original (last time’s) highs. So, the set of companies that have gone past their previous highs are completely different from those that led the rally last time around.
Leading growth: A Spencer’s outlet in Mumbai. The one single variable that’s climbing is the per capita income of the Indian consumer. Indranil Bhoumik/Mint
How do you think firms will react if the fiscal stimulus is withdrawn and interest rates are raised?
They will react very similarly to any company that is dependent upon stimulus-led growth. What is happening in corporate India is—not too many of them are leveraging aggressively. That’s typical of a cautious environment. In 2010, the focus will be on deleveraging balance sheets and bringing down debt. So, all the issuances you’ve had so far, a lot of cash flow that has come in, all of it is effectively going in paying back debt.
How do you see valuations?
Well, the smaller part of the market has always been growth-led. But my style of investing is different. When we look at smaller companies, they need to have the characteristics of being leaders. If they can’t be leaders (in terms of market share) in their entire segment, they should at least be cost leaders. In all probability, companies with these characteristics will dominate their region or their industry. We like growth, but are ready to buy even if it comes at a price—if a company has these characteristics. We would not really mind aligning with these companies even if they are expensive.
Which sectors do you like in this space?
I wouldn’t call them sectors, I would call it themes. I like the consumer space a lot and the food inflation chain a lot. When you have food prices rise—for example, when you have sugar trading at Rs15 in 2005 rise to Rs45 in 2010, clearly on price alone the industry has moved from Rs35,000 crore to Rs100,000 crore. Now, that incremental Rs65,000 crore that the industry has got will help improve profitability down the chain in some (related) industry or the other. The consumer lot also looks good—anything related to the revenue spend of the consumer—aviation, alcohol, media. At the end of the day there is one single variable that is climbing—that is the per capita income of the Indian consumer.