Harish Krishnan, CIO-Equity, Aditya Birla Sun Life Mutual Fund, believes that a resolution in the West Asia conflict can increase the competitiveness of Indian businesses. He tells Kushan Shah that earnings in mid- and small-cap companies can recover after two tough quarters in the fiscal. Excerpts:
How do you see the market recovery amid hopes of peace in the West Asia conflict?
Geopolitical conflicts affect the earnings of a business in the near term but the value of the business is more dependent on its competitiveness. In that context, things have gotten better for Indian businesses in the last 18-24 months due to improvement in domestic demand (due to tax cuts), credit creation, improvement in ratings, etc. The rupee has also become more competitive compared to the Chinese yuan, India’s biggest competitor. So, as and when the dust settles on the West Asia conflict, I think the competitiveness of Indian businesses will improve through these measures. We see this as an opportunity to deploy more into an asset class like equity.
How is your fund house positioning its portfolio in the current market?
We are increasing our exposure to mid- and small-cap wherever we find opportunities. Currently, there is a raw material availability problem, which impacts weaker businesses in the unorganised sector more than the stronger businesses. So, in many sectors, like building materials and chemicals, stronger businesses will benefit disproportionately, which we see as an opportunity. Additionally, strong sectors impacted by an increase in energy prices have seen their stock prices fall more than the near-term impact. So, while the next 1-2 quarters may be tough, we think that heavy users of energy, like cement sector, will benefit due to normalisation of competitive activity. And lastly, high foreign selling has impacted the margins of banking sector, but the overall competitiveness still remains, due to which we have increased our exposure in the sector along with auto ancillaries.
Do you think the valuation in mid and small caps is reasonable now, after about 18 months of correction?
Mid- and small-caps are very heterogeneous segments. Compared to 18 months ago, there are a lot more opportunities available for growth beyond the next 1-2 quarters, where valuations are not very frothy. While the next two quarters could see some impact from raw material availability, growth-adjusted valuations are now more moderate, especially in sectors like auto ancillaries, durables and retail.
What measures do you think can boost FPI participation, and what hurdles does it face?
Global investor sentiment is driven by both cyclical and structural factors. Currently, it looks like the cyclical factors dominate the structural aspects. There is a higher focus on our vulnerabilities in energy and AI trade, due to which foreign investors are choosing markets with higher earnings growth. This is a cyclical trend and as trade fades out from other countries, global investors will come back to structural stories like India.
The expectations of a rise in India’s share in the global economic activity make it a very good trade for FPIs. However, given the current outflows, some measures like ease in withholding taxes to reduce the leakage of local currency gains and a more rapid implementation of measures to increase the speed of foreign capital entering the Indian market can aid FPI inflows.
Do you see the earnings recovering across the broad market in FY27?
While the last two quarters of FY26 brought more optimism for earnings due to the conflict in West Asia, the first half of FY27 will see patchy earnings growth with a higher impact on the mid- and small-cap companies. This is with the assumption that there will be a quick resolution of the West Asia conflict and we will see a free flow of volume availability of raw materials coming through before the festive season. So, the second half of FY27 may see a shift from unorganised sector the organised sector, which can benefit many mid- and small-cap companies.
Which segments or themes do you think will provide potential for alpha generation in the medium term?
There is potential for alpha generation in sectors with low expectations like IT, consumer, chemicals, etc. Sectors like auto ancillaries, aerospace, cement, and financials also have high growth potential in the next 3-4 years due to a boost in demand.