In smallcap, microcap space, there is scope for another 10-15% correction: Gaurav Dua

Gaurav Dua, Head of Capital Market Strategy, Mirae Asset Sharekhan, says on a valuation basis, it is looking very good, very reasonable now and this is a time where a medium- to long-term investor should start looking at some very good stocks. However, there are still some pockets in the market, especially in the smallcap, microcap space, where there is scope for a further 10% to 15% fall in terms of this valuation correction.

Dua says now, we are looking at around 11.5% to 12% CAGR growth and this means the expectation for returns from the equity market over the next two years have to be tapered down.

It is uncertain times for the Indian markets, but we have seen in the past that uncertain times offer a very good opportunity for portfolio building. So, prepare yourself for a long-term investment. But given the fall that we have seen on a YTD basis, given the relentless FII selling, do you believe now is the right time to start looking to deploy afresh or wait for some time so that you get a better opportunity in the next couple of months?
Gaurav Dua: You are talking about timing the market and I am not an expert on that and I do not think it is something which most people are able to do at a very successful rate. But, yes, if you look at the valuations, you are now around 20 times trailing earnings, around 17 times FY27 earning after the sharp cut in the earning estimate for the next two years. So, on a valuation basis, headline basis, it is looking very good, very reasonable now and this is a time where a medium- to long-term investor should start looking at some very good stocks.

However, there are still some pockets in the market, especially in the smallcap, microcap space where there is scope for a further 10% to 15% fall in terms of this valuation correction.

You mentioned how SMIDs could be a place where you are still not comfortable with the valuation that there could be further correction in those names, in those pockets. But as far as largecaps are concerned, there has been considerable selling coming in from the FII. The valuations have corrected a fair bit. Do you see value in the largecap names and if yes, what are the pockets where you are finding value in the largecap space?
Gaurav Dua: We continue to believe that the risk-reward is much better in the largecap space. Now, especially given the backdrop of expected global slowdown and the slowdown in global trade, you obviously will want to focus on the domestic side of the stories at this point of time rather than go and take a risk on export driven business.

So, what we have been recommending to our clients are private sector banks and NBFCs like ICICI, Axis Bank, Bajaj Finserv, and also UltraTech, Bharti Airtel, L&T. These are some of the domestic driven stories where we believe this is the time to buy and accumulate.

Given so much uncertainty around tariff, what has been your reading? Though India does not have that much of an exposure to the US markets and they do not contribute much to our GDP, but overall, India will not be left behind when it comes to what has been happening globally and what sort of a shift we see in the supply chains. What is your take on the same? Which are the best placed sectors and which are the worst ones?
Gaurav Dua: India is a much better place compared to our peers because of our inward looking economy. More so, as the news flows, we see that India would be able to strike some kind of reconciliatory deal or a bilateral trading agreement with the US.

In that front, we are better placed than some of our peers. Having said this, a global slowdown in trade will still affect some of our exporting companies, and that is where you need to avoid. We are avoiding the global commodity companies like steel, metals, and also the exporting kind of companies. On the sectoral side, we are focusing on some of the private sector banks, financials. We are looking at some of the discretionary consumption stocks in healthcare, jewellery companies, and hotels.

Do you see value in the financial space because even in the drawdown, the banks have really lent a lot of support to this market and they continue to do so. The valuations are good right now, especially the financial space wherein the PSUs are doing pretty well now with the RBI rate cut and that also augurs very well for the banks. Do you see value there? And within the financial space, do you see value in the PSU, the private banks or perhaps the NBFCs?
Gaurav Dua: Given that RBI has done its bit in terms of one interest rate cut and especially in terms of infusing liquidity into the system, we have closed the last quarter with a liquidity surplus now on the system which is a very good sign for the banking space on the whole, especially also the NBFCs. But we believe that one should stick to the frontline players. That is why we would rather prefer some of the well-performing private sector banks followed by some of the large NBFCs like Bajaj Finance or Bajaj Finserv. When it comes to the public sector banks, we would like to stick as of now to SBI. However, our preference will still be for the private sector banks.

With the earnings season just about to kick in, what is your overall expectation because just what we have seen in Q3, this time with so much of news flow around, so much of uncertainty, do you believe that it may actually lead into some more further cuts into the earnings expectation not just for Q4 which could trickle in in FY26 as well?
Gaurav Dua: So, yes, it is going to be another quarter of very tepid growth. We are expecting around 1.5%, 2% growth in the Nifty earnings in Q4 compared to quarter four of FY24. So, you are going to end this year FY25 with around 4.5% earning for the year. That is a very sharp moderation. The growth in earning as compared to around 18% to 20% earning growth that we have seen for the past five years.

We believe that earning growth for FY26 and FY27 is also being cut. Now, we are looking at around 11.5% to 12% CAGR growth and this essentially means that the expectation for returns from the equity market over the next two years also have to be tapered down. We have seen that because of the four-five years of a one-way kind of a bull run, the expectations among the investors tend to be pretty high, 20-25% is something that might not be possible in the next 18 to 24 months.