Veteran investor Porinju Veliyath remains constructive on India's long-term economic and equity market prospects, stating that the recent correction in small- and mid-cap stocks has created fresh opportunities for selective investors. According to Veliyath, the sharp rally witnessed in small- and mid-cap stocks over the previous four years had led to stretched valuations, with several stocks rising five to 30 times during the period. As reported by ET Now, he noted that "the small- and mid-cap segment has corrected very well" and that "in the last two months, several small- and mid-cap stocks have risen 20%, 30%, 40% and even 50%," with some special situations doubling. While he believes some stocks may still require valuation corrections, Veliyath said the broader segment appears to have bottomed out. The outperformance of smallcap and midcap stocks is primarily driven by a surge in domestic liquidity, with substantial investments coming from mutual funds and portfolio management services, leading to significant gains despite sector-specific strengths.
Currently, the median smallcap P/E ratio stands at 33x, significantly above its historical average of 20x, indicating that while there is enthusiasm in the market, many smallcap stocks may be overvalued. This elevated valuation level raises concerns about potential corrections, as investors are advised to approach these investments with caution, especially as earnings growth needs to keep pace with these elevated valuations. Veliyath noted that "the market breadth has improved significantly, but India is still not a very large stock market. We are evolving into a much bigger market alongside the economy." He emphasized that rising domestic participation and increasing household allocation to equities will remain key drivers of long-term wealth creation, stating that "the value of India has increased significantly in the global arena, India is becoming an inevitable economic and political force, and these developments will be reflected in the stock market over time."
Reflecting on the past 12 years under Prime Minister Narendra Modi, Veliyath said India has undergone a significant transformation driven by political stability and major reforms. According to ET Now, he pointed to achievements such as housing construction, expansion of digital payments through UPI, Jan Dhan account penetration and sanitation initiatives as examples of large-scale execution. "Every knowledgeable Indian should be proud of what has happened in the last 12 years," he said, adding that "if you list out the numbers, it is amazing. No other leader in this country could have done it." Veliyath credited stable political leadership for enabling long-term reforms and creating a foundation for sustained economic growth, noting that "India has been lucky to have strong and stable political leadership over the last 12 years, and we have utilized that opportunity well." Comparing India with China, he noted that India still has substantial ground to cover despite recent gains, stating that "we are now a little over a $4 trillion economy, while China is around a $19 trillion economy, but we have doubled our per-capita income over the last 12 years."
On the defence sector, Veliyath described the Make in India initiative as a significant step for the country's security and economic development. As reported by ET Now, he said the defence manufacturing theme is "amazing" and "important for national security, economic security and industrial development." However, he cautioned that stock valuations in parts of the sector already reflect strong future growth expectations, noting that "some of the smaller defence-related companies are already priced for the next five years. Whether investors should enter at these valuations is a difficult question." Among sectors, Veliyath expressed optimism about software services companies that can benefit from the AI revolution, stating that "some IT companies, especially in the mid-cap space, are well-positioned to leverage AI through implementation and service opportunities." He also remains positive on healthcare and pharmaceutical companies, stating that these sectors are "sectors that are unlikely to see any major slowdown. Demand for healthcare services and pharmaceutical products will continue to grow."
Veliyath believes that investors should focus on individual businesses rather than sectors, as stock performance has varied significantly even within the same segment. He noted that "there are companies whose stocks have corrected 40% to 60%, but they continue to have earnings visibility and growth potential. In some cases, temporary events have impacted earnings and the market has punished them severely." He emphasized that some fundamentally strong and well-managed businesses are now trading at significantly lower valuations despite maintaining long-term growth prospects. A potential correction in smallcap stocks could be triggered by profit-taking, changes in market sentiment, or external shocks such as policy changes or disappointing earnings reports. The market's current high valuations, combined with the recent influx of capital, make it particularly vulnerable to such corrections if growth does not materialize as expected. As per ET Now, Veliyath stated that "it is again time to cherry pick in the small and midcap segment. It is going to be rewarding — but it is not going to be an exciting market at the index level."
