“It does make sense that from a three to five years perspective, you buy into the mid and smallcap segment. We are all seeing that the numbers are better than the largecap space. Nifty 50 at least, they are much better than the largecap space,” he said.
Most of the high-growth sectors are currently concentrated outside the large-cap space, with smaller companies having greater exposure to the themes that Sonthalia said he alluded to. As a result, the mid- and smallcap segments are likely to benefit from a meaningful growth runway over the next five to seven years, he added.
According to Sonthalia, investors should allocate capital to these segments through systematic investment plans with a three to five-year horizon to capture early-stage growth in emerging sectors.
The Nifty 50 index is currently weighed down by its 50% exposure to banks, information technology and fast-moving consumer goods (FMCG), which face headwinds or sluggish growth, Sonthalia said.
Consequently, market alpha has shifted outside the benchmark towards high-growth themes such as energy transition, high-tech manufacturing, semiconductors, artificial intelligence data centers, medical and retail platforms.
These sectors are predominantly represented in the broader market, providing a runway for smaller companies to scale into largecaps over the next five to seven years, he said.
Sonthalia added that India’s manufacturing sector is gaining momentum, with the manufacturing index at an all-time high and China’s currency challenges providing an advantage.
He also highlighted energy transition, AI data centers, semiconductors, high-tech manufacturing and CDMOs as key themes, saying thematic funds could outperform diversified funds.
He said he remains constructive on the automobile sector despite a higher base creating some pressure on growth in the second half of the year. Festive demand remains encouraging based on channel checks, while the recent time correction in some auto stocks has made the sector more attractive from a two- to three-year perspective.
His preference extends to both original equipment manufacturers (OEMs) and auto component makers. Among larger companies, he pointed to Eicher Motors and Maruti Suzuki, while Lumax Auto Technologies and Sansera Engineering were among the component companies discussed. Sansera also provides exposure to aerospace and defence alongside its internal combustion engine business.
Large private sector banks are another area where Sonthalia sees value. Lower funding costs, healthy credit conditions, abundant liquidity and a potential recovery in retail lending could support the sector. He also sees current valuations as providing a margin of safety, although management transitions at some banks remain a factor to watch.
Sonthalia is also not writing off Indian IT services despite concerns around the impact of AI on the sector. He believes valuations have already factored in a weak growth outlook and sees the possibility of IT companies adapting as AI adoption moves further towards the application layer.
“I am really believing that there’s a very good contra play to add into your portfolio from the next two to three years point of view,” he said.
For full interview, watch accompanying video
