Should Large-Caps Be Your Current Choice?

The volatility in the markets on account of several factors has created a wave of confusion among investors as to whether Small-Cap and Mid-Cap stocks are a preferable choice. However, as this article shows, Bhavya Rathod elucidates how during such times the Large-Cap stocks should be focused on since they provide stability to the portfolio 

Amid massive volatility in the Indian and global markets, investors remain clueless as to how to surf through the rough tides which have kept coming since the pandemic. However, longterm investors in general thrive in such moments and remain resilient with quality large-cap companies. Ever since the coronavirus pandemic hit the world unexpectedly, the markets have unhappily welcomed high volatility as a gift. Factors such as the geopolitical situation between Russia and Ukraine, continuous rate hikes by the Federal Reserve, inflation’s threat looming each time there’s some upward action in the market, the Adani Group and Hindenburg crisis and the latest fall of the Silicon Valley Bank have severely impacted the market sentiments. 

This makes us wonder where to invest in such turmoil markets. In such uncertain market conditions, it is wise to invest in dependable, blue-chip stocks that offer reliable returns at a reasonable cost rather than focusing solely on expected growth. Opting for large-cap stocks is a prudent approach to mitigate risks and ensure stability in the equity markets. It’s important to acknowledge that volatility is an inherent part of equity investing and that risk and reward go hand in hand. In such a scenario, depending on the dependable is the kind of mantra that must be followed. The following paragraphs indicate why the large-caps should be the flavour of the season. [EasyDNNnews:PaidContentStart]



 

Macroeconomic Activity

India’s industrial activity sustained its momentum in January 2023 with output expanding by 5.2 per cent YoY compared to 4.7 per cent in the previous month. While the sequential growth rate slowed to 0.8 per cent compared to the healthy growth of 5.7 per cent recorded in December 2022, the output was still 9 per cent higher than the pre-pandemic period of January 2020. All three sub-sectors of manufacturing, mining and electricity contributed to the broad-based improvement in industrial output in January 2023. On the use-based side, all sectors except for consumer durables registered an expansion in their production levels. 

Looking beyond the monthly volatility, the growth in output in April-January FY23 stands at 5.4 per cent higher than that in April-January FY22 and 5.6 per cent higher than the prepandemic period of April-January FY20. The recovery has been driven mainly by capital goods, infrastructure and construction and primary goods, while consumer goods (both durables and non-durables) are yet to achieve their pre-pandemic level of output. The domestic economy is predicted to stay strong, boosted by better capacity utilisation levels, robust credit growth, sustained urban and rural demand and increased government spending on infrastructure. 

However, the external downside risks are rising due to global financial conditions and geopolitical uncertainties, which could obstruct domestic industrial activity, given the weakening of global growth impulses. According to Prime Database, mutual funds have been showing a preference for mid-cap and smallcap stocks in recent months. Among the notable small-cap stocks that saw buying were Delhivery, PolicyBazaar (PB Fintech) and Zee Entertainment. The interest in mid-cap and small-cap stocks has been steadily increasing over the past three quarters, with small-cap funds seeing net inflows of ₹ 15,172 crore and mid-cap funds experiencing inflows of ₹ 14,632 crore. 

In contrast, large-cap funds witnessed inflows worth only ₹ 6,392 crore during the same period. Data from the Association of Mutual Funds in India (AMFI) indicates that since October 2021, small-cap schemes have been experiencing consistent mutual fund inflows of around ₹ 1,600 crore. In January 2023, the inflows into small-cap funds reached a multi-month high of ₹ 2,300 crore even without any new fund offers (NFOs). This trend suggests that investors are increasingly turning towards mid-cap and small-cap stocks as a potential source of growth in their portfolios. However, in the recent turn of events, it will be interesting to see if there will be additional interest and inflow in large-cap stocks since both small-cap and midcap indices suffered considerable beating. 

