Upadhyaya also says that in the case of pharma sector, the earnings delivery, by and large, has remained in line with market expectations. There is some money to be made even now from pharma.
What is the view on pharma? Also, within pharma, there are a lot of niche verticals. Where would you incrementally put money to work, if at all?Harsha Upadhyaya: The pharma exposure in most of our portfolios would look like a neutral to slightly overweight position. However, that is not because of the top-down view in the sector. We have been liking some of the pharma companies on a selective basis and those are cumulatively making up an overweight or a neutral position against the index. This is one sector where you cannot probably have a top-down view because each company is very different and they could be placed very differently in terms of regulatory approvals and stuff like that.
So, overall, in this market where valuations have run up for a lot many sectors, pharma remains a sector that has also moved up but not to the same extent as some of the domestic cyclicals. The earnings delivery, by and large, has remained in line with market expectations. So, there is some money to be made even now from pharma.
From the current juncture, do you think one should now be prepared for another year of flat returns, no returns or negative returns?
Harsha Upadhyaya: We have been making these predictions for quite some time but given the kind of liquidity that we have been seeing that has not panned out. But the way I see it is if you look at the last three-and-a-half, four years from the lows of COVID, the mid and smallcap basket has delivered much better earnings compared to large-caps. That positive spread has been close to about 15-16% CAGR and that is unlikely to continue for a long time.
This year itself that is expected to come down to somewhere around 8% to 10% positive spread in favour of mid and small-caps. However, if you look at the first quarter of this financial year, midcap and smallcap earnings have been more or less similar to large-caps and overall been very muted. So, this year itself that can narrow substantially.
Anyway, for FY26, we are expecting the mid and small-cap earnings growth to be more or less similar to large-caps. If any of these things were to happen as per our expectations or are ahead of our expectations, that means that the market would start to look at some of these numbers and start discounting. So, even if you expect further liquidity coming into the market, finally, the earnings delivery is going to be very crucial.
If that positive spread reduces for mid and small-caps, then you are going to see a period of consolidation that could range from very low returns to probably higher volatility in terms of overall returns.I would not ask you to predict what is going to be the return, but what do you think can derail this DII flow story? Historically, how have these cycles panned out? Is this time going to be different vis-a-vis SIP flows coming in or is there going to be a time-wise correction? People could either stop SIPs or stop putting incremental money to work. What will happen?
Harsha Upadhyaya: The SIP flows have been growing month-on-month for quite some time now and that is also a very sticky flow. So, until and unless we see a very large downside in the market or a very large time correction, I think most people would continue to remain positive on the SIP route and continue to invest in markets. So, there is very little to guess that any lower number will pan out on the SIP side. However, the kind of inflows that we are seeing in some of the NFOs in the mutual fund sector, wherein thematics have been raising a lot of money, do not appear to be sustainable over the medium term. The themes will change and also there will be some disappointments on the way because thematics come with a higher degree of risk and there could be a mismatch in terms of investor expectations and the actual delivery of performance from those themes, etc.
So, it is not going to be as easy as what we have seen over the last three-and-a-half years. At this, if money is flowing into most of the thematic schemes, there is a bit of a worry that one needs to have, that is something that could be up for fluctuations in terms of flows. In case the experience of investors changes against their expectations, you can see a reversal in those flows. However, SIP flow should continue to remain quite strong in the overall scheme of things.
