Even as Indian equities have staged a sharp recovery from their March lows, market sentiment remains far from euphoric, according to Samit Vartak, Founder & Chief Investment Officer (CIO) at SageOne Investment who believes investors should stay constructive, but cautious, while navigating the current environment.
“Sentiments are still jittery because there is so much uncertainty… things change on a daily basis,” Vartak said, noting that benchmark indices are still nine to ten per cent away from their previous highs. Despite the lingering volatility, Vartak believes the worst may be behind the market, particularly as key headwinds such as crude prices begin to ease. “The drag for India was mainly crude. I think the worst-case scenarios are probably out,” he said, while cautioning that geopolitical risks, from shifting global politics to tensions in West Asia, remain unpredictable.
Earnings strength driving optimism
What underpins his optimism is the resilience of corporate earnings, particularly in the broader market. “If you look at the last quarter, small-cap median earnings growth was close to 25 per cent, mid-caps were around 20–23 per cent, and large caps were at 18–19 per cent,” Vartak pointed out.
Any near-term inflationary pressure from crude, he argued, is likely to be temporary. “Investors typically look six, nine, or 12 months ahead. The impact may be there for a quarter or two, but it is transitory.”
He also highlighted an often-overlooked positive: margin expansion. “Companies take price hikes when costs go up, but they don’t necessarily reverse them when input costs fall,” he said. “So margins could actually improve meaningfully over the next few quarters.”
Why small caps still look attractive
Vartak remains firmly constructive on small-cap stocks, arguing that valuations and fundamentals are both supportive. He pointed to the sharp correction earlier this year as a key turning point. “The price-to-book of the small-cap index fell below the 25th percentile of its five-year range, something that rarely happens outside events like COVID,” he said.
Unlike the widely used price-to-earnings (PE) ratio, he believes price-to-book (P/B) offers a more reliable valuation lens. “PE multiples can be very misleading, especially in sectors where earnings are cyclical or temporarily elevated,” he explained. “For India, small-cap valuations on a price-to-book basis are still below their historical median.” That, combined with improving earnings visibility, keeps him optimistic. “Earnings growth momentum will continue irrespective of geopolitical noise… small caps are not that heavily impacted,” he said.
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