India’s broader market is likely to continue outperforming largecap stocks as stronger earnings growth and steady domestic inflows support midcap and smallcap companies, according to Pankaj Pandey, Head of Retail Research at ICICI Securities Ltd.
He also believes private sector banks, premium consumption businesses and hospital chains remain well placed, while any delay in implementing the Merchant Discount Rate (MDR) proposal is unlikely to materially alter the outlook for payment companies.
Pandey said smallcap companies continue to offer superior earnings growth compared with larger peers, and he expects the trend to continue over the coming quarters. He added that domestic investor flows are increasingly shifting towards the broader market, providing further support to mid- and small-cap stocks.
“Largecap earnings growth is somewhere about 15-16%, midcap is 24-25%, and then smallcap is 30% plus, and we don’t see that changing.”
He said domestic investors are allocating a larger share of their investments to mid- and small-cap funds than in the past.
“About 58% of the domestic flows are going towards midcap and smallcaps… Earlier, it was somewhere closer to 40%.”
According to Pandey, the benchmark indices have lagged mainly because of weakness in heavyweight sectors such as private banks and largecap IT, while a much broader universe of companies continues to deliver stronger growth. He said stock selection within the midcap and smallcap space will remain important.
Private banks, gold loan NBFCs remain preferred
Within banking, Pandey prefers Axis Bank among large private lenders, citing stronger loan growth and attractive valuations. He said HDFC Bank is still growing below the industry average and may not see a sharp recovery until business growth improves.
He expects the recent 25-basis-point rate hike to improve private banks’ profitability by around 4-5%.
Among NBFCs, Pandey expects retail lending to grow 18-20%, while the gold loan segment could expand by around 40%. He said investors can gain exposure through companies such as Muthoot Finance and Capri Global, while diversified lenders including Bajaj Finance and L&T Finance also remain attractive.
Beyond lenders, he continues to favour asset management companies because of robust domestic investment flows.
Premium consumption remains resilient
Pandey also expects premium consumption to remain resilient despite inflation. He said investors should not read too much into September sales numbers because last year’s festive season began later in the month, making comparisons difficult.
He expects companies such as LG Electronics India and Redington to benefit from festive demand. Within automobiles, he prefers Hyundai Motor India and Mahindra & Mahindra, while Phoenix Mills offers exposure to premium consumption through organised retail.
He also highlighted watches as one of the fastest-growing consumption categories.
Hospitals offer long-term opportunity
Pandey reiterated his positive outlook on healthcare, particularly organised hospital chains and dialysis provider NephroPlus.
He said dialysis services remain underpenetrated in India, allowing organised players to continue delivering healthy double-digit growth. Hospital operators are also expanding capacity over the next four to five years, even though new facilities may initially weigh on margins.
Pandey believes India’s shortage of healthcare infrastructure provides a long runway for growth and advised investors to use any correction in hospital stocks as an opportunity to accumulate quality names.
MDR delay may hurt sentiment, not fundamentals
Commenting on reports related to the proposed Merchant Discount Rate (MDR), Pandey said digital payments companies such as Paytm and Pine Labs could face some short-term pressure if implementation is postponed.
However, he believes the market reaction would largely be sentiment-driven and does not expect the delay to materially change the long-term outlook for the sector as long as the proposal is only deferred and not withdrawn.
“If it is a deferment post festive season, then I don’t see a significant challenge.”
Pandey said the market had expected payment service providers to receive a share of the proposed MDR pool, so any delay could affect sentiment temporarily. Banks involved in the payments ecosystem, including issuing banks and payment service providers, could also see a limited reaction.
“Sentimentally, we can see some impact, but nothing extraordinary.”
He added that the impact would become more meaningful only if policymakers reverse the proposal altogether, which is not his base-case expectation.
For the full interview, watch the accompanying video
ICICI Securities’ Pankaj Pandey sees premium consumption, private banks and hospitals leading market
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