Not much juice left in smallcaps: Ashutosh Bhargava

There is no valuation comfort even in the broader market, says Ashutosh Bhargava, Fund Manager and Head of Research at Nippon India MF, in this interview with ET Now. Edited excerpts:

The market is now liking the PSU basket. What are your thoughts here?
Basically, it is part of the value theme. The market is rewarding stocks that are showing earnings resilience, earnings upgrades and improvement in earnings visibility. Sectors like financials, metals, materials and energy where most of the PSUs belong are seeing good tailwinds in earnings. The price-value gap was immense and so the valuation comfort is there.

I do not think PSUs could be a long-term theme. In the short term as long there are earning surprises this theme could have more legs. Valuations and earnings support is working in this particular basket.

What is your call on the metals basket?
More than the demand angle, metals is a supply side story. There is a very strong commitment from China towards decarbonisation. Whatever correction in metals you have seen recently is due to the fact that China wants to curb speculation. From a medium-term perspective, the story is not going to go away. Supply cuts would dominate any demand moderation, if any. At this point of time we are not even seeing that demand moderation but from a foreseeable future perspective our understanding is that supply cuts would continue. Therefore, we may not have seen the end of the metal up cycle. We may be in the midst of an ordinary correction.

Which themes are you following in this bull market?
China plus one theme has a good shelf life. You are going to see Rs 2 lakh crore of capex in PLI-linked sectors. We have seen this working wonders in the chemicals sector and now there are so many other sectors like pharma, electronics, etc. This theme is here to stay, both from import substitution and from export perspectives.

We also like large banks. They are more resilient and have better provisioning. Their management commentary does not exhibit the kind of panic seen last time because the provisioning is now strong. The market share is coming back to larger banks.

Other than that, globally it is a cyclical theme environment and so we like domestic cyclicals like cements or real estate. We are still very bullish on global cyclicals as we are going to see a very massive up cycle.

How does the valuations look like in the broader market?
There was a clear cut case in favour of equities in general and smallcaps in particular. But now the price and value gap is no more there. If you look at Nifty, 40 stocks are trading at slightly higher valuations than the top 10. Even in the broader market, I do not think there is any valuation comfort. At this point, one should not pick smallcaps over largecaps because that story has broadly played out.