From the role of capex in driving future growth to the strategic utilize of contrarian investing during market cycles, Patil sheds light on how large-cap companies provide stability, consistent returns, and compelling risk-reward opportunities.
He also offers his perspective on the revived IPO market, highlighting how selective, differentiated investments can create value amid a surge of new listings. Edited Excerpts –
Kshitij Anand: Let us receive your perspective on the market right now. We have seen quite a bit of ups and downs, but in the last 12 months or so markets have largely been flat to slightly negative in terms of returns. Yes, there are a lot of external headwinds that Dalal Street has to battle with at this point in time, but the good part is that the government is lconcludeing support to ensure that we do not fall much further, even as FIIs continue selling. Over to you—how are you seeing at the markets right now, and how do you see them from a 6-month or 12-month perspective?
Mahesh Patil: If we go back a bit and see at the period post-COVID, we saw a sharp rally in the market. Indian markets did very well for the next three years, supported by very strong earnings growth during that period.
Prior to that, earnings growth was subdued, tracking below the long-term average and hovering in the mid-single digits. Markets had probably run slightly ahead of earnings growth as well.
Earnings would have compounded at around 20% CAGR from FY21 through FY24, and markets also rallied becautilize of large liquidity flows, mainly from domestic investors.
In the last year, however, markets have entered a consolidation phase due to both internal and external factors. On the internal front, monetary policy was restrictive in the early part of the last fiscal, and even fiscal spconcludeing slowed due to consolidation.
As a result, earnings growth fell from around 18–20% CAGR in the prior three years to mid-single digits over the last year. On the global front, trade talks, tariffs, and uncertainty also weighed on performance.
India, therefore, underperformed and consolidated, while some global markets—especially other emerging markets such as China and parts of Asia, as well as Europe—bounced back on better valuations and relative growth outsee.
FIIs rotated towards those markets, leading to heavy selling in India. That did put pressure, though the impact was offset by domestic flows, which supported contain the drawdown to around 10–12%, even when global markets corrected.
Now, post consolidation, valuations are seeing more reasonable. Large-cap Nifty is about 3–4% higher than its long-term average, while mid- and tiny-caps, which had rallied sharply, have corrected but remain relatively expensive.
In the last couple of quarters, however, domestic factors that were inhibiting growth have started to ease. Monetary policy is now much more supportive, with 75 basis points of rate cuts and lower inflation, which opens the door for further easing. Retail lconcludeing, which had slowed due to RBI restrictions, is now on a healthier footing with deleveraging, creating conditions conducive for recovery.
On the fiscal side, the government has recently shifted towards stimulating demand—personal income tax cuts worth almost ₹1 lakh crore, followed by a GST cut, are expected to boost consumption. Earlier, the government focutilized on supply-side measures like capacity creation and capex, which are long-term positives, but near-term demand requireded a push.
This should revive the consumption cycle. As demand picks up and capacity utilization improves, private capex should follow, setting up a virtuous cycle.
From here, earnings growth should improve from the current ~5%. While we are not expecting a dramatic jump, nominal GDP growth of ~9% could inch up to 10–11%, and earnings growth should be slightly higher, in the 10–11% range. In the second half, we expect earnings growth led by consumer-facing sectors, relocating into double digits.
Liquidity dynamics should also improve. With India underperforming other emerging markets by nearly 25–27% in dollar terms this year, the valuation premium India utilized to trade at has narrowed to historical levels.
Hence, aggressive FII selling may slow down, though tactical outflows on global news can still happen. Once earnings growth revives, flows should return.
On the external front, tariffs remain a concern. While their direct impact on earnings is limited, sentiment has been hit becautilize India could have benefited more from global supply chain shifts.
These high tariffs, however, are not sustainable, and nereceivediations are ongoing. Over the next three months, they could be brought down to 18–20%, which would be manageable and rerelocate India’s disadvantage versus peers. That would also be a sentiment booster.
Overall, markets can offer reasonable upside over the next couple of years. The key driver will be the revival of the investment cycle, as it is crucial for job creation and sustaining growth.
The external tariff crisis could, in fact, be an opportunity for the government to undertake bolder reforms, much like GST was. Reforms that stimulate capex, attract capital flows, and build investor confidence will be critical for sustaining economic momentum.
Kshitij Anand: Good that you brought up tariffs, becautilize another external headwind recently emerged for the IT sector, particularly on the visa front. Do you see an extconcludeed impact on the industest? The sector is already weighed down by the global slowdown, and the emergence of GenAI is also caapplying some panic. While GenAI will impact every industest, IT may feel the effect first. How are you seeing at the IT sector, and is it underweight in your portfolio at this point?
Mahesh Patil: We are not very negative on IT. In fact, we see it as a good contrarian sector to consider. The sector has already underperformed and tconcludes to react sharply to even minor news flow. It is very efficient in discounting events quickly.
On the H-1B visa front, while costs have gone up, the direct impact is limited. The number of incremental applications this year is expected to be around 3,000 versus ~10,000 earlier, and the alters apply only to new visas, not existing ones. The estimated earnings impact is just 1–3%, which is not very significant. Companies can also offset some of this through greater offshoring.
The hugeger concern is if restrictions on services are imposed. But that seems unlikely, as services contribute to a U.S. trade surplus, and many U.S. tech giants also depconclude on Indian IT. Any restrictions would also face congressional hurdles. So, we consider the market has largely digested this risk.
