Will small and midcaps correct more than largecaps this time? Anand Tandon answers

Time of India

29-05-2025

Anand Tandon
, Independent Analyst, says the market is facing valuation concerns. Earnings growth is in single digits. The market trades at 22 times one year forward earnings. Excluding banking and financial services, it trades even higher. Commodity-driven market
valuations
appear stretched. Significant upside is unlikely without major inflows. A substantial improvement in future earnings outlook is needed. Near-term market gains are limited without these positive triggers.
How are you viewing the current mood on Dalal Street? Yesterday was the third day of declines coming in for key benchmarks.
Anand Tandon:
Well, the benchmarks may be easing off a bit but by and large the mood remains reasonably buoyant because if you look at where the market is, it is not showing any major signs of discomfort. The valuations are back at the levels and the levels are back at where they were on September '24 where the market was looking fairly stretched and since then, if at all, the macros have actually deteriorated globally.
India of course is in a bit of a sweet spot. Inflation is down, energy prices are down and therefore the current account deficit may remain slightly under control. But broadly speaking, the global picture for growth is a little dimmer than it was in September and yet we are where we are. So, the market mood is reasonably robust.
Like you were mentioning, valuations continue to be high. Do you see any correction coming anytime soon especially in the small and midcap space or do you think
largecaps
are going to be the preferred space?
Anand Tandon:
Well, despite some amount of give in terms of the valuations of the midcap and smallcap space, they continue to remain at a premium and the market itself is at more than one standard deviation, almost two standard deviation away from the mean on the upside. So, in a situation where the earnings have come down to single digit growth and mid-single digit growth, we are still looking at a market which is trading at, let us say, around 22 times one year forward.
If you were to remove, let us say, the banking and financial services, it is probably trading closer to 24-25 times one year forward. So, for a market which is largely commodity driven or at least substantially commodity driven, to trade at that valuation means you are already stretched and on top of that, the broader market is even more expensive. For the near term, there is not much upside in terms of where the market can be headed unless we see some surprises going forward in terms of either huge inflows or something which triggers a possible great improvement in the outlook for the earnings going forward.
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What is your view on tariffs going forward? How do you compare Indian markets to global markets especially given tariffs are likely to come in over the next few months? Now, the handover from Wall Street was very positive, but we continue to see a decline back home.
Anand Tandon:
Well, the US tariffs will eventually end up. First of all, can it go back to where it was in the past? I do not think so. We are looking at a situation where the US also needs to raise some amount of revenues given the kind of big beautiful bill that they are putting up which is going to increase their fiscal deficit and they need to find some means of compensating for that. So, we are going to have tariffs which are higher.
Now in that country context, the market tends to believe that whatever you are seeing today will continue forever. The reality is not as simple. I would imagine that if you have tariffs, you will have two features coming through – one, the current
supply chains
have to be recrafted and to a large extent strategically. Most countries are going to look at nearshoring or perhaps onshoring of at least part of their supply chains. Now that is both a threat and an opportunity in a slowing down environment globally for GDP, you cannot have India grossly outperforming.
On the other hand, if we were to create a situation in the country where we offer ourselves as a better investment decisions for some amount of increase in manufacturing and not just on PLIs which are dependent on subsidy, etc, but generally improve the industrial outlook, you will have a reasonable amount of offshoring coming, happening out of India, more manufacturing based shifting to India for the domestic market as well as the international market.
So, it is a question of an opportunity which we need to grab with both hands. If the governments and the states and the centre are willing to do that, obviously things can improve. But if they were not, overall there will be a negative impact. In India, we have been putting up walls of tariff against China, etc, and perhaps to some extent we may have to do more of that because with China finding it more difficult to sell to, let us say, the US, that amount of goods that they are going to produce have to be redirected to other countries and clearly one of the countries which is, because the economy is doing well, which will be in a position to import will be India.
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Therefore we should expect to see more pressure on Indian manufacturers coming in from goods from China which needs to be offset by tariffs. Our own tariffs will continue to perhaps go up and provide protection. Overall, we need to find ways to make India more competitive as a manufacturing destination and that is a problem that we still have not managed to lick.
You said that supply chains will have to be readjusted and that the manufacturing space is going to be in focus on the back of tariffs. But within the manufacturing space, is there any particular space that one should be watching out for since India needs to become more competitive? Are there any particular spaces within manufacturing that you are bullish on?
Anand Tandon
: In terms of the government spending money on infrastructure, we have seen a lot of development happening in manufacturing in terms of railways for example. Because you have gone and put out orders and because it is a monopoly buyer, they have to put out orders if you want to make wagons, if you want to make rolling stock and so on, so that is one clear area where we have seen an improvement.
The same thing goes for defence and I think that is a more sustainable kind of longer-term picture because if we continue to improve our defence manufacturing capabilities domestically, and it is becoming more and more evident that that is something that we will have to bring on shore to as much extent as we can, that is clearly another area where manufacturing has to improve.
For most of the others, we are reliant on PLI. We are doing
PLI
for everything from pharmaceuticals to mobile telephones and so on, but the value addition for example in mobile telephone continues to remain bleak. Now going forward, there is a possibility that with more and better quality on shoring of components, it may improve the overall value addition in India, but that is what I was saying that we need to move away from the subsidiary-driven business and move into making cost of manufacturing in India cheaper because of lower cost of infrastructure, lower cost of logistics, and perhaps with cleaner government and easier way of getting permissions and legal process which does not change after three or four years, all of which go to increase cost of doing business currently.
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So, the areas where we are doing well for example where I would expect to have a better outlook would be textiles, with Bangladesh being in a bit of a soup and China itself also having tariffs, etc. That could be one area where India without much help can improve if we were to allow, for example, synthetics to be imported at slightly better tariffs than we have currently. So, there are several areas where we can do well. Defence exports is another area. But, the outlook has to become a little less protectionist and a little more efficient in terms of how we allow Indian manufacturing to work.