The general elections in 2024 are looming on the horizon but before that the BJP government faces a crucial test in seven states going to polls in 2023. The results of these key states will be a litmus test for the government’s continuity and stability in economic policies and governance. The markets are likely to react adversely to any adverse outcomes as they seek stability and continuity. Over the past 3-4 years, the government has been placing greater emphasis on capital spending, resulting in a budgeted capital investment outlay in the current budget that is 33 per cent higher than the last budget and three times the outlay in 2019-2020. 

This level of asset creation has a ripple effect on the economy, benefiting sectors directly exposed to the capital spending theme, such as capital and industrial goods suppliers, infrastructure developers and financiers. Investors should consider exposure towards these sectors and look for opportunities in similar themes as these broad-based multiyear themes are unlikely to fade away in short cycles. Overall, the government’s capital spending initiatives are likely to have a positive impact on the economy and create long-lasting benefits for the relevant sectors.

Interview

Trideep Bhattacharya, Chief Investment Officer (Equities), Edelweiss AMC 

"Large-Cap Stocks are Likely to Navigate Better"

Can you provide your general evaluation of the present equity market situation? 

If I were to look at 2023 and summarise the equity environment, I would probably say that we are are likely to face recessionary conditions globally before rebound in 2023. In the first three to six months of CY23, we will see the economic impact of the interest rate increases done by all major economies of the world over the last 6-9 months. We will see the impact of the same with regards to the growth rates of the companies and the growth rates of the economy. Once we tide through this by 2HCY23 I think broadly global economies will probably bottom out and look to an economic rebound from 2H23 onwards. We monitor data points closely on this front. In this context, the key triggers will likely be the peaking of interest rates, bottoming out of global growth and easing of geopolitical tensions across the globe. Finally, we expect inflation to be sticky and hence expect a gradual reduction rather than a quick movement. 

What is your outlook for the performance of large-cap stocks in 2023 compared to mid-cap stocks? 

As we expect recessionary conditions to prevail globally, particularly in 1H2023, we surmise that large-cap stocks are likely to navigate better through these volatile conditions in a better way as compared to mid-cap stocks. However, as we approach 2H2023, we think mid-cap stocks are likely to present themselves as a multi-year buying opportunity for long-term and patient investors. 

Which three industries do you think have good longterm potential and are worth investing in?

We believe that finding pockets of company-specific earnings resilience is the best way to guard against a recession-like situation. We tend to find earnings resilience in stocks that cater to the following themes over the medium term: 

• Rebound in credit growth
• Private sector investment demand
• Household capex demand
• Global market share gainers
• Idiosyncratic country-specific themes
• Beneficiaries of government growth schemes
• Indigenisation of defence. 

We are overweight on stocks and sectors that benefit from the themes mentioned above and feel that the bottom-up drivers mentioned above are likely to hold up for these companies better than others.
 

Market Update 

PB Fintech has risen from the ashes with the stock rising more than 25 per cent on year-to-date basis. The stock has led the line for large-cap stocks while other companies, particularly in the small-cap and mid-cap segments, have continued to suffer stiffness in their levels and witness continuous corrections in the current year till date. It will be interesting to see if PB Fintech can also carry and drag last year’s laggards – new-age technology companies – to the top this year. We all know how these new-age companies severely underperformed in CY 2022 and certainly these companies shall be on the radar and in focus in CY 2023 as well. Despite being declared the worstperforming sector following a bearish 2022, some of the IT stocks have made a remarkable recovery and are now generating wealth for investors. 

This comes at a time when the market is grappling with challenges such as FII sell-off, high valuations and the Adani Group rout. Persistent Systems and KPIT Technologies lead the chart for being the highest gainers in the year so far for the IT sector in India with the stocks surging more than 12 per cent on YTD basis, followed by Tech Mahindra which surged more than 10 per cent in this year-till-date. Despite the current macro slowdown, investment in technology across clients for the Indian IT industry is expected to increase as a proportion of global GDP. This is due to the several demand indicators that underscore the strength of technology-related investments. Indian IT players are in a favourable position to gain market share during this macro slowdown. 

