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The beneficiaries of geopolitical tensions, China plus one policy and supply constraints, are more in midcaps and in sectors like chemicals and textiles. These valuations are high for multiple reasons and especially it is also the outcome of the rally which has happened in the last two years. If you take any sector from consumer to IT to any other financial services, the only segment where it remains as always at discount to the large cap. When it comes to midcaps, your observation is right that the valuations are at a premium. What is the earnings quality they are likely to post because these companies get more disrupted on margin front and rising rates scenario? How do you analyze the valuation? They are trading as a basket. What are your thoughts on midcaps and smallcaps on valuation terms? Traditionally, they traded at discount to large caps. When it comes to this inflation, the consumption stories definitely get hurt because there is a double whammy of raw material price inflation on one hand and demand translation because of that. What matters to the consumption story of India is crude oil and because it adds a huge burden on the country. Going ahead, when this inflation abates remains the key question, especially since it is triggered and hovering around geopolitical issues and this could be repeated. It has also been around utilities and this has been the trade so far in the market. The outperformers in the market so far in this calendar year have been producers so it can be a commodity producer. What are your overweights right now? If interest rates continue to rise, it is not coming down in a hurry then, which sectors will perform well in this kind of a market?Īlready, the market has played out a part of it. It is definitely supply led and if there is some reservation, then that should come down. It is not that demand is increasing so much that it warrants such high prices. Especially for India, what matters is crude and that is where the focus is. In my opinion, if the sanctions and the associated geopolitical issues abate in near term, that can lead to the reduction in the raw material price pressure. But the recent trigger for it has been supply constraint and that too triggered by geopolitical issues. Though in some commodities, it got aggravated more by under investments in the last five to 10 years. This time around, it is more of a supply constraint-led and when it comes to supply constraints, the near-term triggers for this inflation have been geopolitical issues. Unlike normal times, probably during 20, it was more demand-led cost inflation, maybe commodities, maybe power or any other element. What is different when it comes to margin pressure is the cost inflation because of supply constraint. So yes, it remains a concern in the near term.ĭo you feel that this is the worst of the margin pressure and inflation peak would be made between this and the coming quarter?Īnd it is. However, apart from IT, the issue is different but while in other sectors the issue got aggravated by the recent war situation and associated with raw material prices across the board, the cost inflation has actually got reflected in some of the results in cement and among others. Some of these elements were probably known in the market and the market has started cutting earnings for the same reason. It has nothing to do with inflation in case of NIMs, but broadly that has been the same theme so far. It may be in IT, in some cases it is also about the NIMs which also saw some pressure. So as far as the result season is concerned, there have been some concerns over the margin across segments. But normally, it is observed that if revenue growth is in mid teens or higher, then the margin pressures are absorbed while if it is lower, then it becomes a challenge to absorb it. On the results front, as usual it starts with IT and then financials and the other sectors. How did you analyze the commentary and the quality of earnings so far? It clearly shows that top line growth exists, but margin pressures are there. What are you making on the quality of earnings which have come so far? Almost half of the Nifty earnings on Nifty weightage terms, have declared results. The weightages of that segment is higher in the largecaps and that is why on the index front also, largecaps have underperformed midcaps,” he says Shreyash DevalkarSenior Fund Manager-Equity, Axis Mutual Fund. “Among largecaps and especially Nifty, financial services and consumers which comprise around 50-55%, have got derated because of the challenges in the consumption segment.