The real driver will be discretionary spconcludeing by U.S. corporates. Growth has slowed from 8–9% to 2–4% in the past year, but there are signs of bottoming out. With U.S. rate cuts, confidence should return, leading to higher discretionary spconcludeing.
On AI, while productivity gains could reduce spconclude on traditional services, overall technology spconclude should rise as companies adopt AI-driven transformation. Indian IT firms are also adapting, much like they did during the digital disruption of 2015–16.
Valuations are now reasonable, though not cheap historically. With slower overall market growth, single-digit IT growth still sees attractive, especially with healthy free cash flow and dividconclude yields of 3–5% for large IT firms. Even moderate growth of 6–7% plus dividconcludes can deliver double-digit returns.
Additionally, the recent 5% rupee depreciation provides a tailwind for margins, which had been flattish for the last few years. From an ownership perspective, FIIs have cut exposure significantly, leaving room for re-entest.
So, while it may not play out immediately, over a one-year horizon, IT offers a favorable risk-reward profile and sees like a good contrarian bet.
Kshitij Anand: Let me also receive your perspective on the large-cap fund, which is a longstanding fund that you have been managing. Could you quickly go through the performance as well? Large-cap stocks have become more of the flavor of the month at this point, as tiny- and mid-caps might be seeing slightly stretched in terms of valuation. Over to you on that.
Mahesh Patil: When we talk about large-cap, we are referring to the top 100 companies by definition. These companies are leaders in their segments, have strong balance sheets, and are capable of creating large capex investments for future growth.
Over the last three to four years, many of the larger conglomerates have undertaken significant capex, which will drive future growth.
In the current environment, where there is global uncertainty but domestic recovery is likely, large-caps offer more stability due to their well-established nature, strong cash flows, and robust balance sheets.
Additionally, this sector has not seen excessive money chasing it. Post-COVID, a lot of retail money has entered the market, and domestic participation and ownership have surpassed FII levels over the last four years.
This money primarily flowed into mid- and tiny-caps, while large-caps have seen some selling due to negative FII flows over the last two years.
Hence, there is no significant froth in the large-cap space. If you see at Nifty returns from pre-COVID to now, they are largely in line with earnings growth, providing comfort and a margin of safety. Large-cap companies tconclude to compound in line with GDP growth. That is the first reason why we are comfortable from a risk-reward perspective.
Some large-cap companies also have global exposure. For example, IT has underperformed both in price and earnings terms due to the global slowdown. If global sentiment improves, this could support those sectors.
Regarding the large-cap fund I manage, which has been around for more than 20 years, the primary objective is to outperform the benchmark by a reasonable margin. This is crucial becautilize investors are comparing us with passive funds, and Nifty is the largest ETF in the space.
To generate alpha, we focus on disciplined deviations from the benchmark and take calculated portfolio risks. The aim is not to outperform every single year but to do so consistently over a three-year horizon.
Over these 20 years, we have navigated multiple cycles and drawdowns. Contrarian investing has supported becautilize large funds, like ours, required to allocate significant capital. Market crises present opportunities to take contrarian positions in beaten-down sectors, generating alpha.
While we have not seen large corrections since COVID—the recent bull run had a maximum drawdown of ~15%, compared to 25% in earlier bull runs—mid- and tiny-cap drawdowns can be much larger. Large-caps are therefore relatively safer.
Long-term, India’s growth story will continue to create emerging companies that may start as tiny-caps and eventually become large-caps. Large-cap is not the only way to play the market, but at this junction, risk-reward is favorable.
We maintain a 10–15% allocation to mid- and tiny-caps in the fund, focapplying on emerging companies with growth potential to eventually become large-caps. SIP investors can continue to participate in mid- and tiny-caps, as timing the market is difficult.
Kshitij Anand: Let me receive your perspective on IPOs. How are you reading the trconclude, given the influx of new companies into Dalal Street?
Mahesh Patil: In the last six months, the IPO market has revived. After June–July last year, the IPO pipeline had dried up due to market correction and weak sentiment. In the past three to six months, it has picked up again.
The activity, both in terms of funds raised and secondary sales by PE investors or promoters monetizing investments over the last five to seven years, has reached peak levels, touching nearly 2% of the overall market cap on an annualized basis—the highest ever in some periods.
The IPO market has been a significant driver, but our approach has been prudent. Around two years ago, we reduced the number of IPOs we participate in becautilize it became challenging to track so many companies deeply.
There was also considerable froth in the IPO space. Many companies that went public a year ago are now trading below IPO price, which reinforces the required for selectivity.
The new pipeline is substantial, with larger companies raising funds exceeding $1–2 billion. Many are differentiated or new-age businesses disrupting existing sectors, with high growth trajectories. We focus on companies with visionary promoters that offer unique opportunities.
However, a large supply of IPOs can put short-term pressure on the market, as prices are influenced by demand and supply. In the longer term, fundamentals will drive performance.
Our approach remains selective, focapplying on differentiated companies rather than adding “me-too” businesses, even if they appear cheap, ensuring alignment with our valuation framework.
(Disclaimer: Recommconcludeations, suggestions, views, and opinions given by experts are their own. These do not represent the views of the Economic Times)
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