Mid- and small-cap correction likely over, froth cleared: HDFC Securities' Relli

Dhiraj Relli, MD & CEO, HDFC Securities.
Dhiraj Relli, MD & CEO, HDFC Securities.


  • Excess speculation has been tempered, and the correction necessary for mid- and small-caps has mostly taken place, Dhiraj Relli, MD & CEO of HDFC Securities, says in an interview.

Although many suggest that large caps are a safer choice currently, Dhiraj Relli, MD & CEO of HDFC Securities, contends that the excess speculation has been tempered, and the correction necessary for mid and small caps has mostly taken place. There may still be potential for a further 5-10% decline, he said.

Within sectors, he believes there could be stellar growth in industrials in the coming decade. Moreover, he is of the view that the government’s focus on renewable energy and green infrastructure will continue if the Bharatiya Janata Party (BJP) wins general election. Edited excerpts:

The broking industry has evolved significantly with algorithms and machine learnings. HDFC Securities also launched Sky last year. How is that faring?

We are still in the early stages with Sky. We have recently onboarded nearly 500,000 customers, so the platform is stabilizing. We are adding more features, but are focused on serving an underserved segment. We identified a need for a platform that caters to new-age investors and customers who prefer transparent and simple pricing, and prefer to do everything digitally.

How is Sky faring vis-a-vis competitors like Zerodha and Groww?

We launched in October, just about five months ago. We are acquiring around 100,000 accounts every month and are satisfied with the progress so far. The real test will be in the next fiscal year when we expect to see significant growth and scalability.

Looking ahead, how do you expect the broking industry to perform in the coming years?

In the past, the broking industry was largely made up of small, independent businesses without many entry barriers. However, today, digital technology and compliance requirements act as significant entry barriers. Developing the necessary technology and digital products, such as various order types and algorithms, is challenging for smaller brokerages. Customers now demand features like bracket orders and basket orders, and the industry is evolving rapidly, with changes like T+0 settlement and the expansion of product offerings into commodities.

As a result, smaller brokers struggle to keep up with the heavy investments required in digital technology and talent acquisition. The challenges of compliance, technological innovation, talent acquisition, and product development make it increasingly difficult for smaller players to compete effectively in the industry.

What are the set of investors that you are seeing higher traction in—maybe retail or HNIs?

In our previous platform, Invest Right, we attracted mostly mature investors, aged 35 and above, who had serious investment needs and valued advice. Whereas, in Sky, we primarily see customers who are younger, under 25 or under 30, and are more interested in speculative activities like derivatives trading. They tend to have smaller amounts to invest, so charges matter more to them.

However, serious investors tend to prioritize advice more.

Considering the recent regulatory actions from Securities and Exchange Board of India (Sebi) and Reserve Bank of India (RBI), do you think there is a bubble waiting to burst, or is there still potential for growth despite the noise?

In the mid-cap and small-cap segments, limited liquidity and free float, along with similar constraints in public sector undertakings (PSUs), have created a situation where domestic inflows are driving up demand without enough sellers. This imbalance has led to exuberance in the market due to high demand and limited supply. While foreign portfolio investors (FPIs) have not participated significantly in this trend, inflows have primarily come from systematic investment plans (SIPs) in mutual funds, incremental investments in mid-cap and small-cap schemes, and direct equity investments in the midcap and smallcap space.

This imbalance in demand and supply has resulted in a correction over the past 15-20 days, with many stocks experiencing significant declines of up to 20-40%. HDFC Securities had highlighted in an event in December that there was froth in the mid-cap and small-cap space.

How do you read Sebi’s statements?

Sebi's recent statement suggests concerns about froth in the market. They've taken steps to limit fund flows in response to these concerns. This regulatory messaging aligns with the cautionary approach many intermediaries, including us, have been advocating. Over the past three months, industry professionals have consistently warned investors about it, with stocks trading at high P/E ratios indicating high risk. Additionally, investors typically consider booking profits and rebalancing portfolios before the end of the financial year.

Who is the winner in large cap versus midcap debate?

Many would advise large caps are a better bet at this stage, but I believe froth has been removed and correction that had to happen in the mid and small caps has largely occurred, with potential for further 5-10% downside. But there are some good quality companies in the broader market with strong business models which are poised to thrive amid India's growth and increasing financialization. Whether large, mid, or small cap, companies with value and solid business models will likely excel. For instance, certain new-age businesses like Zomato and Delhivery have demonstrated their potential for profitability and unique market position, making them attractive investments despite challenges in replicating their success.

Are there any sectors that you are bullish and others that you are extremely bearish on in this market?

Consumer staples are facing challenges, particularly with volume growth being stagnant despite some premiumization efforts in recent years. Rural demand, which plays a significant role, is yet to pick up. This trend may persist, especially with rural areas taking longer to recover. Consequently, we are cautious about consumer staples and oil marketing companies (OMCs). Rising oil prices, nearing $88 a barrel, pose additional challenges for OMCs, compounded by the anticipation of price stability until after elections, which may hinder their growth prospects.

We are bullish on financials, particularly large-cap banks like Kotak Mahindra Bank, which have underperformed in the past few years but remain well-capitalized. With the capex cycle showing signs of improvement, banks like these are poised to benefit. Non-banking financial companies (NBFCs) also offer potential, as credit penetration is expected to increase.

I see the industrial sector, encompassing construction and railway infrastructure, as a significant area poised for growth in the coming decade. If the BJP wins the elections, their focus on renewable energy and green infrastructure is expected to persist. Plans are already underway for initiatives within the first 100 days, and there's anticipation of a substantial increase in infrastructure allocations in the upcoming budget in July. This surge in government spending is likely to catalyze private sector capex as well.

What's your outlook on how the elections will affect Indian equities? Do you anticipate a pre-election rally?

I believe pre-election rallies have already occurred, particularly following the outcome of state elections.

That said, there is a lot of speculation regarding interest rate cuts. What are your thoughts on this matter?

Looking ahead, while there may be limited interest rate cuts in the next two years, the full benefit of rate cuts is anticipated by fiscal year 2026.

After the general elections, there will be state elections to contend with as well. With inflation hovering around 6-7%, there's limited maneuverability. Hence, the approach is likely to be cautious, especially since the public has adjusted to higher interest rates. Therefore, there's no need to rush into further rate adjustments.

Any plans on listing?

We are currently in the process of conducting our rights issue, so there's no immediate requirement for additional capital. The bank will provide the necessary funding wherever it's needed. As a cash-flow positive company, we're performing well, and listing is not required at this time. The rights issue for 1,000 crore is underway.

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