Here is what the research head of India’s largest mutual fund thinks 

SBI Mutual Fund’s Head of Research, Ruchit Mehta believes that capex-oriented names across capital goods, engineering, and construction spaces have opportunities for growth. In a conversation with Moneycontrol, Ruchit Mehta, Head of Research, SBI Mutual Fund, shared his quick takes on the small cap space, opportunities for investing in IPOs, and what is next for the Indian equity market in 2024.

Edited excerpts

What is your outlook for 2024?

We remain constructive on equities, with the caveat that given the elevated levels, return expectations should be moderated. The coming few months can potentially be more volatile as we in the midst of the general election cycle. We are (also) more constructive on large caps compared to mid and small caps.

Also read: Don’t look at stock prices every day; hard work is over-rated, says CIO of India’s largest mutual fund

Do you think small caps are overheated right now? Are current valuations supporting their potential for growth?

Small caps are expensive, especially when looked at in the context of valuations of large cap stocks. Typically, one would expect small cap stocks to have a better or faster growth profile as the company typically tends have a smaller revenue base. Current small cap stock valuations (on average) seem to be pricing in significant levels of growth, leaving limited room for earnings to surprise positively.  Incrementally, there is a limited margin of safety in smaller cap companies.

Which sectors/segments are you overweight on and why? Which sectors are you avoiding?

We continue to like capex oriented names. Companies across the capital goods, engineering, construction spaces. We also have been constructive on consumer discretionary names. The BFSI sector is also attractive as valuations are modest, especially as growth and ROE profile is decent. We have been underweight on IT, but incrementally it seems the sector may have bottomed out. If global growth outlook improves, then the sector can benefit through better growth opportunities.

The IPO pipeline has been great over the past few months. Is that opportunity set looking like a better hunting ground compared to the listed universe? 

It is very company specific. We have been very conscious on the valuations at which the IPO is happening. There is a temptation to buy into a new listing, given the fervour that’s there, but one has to be conscious of the valuation being asked.

Also read: How the CIO of the country’s largest MF house hit pay dirt and lost his shirt betting on probabilities

Any parameters you are watching specifically to assess market direction? What should investors be watchful of?

Earnings growth is the key variable to focus on. If earnings continue to be robust, as they have been in H1FY24, then there can be more legs to this rally.

Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.