Mid-cap stocks in a sweet spot, book profits in small caps: Sunil Subramaniam

Sunil Subramaniam, MD and CEO, Sundaram Mutual Fund, explains why he is overweight in two sectors: banking and IT. Edited excerpts from an interview:

The question now is what to buy? IT and pharmaceuticals are the only clear trend and perhaps metals as well, while consumer related sectors are facing the heat.
I think it’s time to be neutral on the whole consumer package, whether it’s FMCG, consumer discretionary, automotive and even housing. For the next 3 months, going consumer neutral is a better bet. There is a risk in terms of input costs and valuations have already priced in a rebound which may not be possible.

I would always support the bank because you have a variety of games. Private sector banks are well capitalized and benefit from every move of RBI in terms of liquidity. PSU banks have the reach and are undervalued. Smaller private sector banks have the opportunity to benefit from the support of the RBI. The first recipient of RBI’s largesse will be the banking system. You can’t go wrong if you continue to buy the banking sector regularly.

When we spoke the last time, you were rather optimistic on cement and the automobile. Have you changed your position?
I remained optimistic on the cement. The government’s infrastructure program and road laying would continue despite all the price hikes, as they will have to continue to provide jobs for NREGA. Construction activity will continue and therefore remain bullish on cement.

I changed auto to neutral from optimistic as the sector was impacted by the second wave.

What to avoid or quit now?
Over the past 1-2 years, the small cap segment has grown a lot and until we come out of this crisis, you can take profits here and transfer it to mid caps. Mid-caps are more balanced in terms of sector exposure because, overall, small-caps have a high exposure to industrials and, due to the recovery of the pharmaceutical industry, they have also increased. Pharmacy is one place I would recommend booking profits as it is a short term rebound due to the second wave. Large caps will be volatile because of FIIs. The midcap is therefore in an ideal position now.

From an industry perspective, pharma is not a long-term game for me. I see NBFCs and insurance suffering with the second wave in terms of retail default rates rising.

The small cap index has risen in terms of forward valuation, while the mid cap index is still trading at a 10% discount to the large cap index.

Would you buy insurance stocks? Even though the insurance premium has increased, the demand has been unrelenting.
Yes, but you must have at least a 3-5 year perspective. In the short term, they will be more volatile because, as the loss ratio increases, they will have to readjust. So we could have the chance to buy insurance even cheaper than today. If you have a 3-5 year outlook, you can continue to regularly allocate a little because you will definitely get it at better prices. But if you want to allocate a lump sum, I’d say you’ll actually have a better day to buy it than today. Overall, having insurance in your wallet is a good thing to do.

What are your non-standard positions? Outside of cyclicals and industrials, where are you significantly ahead of the benchmark?
Banks and IT. I am overweight on both.

Let’s understand it. The average PE multiple for large caps is 25-30 with growth of 10-12%. Are you betting on the depreciation of the rupee or are you playing it safe?
I’m playing three things: Rupee depreciation, security, and the fundamental factor that overseas IT spending is going to increase due to the fundamental nature of 5G, Internet of Things, cloud shift and Work at home.

It’s enormous. More of the budget will be spent on IT, which makes the growth rate sustainable. In the end, you don’t mind paying a high price as long as the growth is predictable. I also believe that the rupee is due for medium term depreciation. I’m factoring in at least a 5% upside a year on these stocks just on their depreciation earnings.