Should you be worried about valuation of smallcaps?

In the last 20 years, whenever the economic recovery has seen strong momentum, the broader market has done well. In FY22, the economy will possibly grow in double digits, and in FY23, it may grow by another 7-8 per cent. And then we have low interest rates. All this boards very well for midcaps and smallcaps. Are the valuations a concern? Yes, to some extent. If you look at the valuation of Nifty50 and compare it with Nifty Midcap 100, valuation is in line. Smallcaps are still relatively cheaper.

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You have to consider growth expectations. We are entering a very solid earnings growth momentum cycle which will be visible for companies across midcaps and smallcaps, alongside largecaps. To an extent, this earnings growth is justifying the movement that we have seen in the market.

A lot of sectors have gained meaningfully from the Covid crisis. Players with strong balance sheets and strong brands in the midcap and smallcap space are gaining market share from unorganised players. Their trajectory is looking very promising and that justifies their valuations.

What is your reading of the earnings momentum?
When we interacted with a lot of midcap and smallcap companies even before Covid 2.0, there was an uncanny optimism on the demand side. They were talking about a demand trajectory which was not seen in the last 5-7 years. They are preparing themselves to bring up the capex to meet the demand in the next 2-3 years.

We believe inflation is quite manageable. People in equity always love inflation because healthy inflation is always conducive for higher earnings growth. It will remain very comfortable from equity market's perspective.