The veteran analyst contends that India’s benchmark index has undergone a structural transformation that renders historical comparisons obsolete. Companies like Reliance, which historically traded at 15-16x multiples, can no longer be evaluated through the same lens due to their evolved business models. Similarly, high-growth retail players like Trent commanding 67x forward multiples reflect a new breed of companies with different growth trajectories and market dynamics.
“The composition of Nifty itself has changed,” Pandey emphasizes, suggesting that while current valuations may appear rich, they’re not necessarily overvalued when viewed through the prism of today’s business realities rather than yesterday’s benchmarks.RetryClaude can make mistakes. Please double-check responses.Edited excerpts from a chat:
Do you think the smallcap rally is in sync with the Q4 results? How much of it is led by liquidity of retail and mutual funds?
Pankaj Pandey: The challenge is that we tend to generalise midcap and smallcap a lot because only top 100 stocks are largecaps, next 150 are midcaps, and then the entire lot is smallcaps. So, it is a fairly large universe. There are some pockets where you are seeing valuation being extremely rich. There are some pockets where things are more or less sober. It is a stock picker’s market.But in general, most of the domestic macros are largely intact, in fact, getting better only, which is a positive tailwind for smallcaps to do well. Thus, we do not see any challenge with smallcaps not performing well. They get beaten down more when your macros turn worse and domestically, our macros are getting better only. So, from that perspective we do not see a challenge with midcap or smallcap as a category right from growth to valuation to even liquidity also.
Do you think that smallcap froth that we saw last year is settled now?
Pankaj Pandey: The way we look at corrections is that every year Nifty will have a tendency to correct at least 10 to 15 percent. And it can happen multiple times. Midcap and smallcaps, being riskier, the extent of correction could be 20-30 percent or more in individual stocks. So, what happened last year or even this year is not out of the blue. It is just that every time they correct and people start putting a picture that these are untouchables. You have a lot of smallcaps where the balance sheet is quite healthy and you do not have issues with debt.
Look at hospitals, for example. You have two hospitals which have a market cap of Rs 1 lakh crore – Max and Apollo. You also have the likes of HCG, Narayana Hrudayalaya. We like most of them.
Do you think Q4 was the last of downgrades as far as earnings are concerned? Are we at the bottom of the downgrade cycle?
Pankaj Pandey: That is what we would want to believe. FY25 was an election year. The entire commodity pack got impacted with cement and steel prices getting hit. GRMs were soft.
Now quarter-on-quarter volume growth is picking up in cement. The EBITDA per tonne for most cement companies has been pretty good. Tata Steel is looking for a Rs 3,000 kind of a price hike. If you are making Rs 12000 EBITDA per tonne, Rs 3000 is a significant number as the entire benefit flows on the bottomline. Similarly, for the GRMs, while it is stable, the crude has come down, so we would want to stick to the marketing side, as they will do well unless the government intervenes.
What is the kind of expectations that you are baking in from the Q1 earning season?
Pankaj Pandey: In FY26 we are expecting ~11% kind of growth. Nifty is now trading about 20 times FY27 PE. One of the concerns that get highlighted is that the valuations are rich. But you have to break it down into company-wise.
Let’s look at RIL, which has the highest weightage in the index. You cannot expect Reliance which used to historically trade at 15-16 multiple to trade at similar multiples because the business model has undergone a change.
Similarly, in the retail space, Trent has been doing exceptionally well compared to the rest of the pack. This is one company which has been growing at 35-40% and trading at 67 times on a forward basis. So, it is commanding two-time PEG. The composition of Nifty itself has changed. We cannot be looking at the historical perspective and saying that the market multiples are beyond value. It is rich, but not overvalued, I would say.
Nikhil Agarwal: As far as portfolio construction is concerned, what is your view on holding cash?
Pankaj Pandey: Generally, we do not suggest holding a high proportion of cash because we have seen historically it is a very difficult call to take. Thus, we do not suggest customers to sit on cash big time. For example, if you do not like the market, then you take stocks which are pseudo cash. So, for example, when the market is bad, then you look for largecaps, you look for FMCG, or you look at the categories which will get less impacted. So, these are your FD kind of positions because you can get 7% or high single-digit returns there. But once the market changes gear, then you can potentially move to some riskier categories. For holding cash, you need luck to get prices at lower levels and most importantly, courage to deploy cash during such times.
Whosoever has been waiting on the sidelines, probably has missed one leg of the rally.
Nikhil Agarwal: Which sectors are you bullish on?
Pankaj Pandey: We like the BFSI space. Within which, we like AMCs like Nippon and HDFC AMC. We also like banks, where you can’t complain that valuations are rich. Banks can be something which can keep doing well, not to say that they will be the top performers, but they should be in your portfolio because most of the banks are looking good.
The other factor is that the bulk of the FII selling is behind us. In banks, they are no longer negative. In the first half of the year, we may see pressure on the margin side but in the second half, deposits will also get repriced.
