ETMarkets Smart Talk | Manufacturing, healthcare and financialisation could create India’s next wealth creators: Sanjay Doshi

ETMarkets.com

Abakkus’s Sanjay Doshi explains why selective mid- and smallcaps remain attractive, while urging investors to assess valuations, financial strength and sustainable growth before investing.

In an interview with Kshitij Anand of ETMarkets, Sanjay Doshi, Head – Investments & Research at Abakkus Mutual Fund, says that while largecaps offer valuation comfort following a correction, selective mid- and smallcap companies continue to present opportunities backed by stronger earnings growth prospects. He emphasises that valuations must be assessed alongside the sustainability of growth, with disciplined stock selection remaining crucial in a market where performance can vary significantly across companies.

Doshi also discusses the risks of elevated valuations in parts of the mid- and smallcap universe, the importance of financial discipline in identifying potential wealth creators, and why investors should align their SIP allocations with their long-term goals rather than react to short-term market movements. Edited Excerpts -

Q) Mid-and smallcap funds have outperformed largecaps over the past year, but valuations appear to favor largecaps. Is this a potential turning point in market leadership?

A) Large caps offer valuation comfort, trading below their long-term historical averages. However, their earnings are expected to grow at around 10–12%, while mid and small caps are expected to deliver relatively higher growth, probably in range of 15-20%. We believe that looking at valuations alone would not provide a complete picture and the pace and sustainability of earnings growth matter just as much.

We continue to see opportunities in mid and small caps, particularly in businesses with room to expand, gain market share and improve profitability. Each company needs to be assessed individually.

Strong, sustainable growth can justify a higher valuation, and in line with Abakkus Investment Philosophy we remain mindful of price being paid upfront and relative margin of safety.

At Abakkus, our focus remains on bottom-up stock picking, as we believe opportunities exist across market caps. We would remain selective rather than make a broad call on rotation, favoring businesses with sound fundamentals, sustainable growth and reasonable valuations. This remains a stock pickers’ market.

Q) There is a growing talk around largecaps. Are largecaps becoming attractive because their valuations have corrected, or do they also offer better earnings visibility in the current market environment?

A) Nifty is down around 10% over last couple of years, and we have seen certain section of large caps being impacted by foreign institutional selling, as India saw earnings growth slowdown, impacted by global geo-political and macro factors and also as investors looked at markets which provided tech related opportunities.

Thus, as mentioned earlier, large caps valuations have come down below their averages and appear relatively attractive when compared to its historical multiples.

Many have established businesses and diversified revenue streams, which can offer better earnings visibility but their earnings outlook needs to be assessed company by company.

For example, over the six months ended September 30, 2026, the Nifty 50 TRI returned 2.13%, while the Nifty Next 50 TRI delivered 16.14%. Together, these indices form the Nifty 100, representing the large-cap universe. Thus, even within large caps, performance can vary considerably.

We would like to re-emphasis that opportunities exist across the market. What matters is whether valuations are justified by earnings growth and its sustainability.

Q) You track small & midcaps very closely - how much of the future earnings growth of mid- and smallcap companies is already priced in? What would it take for these stocks to justify their current valuations?

A) In some pockets, valuations do factor in strong earnings growth over the next few years. Having said that, do note that Mid and small caps are a diverse universe, and we would not paint the entire segment with the same brush.

To justify their valuations, companies need to convert growth expectations into consistent earnings, healthy cash flows and strong returns on capital employed.

At Abakkus, our focus remains on bottom-up stock picking, identifying businesses where earnings potential supports the valuation and offers room for upside from medium to long term perspective.

Q) For an investor starting a fresh SIP today, should largecaps form the core of the portfolio, with mid- and smallcaps playing a complementary role?

A) The core allocation should depend on the investor’s risk appetite, investment horizon and, most importantly, investment goals. Large caps can form the core for some investors, but there is no single allocation that suits everyone.

