Midcaps and smallcaps to contribute to profitability this time: Hiren Ved

People should always focus on high quality companies but the opportunity set itself is going to be very different from the ones that we saw in 2018 and 2019 where the markets got very narrow on the top. I see a much wider breadth of industries starting to contribute to the overall profit pool, says Hiren Ved, Co-Founder, CEO, Director, and CIO, Alchemy Capital Management.

The rising tide lifts all and a lot of people are now advocating that one should narrow the focus. You also say that one must focus on those companies that are able to withstand the pressure of rising commodity prices. So, should one focus on the top couple of companies in each sector?
Actually I believe that while there has been a very strong consolidation in every sector and the big are getting bigger and the strong are getting stronger, the breadth of the market is likely to remain much wider and the opportunity set is likely to remain much wider.

People should always focus on high quality companies but the opportunity set itself is going to be very different from the ones that we saw in 2018 and 2019 where the markets got very narrow on the top. That is likely to change significantly going forward. There are two trends which will play out simultaneously. One is that in several sectors, where there is large unorganised market and it is fragmented, the leaders will continue to consolidate and have a larger share of the profit pool that is not going to stop but at the same time, there are new sectors or sectors which have not done anything for the last many many years.

Capital goods, manufacturing, autos, auto ancillaries -- there are so many sectors which have had very tepid earnings in the last 10 years. Commodities, metals will also contribute to the earnings growth. What we had in the last three-four years was just extreme concentration of profitability at the top. This time, while the top players will continue to consolidate on the profit cycle, I see a much wider breadth of industries starting to contribute to the overall profit pool and that is what we should not miss.

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Both these trends are likely to play out simultaneously over the next few years. For example, there are new emerging growth stories like specialty chemicals. Look at the aggregate profits of those companies three-four years ago and what could happen to that cohort three to four years down the line. The sector is likely to get much bigger both in terms of market cap and in terms of profitability.

I do not expect the breadth to shorten. I expect the breadth to widen and both mid tier and small tier companies will also contribute to profitability this time unlike in the last few years.

Can this profitability pool be disrupted by the new age companies that are headed to Dalal Street? Even before Diwali, we may get a Paytm, a Nykaa, a policybazaar, a Mobikwik; soon thereafter there will have an Oyo and the list goes on.
There is definitely a large queue of IPOs of new economy companies. These are going to broaden the opportunity set for investors in the market. Investors have to look at these companies very differently than how they have looked at it traditionally. The path to profitability for these companies is probably going to be longer. It may take anywhere from the next two to four to five years for these businesses to become extremely profitable like some of the great franchises today. But one will have to be very picky and choosy about which of these new age companies to go for.

Given the fact that the amount of capital available in the capital markets is also growing, I do not worry about the fact that the IPOs are going to draw out all the liquidity like it used to happen in the past. Far more capital is coming into the financial markets and the depth and the participation are improving. The new IPOs can easily be absorbed given the kind of liquidity that we have.

There are even more sophisticated investors who are willing to take those bets and wait it out before these companies start becoming profitable. There will be intermittent volatility and we are willing to take that, then this is the game for you. Otherwise, just stick to the traditional matrix and it is fine, there are opportunities all over the place.