But what do you think of where this money is likely to flow into because yesterday when we saw that data, there was a dip when it comes to the largecap category and we have been seeing in the market of late, midcaps and smallcaps have again started to bounce back and outperform. Do you think next year there will be largecaps that are likely to outperform or do you think the midcaps still provide good comfort and the opportunity to have outsized returns?
Rajesh Bhatia: See, we have been in a bull market and the India story is really being played in the midcap and smallcap. Every new sector that you look at, defence, electronic manufacturing services, engineering services, power transmission equipment, etc, all of that really is in the midcap and smallcap space.
And we are still in a bull market and I do not think there are any macro changes that have taken place which are dramatic, which should cause any significant pause yet on the economy side. So, my sense is that these stock specific stuff will kind of continue to do well, even as you move forward.
There may be some temporary challenges, as I point out, thanks to the macroeconomic variables which may change, the rupee is already under pressure. We will not be able to reduce interest rates as quickly.
Fiscal spending, there will be some challenges given the global pressures that we are having, etc, etc. But I think you need to extend your time horizon to gain meaningfully from the midcap and smallcap spaces. As you move forward, I am a little apprehensive of what is to come starting January and that is what you need to keep an eye on.
There are a lot of these new themes which are emerging up. One is quick commerce. Second is clean and green. Third is solar. What are the themes for 25?
Rajesh Bhatia: So, all the names that you mentioned, they are all multi-year theme. So, my sense is that these themes will continue into the future. See, the market is forward looking. So, what is doing well today, let us say IT. So, IT is also if you see a lot of the sell side is probably a little bearish on IT. It is probably only at the margin that people are changing some of their view.
But if Trump deregulates businesses, I understand that $4 trillion of M&A is going to play out which has been kind of subdued, that benefits banks enormously in America, apart from the tax cut that is going to come in.
So, banks may feel very energized and willing to spend on IT. So, you can see that even though even companies themselves are not at this moment giving you extremely positive vibes on IT, but IT stocks are all at a new high.
So, it is suggesting of what is forward looking, which is to come, and I think all the sectors that I mentioned which are looking attractive, are all probably themes for 25 as well, which is capital goods, quick commerce, digital commerce in fact which is a much larger canvas, I would say private banks, IT, so on and so forth.
So, where is IT headed if I want to be specific here? Anisha and me were discussing in the morning that here is a sector which best will give you a 10% growth. And if I say 10%, I am being charitable. PE multiples are 20 times plus across the board, trailing, not forward. Margins have peaked out. So, why are these stocks coming back the way they are? I mean, is it just because of currency? Is it because market are in defensive mode? Or is it because markets are running out of ideas?
Rajesh Bhatia: So, there is a bit of a macro play here as well. I heard you in the morning talk about how Bajaj Finance is trying to become a fin AI company and I was there in the meeting yesterday and Sanjiv Bajaj was talking about, they have 300 projects in AI. So, corporates are going to adopt AI, which means that they are going to spend on AI.
For the moment, the projects are quite small. But I think that is also area where IT companies are going to spend.
Second, I pointed out the US macro, if it improves, then that is going to mean spending coming back. So, growth rates which have been 3% or 6% will probably become 8% or 10%. By the way, that is in dollar terms. Third, you mentioned that margins are peaked out, I would disagree with that because operating leverage, if the size of business grows, actually a lot of companies are pointing out that our margins would expand 200 basis points, 300 basis points.
Plus, you must know that these are very high free cash flow businesses. So, they pay dividends of probably 3% yield or 4% yield. So, you can get 3% or 4% from the dividend, you can get maybe 10% or 15% on the earnings, probably if not more and a little bit on the price earnings, if you can accumulate that, you could make a 20-25% equity return. For the tailwinds that the IT sector has, my sense is, this is a good equation to have.