Indian equities have staged an impressive recovery from their March lows, with benchmark indices as well as mid- and small-cap stocks bouncing back sharply. According to The Economic Times, cooling crude oil prices, easing volatility across commodities and cryptocurrencies, and resilient corporate earnings have all contributed to the market's recovery. However, market sentiment remains far from euphoric, with Samit Vartak from SageOne Investment Managers noting that while markets have recovered significantly, sentiment has not yet turned outright bullish. As reported by ET Now, Vartak explained that while the Nifty is still 9-10% away from its September 2024 highs, the drag from crude oil prices has eased considerably. He believes that one of the biggest overhangs for India—crude oil prices—has eased considerably, although geopolitical developments remain unpredictable. Vartak emphasized that sentiments are still jittery because there is so much uncertainty… things change on a daily basis, but believes the worst may be behind the market.
Despite lingering uncertainties, corporate earnings continue to paint an encouraging picture for investors. According to The Economic Times, small-cap companies delivered median earnings growth of nearly 25% during the previous quarter, while mid-cap companies reported growth of around 22-23%. Even large-cap companies posted healthy earnings growth of about 18-19%. Vartak believes that while higher crude prices could temporarily affect profitability, investors would know this is a transitory phase. He noted that several businesses could actually benefit once raw material costs decline, particularly those that have already implemented price hikes during periods of elevated commodity prices. He explained that companies may make a significant improvement in margins going forward, citing examples from post-COVID times when commodity prices went up and companies took price hikes, but when things cooled down, no one really took prices down. He also highlighted an often-overlooked positive: margin expansion. "Companies take price hikes when costs go up, but they don't necessarily reverse them when input costs fall," he said, noting that margins could actually improve meaningfully over the next few quarters.
Vartak turned positive on the mid- and small-cap segment when valuations corrected sharply earlier this year, with the key trigger being valuation comfort rather than sentiment. As reported by The Economic Times, the price-to-book ratio of the small-cap index had slipped below the 25th percentile of its five-year historical range, a rare occurrence previously seen only during the COVID market crash. Unlike the price-to-earnings ratio, which can fluctuate significantly depending on earnings cycles, Vartak prefers price-to-book as a more stable valuation metric. He emphasized that India's small-cap valuations remain below their historical median while earnings momentum continues to strengthen, making them attractive for investors seeking both growth and valuation combination. Using global semiconductor companies as examples, he explained that elevated earnings can sometimes make PE ratios appear inexpensive even when valuations are stretched. "For me, price-to-book is a much better multiple compared to the PE multiple. PE multiple tends to be very volatile," he said. The reason he is positive about small-caps is because that is the space where you do have the growth as well as valuation kind of a combination, which is not really available in the frontline kind of names which are pretty well known to everyone.
The discussion turned to India's IT sector, where companies have increasingly been pursuing acquisitions to strengthen artificial intelligence capabilities. According to The Economic Times, while acknowledging the strategic intent behind such deals, Vartak cautioned investors against assuming successful outcomes. He noted that acquisitions involve considerable execution and integration risks, particularly when companies are entering unfamiliar growth areas. Vartak advised investors to remain cautious about these acquisitions, stating that while they could provide big returns if successful, the integration challenges make them highly uncertain. "Companies do try multiple things and it may not be something which is highly predictable. Acquisitions are highly uncertain because the integration... it is a new growth avenue for them," he said. He would definitely take these acquisitions with a pinch of salt. These are high risk. If it plays out, yes, it can really give you big delta, but I am not so sure about this."
Despite several themes such as defence, power equipment and power ancillaries continuing to attract investor interest, Vartak believes many of these sectors have become excessively expensive. As reported by The Economic Times, he noted that several frontline defence companies now trade at valuation multiples far above their historical averages, leaving limited room for error. Instead of chasing popular themes, Vartak recommends identifying businesses where both growth and valuations remain favourable. Among the areas he currently likes are export-oriented industries including textiles, specialty chemicals and contract development and manufacturing organisations (CDMOs), as well as export-focused defence companies and select non-banking financial companies capable of delivering sustainable growth of over 20%. Interestingly, he believes the best opportunities are often found outside the well-known market leaders. "Picking the right theme or space is not good enough. Picking the valuation within that is also important," he said. He highlighted that several newly listed companies in power ancillaries and specialty chemicals continue to trade at significantly lower valuations than their established peers despite offering attractive growth prospects.
