There is no cushion for IT investors. Just no cushion. What has gone wrong? I mean, two quarters ago all IT companies they came out and said the following — all is well and AI is not a threat, it is an opportunity and we are getting fat deals. But in between six months or less than two quarters, the commentary has changed 180-degree. What has gone wrong? I mean, I do not challenge the spirit of some of these IT companies. I mean, they are good corporate managements. It is just that they have not been able to understand the environment, I guess.
I think clearly what you mentioned is very important that the environment itself is very fluid. As we were actually interacting with the IT managements over the last maybe one or two quarters, I think this was clear that there are delays which are taking place. Clients’ decision making is a bit delayed. But what these managements were sort of also alluding to was the fact that the deal pipeline looks okay which I think anyways when we look at the numbers most of the companies if one focuses on the deal pipeline those are okay. The other thing which I think the managements have been guiding towards is the fact that while transformational deals may be sort of difficult to come by, but some of these efficiency related deals or cost takeout deals, those are still coming up.
So, a question to me actually in my mind is that some of these cost efficiency deals if they are actually improving, they should not be seeing delays in terms of starting because if the companies over there are worried about a slowdown, they should be, in fact, looking towards enhancing or accelerating the deployment of the cost takeout deals so that is something which I sort of not getting clear answers to.
The other thing which I feel as far as the IT sector is concerned, while we may keep going through these ups and downs and the sentiments like you were saying a few minutes back, sentiments is what actually drives these short-term moves. But I think I would sort of go on the side of this aspect that whatever I have read and we have interacted with the management, the artificial intelligence or the machine learning, all of these are only going to create a lot of more business opportunities.
More and more companies are wanting to sort of look at those as a matter of adapting in terms of their businesses. So, I think eventually these things will play out. What we are also seeing is that there are delays and we should anticipate that at some point, maybe in a quarter or two, things should see some normalisation.
So, at a price point is what I would suggest that one should look at the IT sector. At, let us say, 5% of dividend yield some of these large caps really become good attractive. So rather than focussing so much on the noise in the short term, I think if one takes a slightly longer-term picture and buy at a right valuation, maybe that should be a good strategy.
I would like to draw your attention to something which you have really specialised in, understanding the small and the midcap space. Some of your peer AMCs have stopped accepting lump sum flows into small cap funds. What is your understanding of the positioning and the risk reward ratio for the small cap universe per se right now?
I think overall, if we just maybe look at the last three months or so, the way we have seen the markets actually move up and it is a broad-based rally which has actually taken into consideration the midcaps, the small caps and all across we have seen a significant up move.
And especially if we look at YTD, the large caps maybe have gone up by 10 odd percent, but the mid and small caps have gone up almost 17-18%, so that is a massive up move in the last maybe YTD.
So, I would say in terms of valuations, definitely when we see such sharp moves I think that creates a certain amount of worries in our mind while for a large pool of investors as it goes up, the risk seems lower but on the contrary as it keeps going higher, the risk actually also keeps going higher which is not generally considered at that point in time because the narrative is that everything is okay and people are choosing to not consider the risk at that point in time.
So, I would say that while the valuation risks remain in lot of pockets, but on the whole if I look at the comparisons of valuations across the large cap, midcap and small cap, I would say that small caps are relatively still well priced.
There could be pockets of hyper valuation in some of the categories, but there are a few categories where the valuations are looking reasonable.
So, I think from that perspective, it is okay to own some of these small caps as we consider that the next few years, the broad-based economic growth will aid the good companies’ growth across the mid and small caps as well.
I think from that perspective, one should take that long-term view and hold on. But also from the sensitising the risk of valuations, I think if one has gotten extraordinarily overexposed to the category, I think there is no harm in actually cutting down some bit of that exposure as well.
At the current juncture if you have to keep it very simple for the benefit of our viewers, what to your mind is the most overrated sector or theme and similarly the most underrated theme/money-making potential?
I think it is very simple. I get worried when I look at the valuations of the engineering, capital goods, manufacturing theme. See, there is a fundamental backup, but I would say that there is a lot of narrative which is actually also pushing the valuations higher.
So, I would like to caution investors on that category while we have certain amount of exposures in our funds as well. But we also have time horizons, we know that over a long period these will do well but in the short period I think they have moved ahead of their fundamentals.
So, one has to be cognisant of that fact. On the other hand, the category which has not seen maybe interest of investors for valid reasons, but I think those data points are also changing and making us more positive is the pharmaceutical companies where we have been, so I have been calling out the positive view on that for a while. But it has not worked. But I believe that the data points now seem to be turning. We have US markets which are now facing shortages of drugs. Indian markets are pretty okay, 10-11% growth you mentioned for IT, cash flow, ROC, I think that holds true for the pharmaceutical sector as well.
So, I think these two I think are two different sides of the poles and it is all about the sentiments when the sentiments change.
