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Smallcaps offer Alpha; midcaps look expensive: PGIM India's Aniruddha Naha

Amid the ongoing conflict in West Asia, ANIRUDDHA NAHA, CIO – Alternates, PGIM India Asset Management Company, cautions investors that a sharp rise in crude oil prices could pose a significant risk to India's economic stability. In an email interview with Sirali Gupta, he also suggested taking some money off midcaps given its high valuations. Edited excerpts: What are the key challenges that could weigh on Indian equities? The risk for India emanates from higher crude oil prices. Crude happens to be one of the largest imports for India and accounts for almost one-third of the import bill. Any geopolitical event that drives crude oil prices higher in a dramatic fashion would have implications for the Indian macro and could hurt the economic stability of the country. Should investors exit or trim exposure to any segment in this market? India probably offers one of the best equity markets to create wealth over the next decade. However, the segments where we see valuations on the higher side and one can take some money off the table is midcaps. Given the limitation of how midcaps are defined and are limited to 150 companies, continuous inflows in this segment leave limited upside in the near term. What are the themes you are optimistic about over the next 12–18 months? We remain positive on the revival of the investment cycle, now supported by improving data on private capex and rising government spending. With deleverage balance sheets and recovering demand, corporates are well-placed to invest. Consumption, especially lower-ticket discretionary spending, should benefit from income tax cuts and rising per capita GDP. What are the key advantages of long-only alternate strategies, especially in the context of small and mid-cap investing? Alternate strategies have the flexibility of being agnostic to benchmarks both in terms of market capitalisation and companies. This helps in building portfolios that could have very low overlaps with a benchmark and build a differentiated portfolio. One can limit the asset under management (AUM), which makes a lot of sense in small-cap portfolios. How do you generate alpha in smallcap stocks? While large and midcaps are well-defined, smallcaps include companies beyond the top 250 by market cap. As we go lower, one can fine manu undiscovered opportunities. We scout from a universe of nearly 4,000 companies, down to ₹500 crore in market cap. Given the growth potential and attractive valuations, we believe small caps offer the best alpha generation opportunities. Do you see alternate funds becoming part of mainstream investing? As per capita gross domestic product (GDP) rises and financialisation of savings takes centre stage over a period, the demand for Alternate assets will keep growing. Not only listed, unlisted but other asset classes will get introduced in the country. Having said that, Alternates will be a solution provider for spaces, where the mutual funds do not have a solution. They will be peripheral to the core mutual funds, but their share and innovations will keep increasing and driving their relevance. Your PGIM India Equity Growth Opportunities Series II Fund expects 28–30 per cent earnings growth in FY26 and FY27. What's driving that confidence? We believe there are still ample opportunities in small caps to generate alpha. Our focus is on identifying companies with strong earnings visibility—often quality businesses at the bottom of their cycles. As the cycle turns, earnings rebound and, with improved sentiment, there's potential for both earnings growth and P/E expansion.