Large Caps Gain Edge Over Small Caps: Aditya Birla AMC Strategist

Large Caps Outshine Small Caps

Harish Krishnan, Co-Chief Investment Officer and Head of Equity at Aditya Birla Sun Life AMC, stated that large-cap stocks now present a more attractive risk-reward profile than their mid and small-cap counterparts. This sentiment stems from evolving sector trends and significant fund flows, he explained.

Shifting Market Leadership

Market leadership is undergoing a transition, moving away from business-to-business (B2B) sectors towards consumption-driven themes. Krishnan noted that several sectors which have underperformed in recent years may lead the next market cycle. These include banking, IT services, metals, cement, textiles, chemicals, fast-moving consumer goods (FMCG), oil and gas, and energy. These sectors typically carry a higher weightage in large-cap equities.

Small Cap Crowding

Krishnan identified a considerable overcrowding in small-cap stocks. He observed that approximately 23% of the Indian mutual fund industry's assets are concentrated in small caps, despite these companies contributing only about 11% to the total profit pools. This imbalance suggests that the risk-reward proposition currently favors larger companies.

Top Sector Picks

Looking ahead over the next 12 to 18 months, Krishnan pinpointed three primary sectors: consumption, IT services, and materials. Government fiscal and monetary support measures are bolstering consumption demand, while companies are prioritizing volume growth over margins. Many FMCG firms are adjusting margin guidance and using cash flow for strategic acquisitions.

In IT services, Krishnan anticipates benefits as businesses adopt artificial intelligence, with currency tailwinds also supporting the sector. The materials sector, encompassing chemicals and building materials, presents opportunities as recent capital expenditures are poised to translate into revenue growth. Metals are also seen as a supportive theme following robust past performance.

Consumer Durables and Equities vs. Gold

While FMCG stocks may appear expensive, many companies are demonstrating consistent cash flow generation and a renewed focus on volume. Krishnan's team prefers niche personal care and food companies less affected by rapid competition. Opportunities are also identified in consumer durables, where large revenue bases exist alongside lower margins. He noted a sharp decline in valuations for business-to-consumer durable companies over the past five years, contrasting with valuation expansion in B2B firms. "We are finding value on the consumer side," he commented.

Medium-term, equities are expected to outperform gold, even amidst global uncertainties. Krishnan cited historical instances where equities, relative to gold, bottomed out during periods of peak fear. He recommends a higher allocation to equities for medium-term investment goals, cautioning against relying solely on price momentum for precious metals.

Selective Small Cap Opportunities

Market weakness is largely attributed to investor caution and profit-taking in mid and small caps, rather than new negative triggers. While overall earnings growth may improve, upside potential for small caps as a group could be capped by high ownership. Nevertheless, selective opportunities persist. His team is actively investing in consumer-focused small-cap stocks within materials and consumer durables that exhibit steady cash flows and have completed significant capital expenditure. Krishnan emphasized the need for a fresh investment approach, as the nature of winning stocks will differ from those that led previous market cycles.