Edited excerpts from a chat:
Midcaps are once again the market’s poster boys. How do you separate sustainable compounders from temporary crowd favourites while picking stocks?
Sustainable compounders are stocks that exhibit most, if not all, of the following characteristics: consistent earnings growth, high return ratios, a healthy balance sheet, consistent cash flow generation, a sustainable competitive advantage, and quality management. In contrast, stocks with weak fundamentals or driven purely by narratives are likely short-term favourites that should be avoided. We build our portfolio around sustainable compounders, provided valuations are reasonable.
How has the positioning of Tata Midcap Fund evolved over the past 12–18 months as valuations stretched and sector rotations intensified?
Valuations for the midcap category have been elevated for more than a year. Our investment philosophy is based on GARP (growth at a reasonable price). Last year, we realigned our portfolio to bring valuations significantly below benchmark levels. We reduced exposure to richly valued sectors like consumer and IT, and increased allocation to banking and pharma, where valuations were more attractive. We also diversified the portfolio across multiple sectors to reduce concentration risk.
Do you think midcaps are relatively more attractive in valuation terms than small caps at this stage?
In absolute terms, both midcaps and small caps are trading above their long-term averages. However, midcap valuations have fallen ~17% from their peak a year ago. Midcap companies tend to be more established than small caps, with steadier earnings and operational resilience. This has historically justified their premium over small caps. Given the outlook for mid-term earnings growth, midcaps remain an attractive investment for a 5-year+ horizon.
Within the midcap space, which sectors do you find more attractive at this stage?
Three sectors/themes we are positive on are capex/manufacturing, healthcare, and NBFCs. We expect capex-oriented sectors such as industrials, capital goods, and cement to continue delivering strong earnings growth, supported by favourable local and global factors. Other sectors linked to the manufacturing and infrastructure ecosystem, such as logistics, are also well represented in our portfolio.
Healthcare is another area we like, as rising disposable incomes and poor-quality public healthcare are driving demand for better private healthcare services. In NBFCs, we expect margins and credit costs to improve, with valuations remaining reasonable.
Have you made any contra calls lately where the market is ignoring but you’re doubling down?
Completely ignored categories are rare, but we aim to be early in accumulating positions when sectors are still under pressure but close to a turnaround. Last year, we went overweight on insurance during regulatory headwinds and added cement during a slowdown in economic activity. More recently, we increased allocations to NBFCs where concerns over unsecured portfolios are peaking, and we expect earnings to improve in the coming quarters.
How is the Q1 earnings season turning out for sectors you’re invested in, and how has that shaped your outlook?
Q1FY26 earnings have been weak but largely in line with expectations. Large sectors like IT, financials, auto, and consumer have shown muted earnings growth, while cement and healthcare have delivered strong results. The trend from Q4FY25 has continued, with aggregate earnings growth in the mid-single digits. However, management commentary from the consumer and banking sectors has been encouraging, indicating that margin and growth pressures may be easing. Our portfolio decisions are based on a long-term view, so we typically avoid major changes based solely on quarterly results.
Do you think the earnings recovery many expected in Q1 can actually happen in H2FY26?
We believe earnings growth will be stronger in H2FY26 than in H1, though the extent of improvement will be key for market performance. Several factors could support this rebound: the RBI’s front-loaded 100-bps rate cut, Rs 1 lakh crore in tax relief announced in the budget, and a favourable monsoon—all of which should boost credit growth and consumption. This would benefit consumption-driven sectors such as FMCG, automobiles, retail, agri-inputs, and NBFCs. We also expect tariff-related uncertainty to ease before year-end, which should lift the outlook for export-oriented sectors.
Is this the right time for retail investors to enter midcaps, or are SIPs still the better bet than lump-sum allocations at these levels?
Midcap valuations have cooled from their peak but remain elevated. Given global geopolitical and tariff tensions, timing a lump-sum investment is tricky. SIPs help smooth out entry points, reduce the impact of short-term volatility, and remove emotional decision-making—building long-term wealth steadily. For most retail investors, SIPs remain the smarter choice at current levels. For those opting for lump-sum investments, it should be done with a minimum 5-year horizon.
