Big surge in large caps not reason enough to switch to cheaper scrips: Experts

Many blue-chip stocks like TCS, HDFC, Bajaj Auto, and L&T, among others, are near their life-time highs, and some retail investors are thinking of booking profits in them and switching to other stocks that are quite far from their previous highs, say some advisors. The reasoning is simple — scope for further appreciation is limited when a stock hits an all-time high. So, it is better to take profit, and move to a stock that has some catching up to do.

“Most retail investors pay little attention to valuations, or fundamentals of companies. In every bull run, they sell blue-chip stocks when they have run to new highs and switch to stocks which are yet to move,” says Anup Bhaiya, MD and CEO, Money Honey Financial Services. However, experts scoff at this logic, and caution investors against placing their calls on the basis of the historically high stock prices.

“Earnings growth of large companies is consistent and is likely to be higher compared to mid and smallcap companies over a three-year period. We do not recommend switching out of large-cap companies. After the recent run-up, some mid-caps appear expensive over large-caps, leaving lesser margin of safety,” says Rajesh Cheruvu, chief investment officer, RBS Private Banking.

Future is Not Bleak for Them

Experts say many such stocks have run up due to good performance by the companies in the recent past, and they also have a bright future. “Many large cap companies, despite the economic slowdown, have exhibited strong earnings growth and expanded margins in the last five to six quarters,” says Vikram Dhawan, director, Equentis Capital. Experts add that such companies would benefit from the policy initiatives by the new government to vive the economy.

“As and when the economy turns around, these largecap companies will be big beneficiaries due to their strong execution capabilities,” says Yogesh Nagaonkar, VP — institutional equities, Bonanza Portfolio. He recommends L&T. TCS also finds favour with analysts despite touching an all-time high of Rs 2,492. “The US economy is doing well, with IMF expecting GDP growth of 2.8% in 2014 and 3% in 2015.

This, in turn, will result in higher discretionary spend leading to higher orders for Indian companies,” says Ankita Somani, research analyst, MSFL Research. She expects TCS to record a revenue growth of 5% for Q1. HDFC may also perform well as the government tries to fulfill its promise of affordable housing to all by 2020.

“India’s mortgage to GDP ratio is less than 10% compared to developed countries where it is above 50%,” says Alok Churiwala, MD, Churiwala Securities. As the economy picks up, he expects HDFC to benefit due to rising demand for mortgages from tier-2 and tier-3 cities.

Deep Pockets Score in Crisis

Experts feel large-caps are safer even if they are near their historical highs, as they are sitting on huge pile of cash which gives them an edge over smaller companies, especially in times of an economic slowdown. Vikas Gupta, executive VP, Arthveda Fund Management, recommends Bajaj Auto, which has cash of Rs 2,790 crore on its balance sheet.

“In an environment where money is difficult to raise, this cash can come handy to grow organically or to fund expansions,” says Gupta. Finally, large companies score over smaller companies due to their strong brands, financial strength and ability to hire the best talent.