Stock selection key as earnings and valuation gaps widen: Tata MF’s
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Stock selection will be critical for investors as earnings and valuation gaps widen across large-, mid- and small-cap stocks, according to Chandraprakash Padiyar, senior fund manager at Tata Asset Management. Padiyar said valuations look expensive in some pockets but reasonable in others, making earnings and cash-flow growth key filters in a more volatile global environment. He remains positive on banks and manufacturing, while seeing select auto-ancillary companies as a better way to play the auto theme.
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Loading...×Stock selection will be critical for investors as earnings and valuation gaps widen across large-, mid- and small-cap stocks, according to Chandraprakash Padiyar, senior fund manager at Tata Asset Management. Padiyar said valuations look expensive in some pockets but reasonable in others, making earnings and cash-flow growth key filters in a more volatile global environment. He remains positive on banks and manufacturing, while seeing select auto-ancillary companies as a better way to play the auto theme.Edited excerpts from a chat:
How are you positioning Tata Large & Mid Cap Fund and Tata Small Cap Fund in the current market? What are the biggest changes you have made in both portfolios recently?
We have made material changes to the portfolio for both Tata Small Cap Fund - An open ended equity scheme predominantly investing in small cap stocks, and Tata Large and Mid Cap Fund- An open ended equity scheme investing in both large cap and mid cap stocks with lots of new names added to the portfolio along with weight changes and some exits as well. These changes have been made over 2HCY2024 and CY2025. Our thought in making these changes has been to focus on select businesses which may grow earnings at a strong pace along with free cash generation and reasonable valuations. FY27 has started on a very strong note for our portfolio companies, and we believe visibility of earnings growth also looks healthy despite global headwinds specially linked to energy price inflation and logistical challenges.
After the sharp outperformance of mid- and smallcaps, are largecaps now offering a better risk-reward profile? How are you balancing valuation comfort against higher growth potential?
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We believe March 2026 levels for Mid-Small caps were very attractive and since then markets have normalised the valuation levels. We do believe valuation across market capitalisation be it Large/Mid/Small are quite expensive in certain pockets and appear reasonable in other pockets. Unlike the period between 2020 and 2024 where stock selection need not be the sole criteria of healthy returns, we have entered a different market environment where earnings and valuation differential is very large, and stock selection is extremely important specially with the volatile global environment. Ultimately one needs to focus on earnings/cash flow growth. We believe as a team it is important to identify high growth businesses available at a reasonable price driving optimism.
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Financial services account for about 34% of Tata Large & Mid Cap Fund. What is your current stance on private banks, PSU banks, NBFCs and insurers? Do you think private banks offer the best risk-reward opportunity?
We are overweight on Banks and have a positive view on all lending institutions be it Private Banks, PSU Banks, NBFC, Credit Cards etc. We think credit growth is likely to be strong with NIM (Net interest margin) pressure stabilising along with stable credit cost leading to healthy profit growth and ROE profile. Valuations are attractive given the fundamentals.
Capital goods and chemicals are the two largest sector exposures in Tata Small Cap Fund. What is driving your conviction in these segments, and where are valuations becoming excessive?
We have been extremely selective while choosing portfolio stocks for Tata Small Cap Fund. We have not taken a sector view while adding businesses. Our focus has been to add companies which may deliver strong earnings/cash flow growth and are available at reasonable valuations.
What is your outlook for earnings over the next 12–18 months, and which themes — domestic consumption, private capex, manufacturing, financials or exports — could drive the next phase of market returns?
As of now all segments of the economy are seeing steady growth keeping us optimistic on the economic environment in India. Manufacturing as a segment is showing very positive signals on sustaining high growth over the foreseeable future. However, not all segments are likely to grow in a similar fashion and hence one needs to be selective while identifying companies within the manufacturing space.
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Foreign flows have improved at times, but IPOs, government offers for sale and other primary issuances are absorbing substantial liquidity. Is this a pain point for markets?
Flows and capital raising/divestments are short term technical factors which does impact the movement of the market. However, for long term investors like us technical factors are seen as an opportunity, and we focus more on fundamentals i.e. earnings growth and valuations. As mentioned earlier, India specific factors look positive to us and our confidence in corporate India to deliver healthy profit growth over the next 12-24 months is relatively high. The global backdrop is increasingly challenging and does need to be monitored closely.
What are your broad expectations from the Q2 earnings season and as the base effect of GST starts fading, do you think numbers could disappoint Q3 onwards in select sectors like auto?
We focus on the long-term prospects of business since quarterly variations are quite normal. For example, Auto sector OEMs (original equipment manufacturer) benefit significantly on account of GST cuts starting 2HFY26, and 2HFY27 could see slower growth for the sector due to base effect. However, selectively we do think Auto Ancillary companies may be the right way to play this theme since they have the benefit of global market exposure, and also do business in the industrial/Railway/Defense/Aerospace segments.
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