It is better to be in largecap stocks than midcaps now: Rahul Shah

What a volatile week it is turning out to be! How are you riding this uncertainty and volatility?
After a long time, we finally saw some correction and volatility is again in the front seat. Otherwise, the market was just one way street for some time. India is one of the best performing markets in the calendar year versus the MSCI’s emerging markets as well. Still we are just 21% above the calendar year. I think this volatility is because of the virus and there is a 95% chance that the market should do well from here. The bottom that we made near term should be the bottom for near term and one should start looking at good quality stocks. A lot of stocks have corrected over 20% plus and obviously saw some rebound, but in a largecap space, it still looks interesting from here. So the volatility will be there but one should keep investing into the largecap space.

On one hand, there is HDFC Ltd. which is the index topper today, up by about 3.5%, but the Bank Nifty is under pressure. How would you approach this entire pack?
In the financials, ICICI Bank, Axis Bank — both of them have corrected over 16% to 18% from the recent highs. It makes a lot of sense and the valuation looks much more comfortable from here. Obviously one is comfortable post results as well, but it seems more promising from here onwards. ICICI Bank at two times book forward adjusted Axis Bank at 1.3 times book adjusted — both look very interesting from current levels.

The Bank Nifty has corrected from 41,500 odd levels to 36,400 odd levels. We have not seen any major surprises in the Q2 earnings and the commentary from the management and most of the banks’ financials were quite promising and outgrowing.

The macro factors are improving as both GDP number and GST collections are very encouraging and also oil price has come down in the last few sessions. All these factors put together, makes all the financial stocks more interesting from current levels. I would be a buyer in all the large financials which can do much better from here.

What about the pharma names? Do you think pharma stocks were lacking a catalyst since the time the reopening theme was playing and that is why once again we are seeing some amount of movement there?
Definitely this was one of the things. If one looks at Q2 numbers, most of the pharma names were muted barring a couple of names. That is why we saw all around selling in pharma stocks. The pharma index was down 7-8%.

So the emergence of the new Covid mutant has brought the pharma stocks back into limelight. Sun Pharma has made a very reasonable comeback and with back to back two good quarters, this stock can still do better. We have seen a correction in Divi’s and this stock also looks interesting, as does Cipla. We have seen good correction post numbers. These three pharma stocks can have a good runup from here.

In terms of midcap names, we have seen a selloff or some decent amount of profit booking in the last 10 days. If the economic growth is for real and if it continues, do you think midcaps is still the space to be?
Two things, one is we had seen a sharp runup in a lot of midcap valuations which were uncomfortable but which people were just riding as the market was moving up. Secondly, whenever there is a correction, people tend to move their portfolio from midcaps to largecaps and that shift has happened. So these are the two near term challenges.

Thirdly, as the economy continues to grow, the midcaps are trying to give a better delta than the largecaps from here. We expect in the near term the largecaps to do better than the midcaps. In a way, the market is right. It is better to be in largecap stocks rather than midcaps.