After the 30-share Sensex raced past the 38,000-mark yesterday, and the broader Nifty hit fresh record high, ace investor Porinju Veliyath said that the indices are not representative of the stock markets today. According to Porinju, small and midcap stocks are showing signs of a rebound after the recent correction in the space. “Some correction was definitely due because of the overheated small and midcaps. It was going on for 4-5 years of rally, whereas the bluechips under-performed for this time. I think it’s a great time today to explore value in the small and midcap space,” Porinju told in an interview to ET Now.
Porinju Veliyath said that there is going to be a more broad-based rally in the markets, instead of a few top notch stocks leading the rally. Accordingly, he said that investors must not jump the bandwagon and buy blue chips at exorbitant valuations. “I don’t agree with the view that you buy only top quality companies at 70-100 PE. It’s a cycle. The companies which under-performed in the last 5 years are doing well in the last six months. Buying Britannia, Page, etc at 70-100 PEs is equivalent to picking up midcaps in November-17,” he noted.
According to the expert, picking up such stocks at the current levels may prove to be a bad idea, as these companies will have to grow at 20-25% CAGR for many years to justify such valuations. “It’s a disruptive world out there. Expecting that a company can continue to grow at 20-25% for the next 100 years is nonsense. Competition can come from anywhere. The Sensex and Nifty doesn’t represent the Indian markets today. It represents the irrational activity of certain people,” he said.
In the same interview, Porinju noted that picking up top 10 blue chips in India at current valuations, may give only 5-10% CAGR returns in the next 10 years. Right now, these companies are doing well, and giving with earnings higher than normalised earnings, due to lesser competition. So the returns of these stock will be disappointing in the next 10 years, he said. He advises investors to pick up medium quality mid caps at a reasonable valuation. “if you see the small and midcap space, there are stocks, especially after the sharp correction, that can provide a CAGR of 30-35%. Look at medium quality companies among the small and midcaps,” he noted.