This is because clients are more focused on cost optimisation and efficiency improvement, as evidenced by the increase in contract activity during Q3FY23 rather than more discretionary spending on digital transformation. Not only are foreign institutional investors (FIIs) interested in IT stocks, the domestic mutual funds are also showing interest. The mutual funds’ holding in the IT sector has risen by 41 basis points (bps) on a month-on-month (MoM) basis and 10 bps over a threemonth period. Post significant correction in the last CY 2022, IT large-cap stocks look favourable because the risk of a recession or the sentiment towards a deep recession in the US is kind of fading, especially given the tight labour market that has been there in the US.

Conclusion 

According to Raghvendra Nath, Managing Director, Ladderup Wealth Management (P) Ltd., “Large-cap stocks are one of the safest investment avenues when considering the equity market and this is especially true in the current volatile market. Given their large market capitalisation and proven track record, large-cap stocks have the ability to pivot from major corrections, especially in the long run. As investors, you should take the ongoing correction as an opportunity to build incremental exposure to large-cap stocks, at a cheaper rate, and this can be done through smaller equity investments, on a regular basis, or through mutual fund SIPs in large-cap funds. Large-cap stocks should remain on everyone’s radar since these are time-tested stocks with the proven potential to offer stable yet high returns.” 

“Further, investors should understand that the ongoing weakness in large-caps is not a testament to their low investment quality, but rather a proof of negative market sentiment, making this an opportune time to acquire these stocks below their fair price,” he adds. Exploring stock price behaviour is always fascinating, particularly when it comes to identifying which stocks may outperform in the near future. In addition, it is crucial to pinpoint which sectors will likely outperform in CY 2023. As per CY 2022, banks and FMCG stocks outperformed, whereas IT and consumer durables underperformed. However, several large-cap IT stocks have outperformed the markets on a year-to-date basis, implying that IT may stage a comeback in the future. Despite a sharp correction, there is an opportunity to spot value in the large-cap space. 

Nevertheless, the current market is highly growth-sensitive and investors are willing to pay a premium wherever growth is visible. High-growth stocks have a definite preference among investors, but those with a long-term horizon can still identify lucrative opportunities where growth is available at a reasonable price owing to the recent steep correction in stock prices. Investors should be cautious about purchasing growth stocks that fail to deliver on growth as the market is sensitive to growth prospects. The punishment for growth stocks that fail to live up to their potential can be severe. In summary, analysing stock price behaviour and identifying promising sectors and stocks can help investors take informed decisions in a highly dynamic and sensitive market environment. One should also never forget this famous quote given by arguably the best investor of all time, Warren Buffet – “ The most important quality for an investor is temperament, not intellect”. 

In the table above, we have mentioned all those large-cap stocks which have suffered massive correction from their 52-week high level and all investors should keep a close eye on the aforementioned stocks. Out of all the aforementioned the 10 stocks, new-age technology companies such as Nykaa and Delhivery have suffered the most significant correction and thus should be monitored by all investors. Investing in largecap stocks has various benefits. First, there is an abundance of historical data available which makes research easier. Large-cap stocks also tend to have higher levels of corporate governance, improved liquidity and more efficient pricing, leading to relatively cheaper buying and selling. Moreover, these stocks typically have better fundamental parameters, including higher return on equity (ROE) and are often backed by proven management quality.

Methodology 

To come up with a list of performing large-cap stocks, we took into consideration five crucial parameters. The first includes market capitalization. Next three parameters obtained from the Profit & Loss Account include Sales, Operating Profit and Net Profit. We have also taken into consideration the efficiency of the companies by analyzing operating and profit margins. Each parameter was then ranked by awarding it a carefully determined weightage based on its significance. We then segregated the companies into three categories as follows:

Turnaround Performance: These companies include those that successfully managed to turnaround the losses incurred in FY21 into profits in FY22.

Improving Financials: Although these companies still reported losses in FY22 as they did in FY21, they succeeded in reducing these losses by a notable amount. This indicates that they are on the road to recovery.

Thriving Companies: This list includes all those companies that have seen their profits increasing on yearly basis for FY22. All the raw financial data is sourced from Ace Equity and price-related information is as of March 17, 2023.

Click here to download list of large caps 2023 

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