Let us start talking about sectors then. One sector where right now the jury is not out whether it is cheap or whether it is realistic view which is it. I can argue about these are fantastic companies. They do buybacks, cash, and stocks are cheap. You can argue back and say that where is growth. AI, US, maturity of business. I do not know which side of the argument would win. So, let us start arguing.Hari Shyamsunder: So, on the IT side, we are mostly well neutral. We are a bit mixed on that and the reason we are mostly neutral is we see both sides of that argument really. So, on the largecap IT if you look at the size of our IT companies now, the IT exports from India are close to about 20% of global IT spends now. In terms of headcounts, we are about 35% to 40%. So, we are not small by any stretch of imagination.
Over the last 20 years it has gone from 4% to 20%, 4% to 12% to 20%. So, now, if you maybe 28% even in the next 10 years, then the rate of growth definitely has been slowing down. So, we need to keep that in mind.
At the same time, we have seen headwinds coming from the GCC side where the global capability centres have been ramping up in India and that is acted as a bit of a headwind for the IT companies as well and at the same time put into all this mix we have seen that AI is a bit of a wild card in terms of what kind of impact there can be, the impact we can see immediately.
The kind of benefits, the kind of new use cases that can come up are a bit harder to envision. So, it is a bit of waiting for some of those to become a bit clearer while we can immediately see some of the impacts which are coming through.
Start of the year it was pretty apparent that all and everyone just wanted to stick it out with the largecaps because the whole valuation bubble so to speak started off with small and midcaps. Data in the April recovery does not seem to be suggesting so. In fact if nothing mid and smallcaps at an index level have done a lot better and I am not even talking about individual stocks here. Do you think it makes sense to do any kind of market cap categorization or classification in your portfolios?Hari Shyamsunder: So, on the debate between large, mid, and smallcaps, we have been acknowledging that largecaps had become cheaper at least. The most recent rally has taken it up now maybe to one standard deviation above long-term averages again. But what we would note is that over the next three to five years we continue to believe that given the drivers of the economic growth in India, just the texture of that would tend to benefit mid and smallcap earnings over this period. So, while mid and smallcaps might be expensive and they are continuing to be above the long-term averages, we know that we cannot exclude them completely. If you are going to look at Indian growth story, if you are going to look at the Indian opportunities which are coming out, then the mid and smallcap need to continue to be a part of the portfolios. So, we have not moved into a camp which just completely throws out the mid and smallcaps and says that that is completely uninvestable. Instead, we continue to look for opportunities. As I said, looking particularly where maybe valuations have become cheaper for some of the maybe not sound reasons in the long term, maybe there are some short-term reasons why the stocks have corrected and we are looking to pick them up.
So, I am going to change gears and talk about something which you said manufacturing. India is not big in manufacturing, but manufacturing stocks in India have done well. Whether India does well or not, I do not know. Manufacturing stocks have done well. Defence stocks have done well. Power stocks have done well. Solar power stocks have done well. There is a lot of narrative in the market, like some storytelling stocks. What happens to some of these storytelling stocks, manufacturing, defence, solar, EV, drones?Hari Shyamsunder: Yes, so that is really the big debate or it is a big challenge because the valuations are not cheaper by any stretch of imagination. So, it is something which we have been struggling with as well. The opportunity is kind of clear in some cases. Some of it is, as you said, there is a bit of a story, of course, a narrative which has been built and the numbers are not yet as clear.
So, in these cases again we have been looking for better levels and while they were approaching better levels, before we could act on them decisively enough maybe the stocks have moved up very sharply. But manufacturing you need to look at it directly in terms of some of the sectors which have been mentioned, but there are still continuing to be industrial product companies, for example, where we still own certain positions.
There are certain ancillary associated with manufacturing kind of stocks which we can look at instead of looking directly at some of the headline names. But you are right the challenge here is that valuations have become pretty stretched here and so we will need to get lot more conviction on the visibility of the numbers before we wade into them with a lot more conviction.
So, what should be the expected rate on return? We have done 20 minutes of sector valuations, ultimately it matters is that for a viewer he wants to know from you is that if the starting point is today and the time horizon is three year, will a large, well-managed, equity diversified scheme will it first beat the index and what could be the index return?Hari Shyamsunder: As I said this is a market which is going to favour stock picking. So, we like our chances here in this kind of a market where it is down to the skills of fund manager in terms of picking the stocks.
So, over this period as a market we should still be looking at the range of, let us say, about 10% to 13% for the largecaps at least and well, mid and smallcaps we are starting off from that the markets.
Across the board broader markets itself should be in this kind of a range compounding at 10% to 13% over the next three-five years. So, that is the kind of expectation which we should bake in given where the valuations are today. Within this, of course, there is a lot of new stocks which are coming up. Just note that over the last couple of years we have seen a lot of stocks being listed, about 150 odd in the main board at least.
The Indian stock markets are very dynamic. There are a lot of new ideas coming. While we do not participate in all of the IPOs, they are a pool of ideas which we keep coming back to and I think that that is what keeps the Indian markets interesting.