A flexi-cap fund can be a good option, as it gives the fund manager flexibility to invest across large, mid and small caps as opportunities emerge. Investors should not change their SIP allocation simply because one market segment has corrected. The allocation should remain aligned with their long-term goals and ability to handle volatility.

Q) What could trigger a sustained rotation from mid- and smallcaps towards largecaps: earnings disappointments, valuation compression, foreign investor flows or a broader economic slowdown?

A) Any of these factors could trigger a rotation, but a sustained shift would likely need a combination of almost all of them. If mid- and small-cap earnings fall short of expectations, their valuations may come under pressure.

A broader economic slowdown could also favor established businesses with stronger balance sheets and more predictable earnings.

However, earnings growth has remained strong so far, and most challenges are external. The monsoon remains a key domestic risk and can have some impact on second half growth.

If conditions worsen significantly, we could see some rotation towards large caps, but we believe this may be temporary, given the breadth of growth opportunities in the mid- and small-cap space for the medium to long term.

Q) Should investors rebalance towards largecaps after years of mid- and smallcap outperformance, or could that mean exiting too early?

A) Rebalancing should be driven by an investor’s goals, risk appetite and portfolio allocation, rather than recent market performance alone. If mid- and small-cap outperformance has increased their share beyond the intended allocation, bringing it back into balance can help manage risk.

However, shifting towards large caps simply because mid and small caps have had a strong run could mean exiting businesses with a long growth runway too early. The key is to assess whether earnings growth continues to justify valuations. We would favour a disciplined review of the portfolio rather than a broad exit from any segment.

Q) Where could India's next generation of small- and midcap wealth creators emerge from: manufacturing, capital expenditure, financialization, healthcare or emerging technology businesses?

A) Opportunities can could emerge across all these areas. Manufacturing intensity in India is still at nascent stage and with Government focus on Indigenization and policies to support India as reliable global supply chain partner can create opportunities in engineering, components, power equipment and renewables, electronics, defence and aerospace, specialty chemicals and more.

Financialization, supported by the shift from savings to investments, creates opportunities in asset management, insurance and wealth management. Healthcare offers potential across pharmaceuticals, diagnostics, CDMO and medtech.

Emerging technology businesses also offer potential, particularly where technology improves productivity or addresses a clear customer need.

However, being part of a promising sector is only the starting point. The next generation of potential wealth creators will be companies that convert these opportunities into sustainable earnings and cash flows, backed by strong execution and disciplined capital allocation.

Q) How important are return on capital, cash-flow generation and balance-sheet strength when evaluating small- and midcap companies? Which financial warning signs would make you avoid a stock despite its growth potential?

A) Under our MEETS framework, we look closely at management’s capital allocation and the quality of earnings across business cycle. We want to understand whether the money invested in the business is earning a healthy return and whether reported profits are translating into cash flows.

A strong balance sheet also gives a company room to grow and manage difficult periods and as part of our Investment Philosophy we avoid companies with fractured balance sheet or unsustainable leverage.

We would be concerned if debt keeps rising without an improvement in returns, profits grow but cash flows remain weak, or receivables and inventory consistently grow faster than sales. Poor governance or questionable use of capital would be reasons to avoid a stock, even if the growth opportunity looks attractive.

Expansion can temporarily affect cash flows, so we look at the reasons behind the numbers. Ultimately, we focus on growth that can strengthen the business and can create value for shareholders.

Q) Small-cap funds attracted ₹9,039 crore, while mid-cap funds received ₹7,835 crore. Given the strong investor interest, are valuations in these segments justified by earnings growth?

A) Strong inflows reflect investor interest, but they do not, by themselves, justify valuations. What matters is how earnings grow and whether that growth can be sustained.

Within the same market-cap segment, companies differ widely in their valuations and earnings prospects. It is therefore important to assess each business and its growth potential rather than rely only on broader index valuations.

Healthy growth, good returns on capital and strong cash flows can justify a higher valuation, but the price we pay remains important.

At Abakkus, our focus remains on bottom-up stock picking guided by our well define Investment Philosophy and supported through our MEETS Investment framework.