investment themes: Porinju Veliyath on 4 investment themes for smallcaps and midcaps in 2023


“There are no two thoughts about it. Everybody is agreeing how equity investors are going to make it. So one has to believe in equities and it is a proven thing to make long-term wealth. There is nothing like equity. I think it is going to be a wonderful year from that perspective,” says Porinju Veliyath, Founder, Equity Intelligence.

Do you think it will be a comfortable year for a stock picker like you? Why?
On the macros, all the smart banks out there have been talking about India being in a sweet spot in an otherwise challenging global environment. I think India is at the beginning of a massive scale up in its size of the economy, the per capita GDP, the per capita income and the wealth over the coming years and decades.

There are no two thoughts about it. Everybody is agreeing how equity investors are going to make it. So one has to believe in equities and it is a proven thing to make long-term wealth. There is nothing like equity. I think it is going to be a wonderful year from that perspective.

The space where you have invested traditionally is the mid and the smallcap space and over the years, there has been a big shakeout in these spaces. While 2022 will be remembered as a year where PSU and a lot of midcap banks made a comeback, it will also be remembered as a year when fintech and a lot of midcap IT stocks took a whack. Among smallcaps and midcaps, what will be the highlight theme for 2023?
We continue to be in that space even though we have moved occasionally to larger companies like

or Tata Consumer, from which we are out already. The focus is on emerging stories and turnaround companies, especially with regard to the management perception which I used to talk about always. We have not changed that at all/

Of course, mistakes are an integral part of equity investing. There is no escape from that. There is risk day in and day out. We have to live with that but that does not mean people with investible funds just avoid equities and buy into real estate or FDs and gold. That era is over.

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India is seeing a structural change in terms of the stock market structure. In the ‘90s, the brokerages were very powerful in the market. They were opinion makers and they used to control the market. Then we moved to an era of where we used to follow the HNIs, the fancied investors, operators in the market and then again the time came and we moved into the funds, DIIs and FIIs and some of the star fund managers used to have a big say in the market direction, in the valuation aspects. We used to debate about FII buying and selling and how domestic investors were buying and selling.
I think we are getting into a different now in the capital market system. Millions and millions of retail investors are coming into the market. There are multiple players in the market, not just one, two or three. There are different formats and mutual funds are going stronger. There are PMS, AIF, family offices and hedge funds.

There are manifold sectors within the stock market and the regulators are doing a great job. More and more regulations are coming in; we may dislike some of them sometimes because we find then slightly complicated but ultimately, these are going to lead to a very strong stock market system and the process.

Now there are many wonderfully performing mutual funds. Nobody knows who the fund manager is. Without the star fund managers, large institutionalised fund management is happening and performing well. So this is something structural. System wise, we are into a wonderful, well grown, mature capital market in India and on the economy front, we have all those aspects or the experts in the market. They have been talking about all these things.

We have various things, general aspects like the young population talking about the wonderful large-scale reforms happening in the country, a complete cleanup of the banking system is very important; a lot of people are underestimating. It is not a small thing and seeing the multi-polar geopolitics happening globally is helping India tremendously in various aspects. Also, politically we have been going through a stable period.

There are a lot of themes happening in India – manufacturing, financial, IT, even consumer. What is the anchoring theme of your portfolio for the next 3-5 years?
Industrials is one. Industrials include manufacturing, defence, perhaps infrastructure. We have been going through not such great times in the recent past or maybe last decade. That is basically turning around with the new themes and initiatives and with the reforms happening, Make in India is going to really help equity investors. It is one micro segment. Investors should focus in the coming years since there is a lot of money to be made, a lot of wealth to be created but if somebody is looking to make money in the next one quarter. Even in 2023, it is going to be creating a lot of wealth for shareholders. It is not that predictable.

I do not think anybody knows it. So any such predictions can go wrong. This is one aspect. We had IT and pharma beaten down in the last many years. I think it is time to start looking at the IT and pharma sectors. There is no hurry but it does not mean every stock in the sector is going to go up. There are wonderful pockets of opportunities in those sectors for the next 5-10 years.

More than sectors, India is about the cherry picking of stocks. Selective stock picking is going to be rewarding even in 2023. Anybody can go wrong in predicting the index but the trajectory of wealth creation or returns is going to be definitely very positive in 2023 and the coming years.

It is a coincidence that you have a lot of Tata stocks in your portfolio. You have specifically mentioned two – Tata Consumer which you have sold and Tata Communication, which you currently have. Is it just a coincidence?
Not really. One of our largest holdings is Tata Communication and it did not perform much in the last one year but we believe in this stock. It is one of the Tata companies and that is a technology company. It is not just the voice and data infrastructure company. It goes beyond what the management is guiding and the kind of resources they have been investing in the company and the kind of human resources that is brought into the company.

This is one company one should bet on, it is around Rs 30,000-35,000 crore market cap. It is very good but the risk is there all around on any equity, anywhere. So it not foolproof but one of the very good companies among midcaps for investors to look for. We continue to hold the stock.

We have been buying the stock since when it used to be Rs 300-400 onwards. Now it is around Rs 1200-1300.

There are many Tata companies, we exited Tata Consumer last year and we have also exited

. We exited a bit early. There was a bit of a rise afterwards. Tata companies have been doing very well but we cannot expect the kind of return in the last two-three years in Tata Group companies which is not sustainable, it was very amazing growth but there are pockets people should be looking at.

Now one thing I have been looking at are some of the old economy stocks. There is a dramatic transformation happening in some of those old established legacy companies, legacy businesses which are asset based. After going into fancied IPOs in the last two-three years which were in general highly overpriced, no wonder people are looking into some of the well managed listed companies in the same space. That is something I used to be surprised about. I am still surprised. In 2021 Manyavar was planning IPO. It had around Rs 20,000 crore valuation. It is a good company but despite the size, the business potential and other aspects, a company like

was available at Rs 2,500-3,000 crore valuation while Manyavar was planning an IPO at Rs 20,000 crore.

I would say Manyavar was a fraction of Raymond but this may be not very straight comparable businesses or companies. There are points to compare, there could be issues about the management perception among the investing community but in any case, the new issues were over-fancied. Even retail people were going after them and a lot of them had to pay a heavy price. Many of these companies were already overpriced at the IPO valuations and from there, it has gone 2 and 3 times.

Now, they are all coming back to earth, to normal valuations. Some of them need to correct further and come to reasonable valuation at par with the other earlier listed companies. This is another opportunity. I am talking about some of these old established legacy companies and businesses investors should look for in 2023 also.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)



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