Economy linked mid and smallcaps could be in for negative surprise: Jayesh Gandhi, Birla AMC

In a chat with ET Now, Jayesh Gandhi, Birla AMC, says on a forward earnings basis, the largecap indices are fairly valued and there is fair amount of scope for investors to make money

Edited excerpts:

Let us start off with your views on the benchmark as well as midcap end of the market what do you make of it in terms of the valuations?

The valuations today are fair in the sense that if I look at the historic valuations of the equity market and the largecap indices, we are close to the long term average. If I look at the one-year forward PE, earnings for FY17 obviously are getting downgraded because of the slowdown in the economy but at the same time the earnings for FY18 and FY19 are getting upgraded.

On a forward earnings basis, the largecap indices are fairly valued and there is fair amount of scope for investors to make money in line with the earnings growth over the next two years.

Regarding the broad market, there has been a fair amount of correction in the last one-one and a half month. The broad market has actually corrected much more than the largecap market and that again gives us an opportunity from a medium term point of view. Very clearly, the slowdown in the domestic economy is a disruption. I would say a few sectors of the domestic economy would have a much larger impact on the mid and small cap companies which are predominantly focussed on the domestic economy. That is where there could be earnings surprises or negative earnings surprises.

By and large, the broad market particularly the mid and smallcap corporates will benefit immensely as the economy picks up in 2018 and 2019. GST could be a big big beneficiary to lot of companies particularly working in the domestic sectors and last but not the least the biggest benefit is the reduction in interest rates.

We saw the announcement made by SBI and some of the large banks about reducing the interest rates. Finally, the transmission of lower interest rates is happening and the benefit of that should be very strongly visible in FY18 and FY19. So with a hope and estimate of a much better FY18 and FY19, we think the market is fairly valued with a good opportunity to make decent returns over the next two years.

What are your thoughts in the specialty chemical space, there have been big multibaggers in the last few month there?

This is a very niche area, where Indian companies are slowly and steadily gaining global market share. This is an area which is kind of similar to what the generic Indian pharma companies are capable of or this area can very well replicate the success that the generic Indian pharma companies have been experiencing.

Tell us about the auto ancillary and engineering space because there are so many names there, what do you like?

Again it will be very very promising, we think there could very well be fair number of multi-baggers that investors could find and we try to find them in our fund as well in the area of auto ancillary as well as area such as domestic products and industrial products and engineering services. This is an area which is not very large but it is very niche.

Few companies who have their business model right and have the right kind of products and customer base can actually outgrow the domestic economy as well as the global economy and these are the kind of business models that we typically look for and have found favours and found places in our portfolios as well.