Indian stocks have staged an impressive recovery from their March lows, with benchmarks as well as mid and mid indices. small cap stocks bouncing suddenly. Cooling crude oil priceeasing volatility in commodities and cryptocurrencies, and the resilience of corporate profits have all contributed to the situation. walkrecovery. However, investor confidence remains measured as geopolitical uncertainties continue to dominate the news.
Speaking to ET Now, Samit Vartak of SageOne Investment Managerssaid that although markets have recovered significantly, sentiment has not yet become fully bullish.
“Yes, I mean, sentiments are still jittery because there is so much uncertainty. Things are changing daily. We have bounced back from the lows, but if you look at our highs, Nifty is still 9-10 per cent away from where we had reached, maybe in September 2024. So, in that regard, sentiments are far from what we can call bullish,” he said.
He believes that one of the biggest problems for India – crude oil prices – has eased considerably, although geopolitical developments remain unpredictable.
“I think the worst case scenario for India, which was mostly crude oil, is probably behind us. We don’t even know, we hope things will improve, but there is no certainty about that given Trump is in the leadership position and then with Iran, where things are changing very, very quickly,” he said.
Strong profits give confidence
Despite ongoing uncertainties, Vartak believes corporate earnings continue to paint an encouraging picture for investors.
According to him, small-cap companies saw a median earnings growth of almost 25% in the previous quarter, while mid-cap companies saw growth of around 22-23%. Even large-cap companies saw healthy earnings growth of around 18-19%.
Although rising crude prices could temporarily hit profitability, he expects investors to look beyond short-term disruptions.
“There could be some slowdown due to crude price inflation, but again, investors would know that this will be a transitional phase and it could probably have an impact for a quarter or two, but investors would still be looking 6, 9, 10, 12 months beyond that,” he said.
He also pointed out that several companies could actually benefit from lower raw material costs, particularly those that have already implemented price increases during periods of high raw material prices.
“Many companies could significantly improve their margins in the future… We saw the same thing happening in the post-Covid period, when raw material prices rose and companies raised prices, but when things calmed down, no one really brought prices down,” he said.
Why he remains bullish on small caps
Vartak recalled that he turned positive on the mid- and small-cap segment when valuations corrected sharply earlier this year. The main trigger, he said, was comfort in valuations rather than sentiment.
He noted that the small-cap index’s price-to-book ratio had fallen below the 25th percentile of its five-year historical range, a rare occurrence previously seen only during the COVID stock market crash.
Unlike the price-to-earnings ratio, which can fluctuate significantly with earnings cycles, Vartak prefers price-to-book as a more stable valuation measure.
Using global semiconductor companies as an example, he explained that high profits can sometimes make PE ratios look cheap, even when valuations are stretched.
“To me, the price-to-book ratio is a much better multiple than the PE multiple. The PE multiple tends to be very volatile,” he said.
He added that Indian small-cap valuations remain below their historical median while earnings momentum continues to strengthen.
“I think the price-to-book ratio of small caps is quite reasonable. They are significantly below the median of the last five or six years and, more importantly, earnings growth has accelerated,” he said.
AI acquisitions remain a high-risk bet
The discussion also touched on the Indian IT sector, where companies are increasingly looking for acquisitions to strengthen their artificial intelligence capabilities.
While acknowledging the strategic intent behind such deals, Vartak cautioned investors against assuming positive outcomes.
He said acquisitions carry considerable execution and integration risks, particularly when companies move into unfamiliar growth areas.
“Companies are trying multiple things and it may not be something that is very predictable. Acquisitions are very uncertain because the integration…it’s a new growth path for them,” he said.
He advised investors to remain cautious.
“I would definitely take these acquisitions with a pinch of salt. They carry high risk. If it comes to fruition, yes, it can definitely give you a big delta, but I’m not so sure,” he said.
Stock selection matters more than sector selection
Although several themes such as defense, power equipment and auxiliary power equipment continue to attract investor interest, Vartak believes that many of these sectors have become prohibitively expensive.
He noted that several frontline defense companies are now trading at valuation multiples well above their historical averages, leaving limited margin for error. Instead of looking at popular themes, he recommends identifying companies whose growth and valuations remain favorable.
His current focus areas include export-oriented industries including textiles, specialty chemicals and contract development and manufacturing organizations (CDMOs). He is also positive on export-focused defense companies, gold finance companies and some non-banking financial companies capable of generating sustainable growth of over 20%.
Interestingly, he believes that the best opportunities often lie outside of well-known market leaders.
“Choosing the right theme or space is not enough. Choosing the valuation within it is also important,” he said.
He highlighted that several newly listed companies in the power auxiliaries and specialty chemicals sectors continue to trade at significantly lower valuations than their established peers, despite attractive growth prospects.
“The reason I’m positive on small caps is because it’s a space where you have a combination of growth and valuation, which isn’t really available in the blue chip stocks that are pretty well known to everyone,” he said.
