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Informist, Thursday, May 14, 2026

 

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--PGIM Paharia: High interest in low-growth, low-quality mid-caps a worry
--PGIM Paharia: High interest in low-growth, low-quality small-caps a worry
--CONTEXT: Comments by PGIM India MF CIO Paharia in interview with Informist
--PGIM Paharia: Valuations of large-cap stocks have corrected meaningfully
--PGIM Paharia: Threat from W Asia war disruption a worry but only transient
--PGIM Paharia: Proliferation of AI bigger worry than W Asia war fallout
--PGIM Paharia: IT cos not investing enough in AI, face threat of disruption
--PGIM Paharia: Underweight on IT cos, pure-play commodity cos
--PGIM Paharia: Positive on healthcare svcs cos, returns on capital strong
--PGIM Paharia: Betting on select new-age cos, specially quick-commerce firms

 

By Anand JC and Anshul Choudhary

 

MUMBAI – India's key small-cap and mid-cap indices have outperformed the benchmark Nifty 50 in the short term and medium term, brushing aside worries about geopolitical uncertainty. However, the sharp rebound and outperformance have been concentrated in select pockets of the small-cap and mid-cap universes, especially in "low-quality, low-growth" companies, Vinay Paharia, chief investment officer at PGIM India Mutual Fund, told Informist in an interview.

 

"Small-caps and mid-caps have once again gone back to their previous highs," Paharia said, adding that he was worried about the nature of the trend. "In the small- and mid-cap, especially since 2023, we have seen a meaningful rally in low-quality, low-growth companies," he said.

 

In contrast, "high-quality, high-growth" small- and mid-cap stocks have meaningfully underperformed, the fund manager said. The trend of lower-quality stocks outperforming high-growth, high-quality stocks persisted from April 2023 to June 2024 before reversing. "At this point of time... my concern is still the extremely elevated valuations of low-quality, low-growth companies relative to their underlying potential growth," Paharia said. Low-quality, low-growth companies have continued to find takers, but investors have to understand that 20% growth cannot be sustained indefinitely, he said. Paharia refused to name any of these "low-quality, low-growth" small-cap and mid-cap stocks.

 

Large-caps have lagged the broader market across time frames in terms of returns. In the past three months, the Nifty 50 declined around 3% while the Nifty Midcap 150 and Nifty Smallcap 250 gained roughly 3% and 6%, respectively. Over the past six months, the Nifty 50 has fallen nearly 10% while the Nifty Midcap 150 and Nifty Smallcap 250 indices are down only around 2?ch.

 

Over one year, the divergence becomes starker: while the benchmark large-cap index has fallen more than 10%, the mid-cap and small-cap indices have gained 8% and 7%, respectively. The divergence is visible over three years as well, during which time the Nifty 50 rose 28%, far lower than the 80% and 74% gains clocked by the mid-cap and small-cap indices.

 

Valuations are affected not only by declines in share prices, but also by what Paharia terms a "time correction". "Earnings go up, share price doesn't go up; (this means) your valuations have gone down. So valuations have clearly gone down in the large-cap space," Paharia said.

 

PGIM India Mutual Fund is currently betting on high-growth, high-quality companies that are now available at reasonable valuations, Paharia said. "We think that high-quality, high-growth companies are trading at reasonable valuations. Importantly, their fair values are growing at a faster pace, which means the potential returns for these kinds of companies over a three-year period should be pretty attractive," he said. Fair value of any stock is its estimated "true" or intrinsic worth based on fundamentals such as earnings growth and assets, rather than just its market price.

 

VALUATION PENDULUM

Equity valuations have cooled considerably from the high levels seen in late 2024, with the correction accelerating after the war broke out in the Persian Gulf region. According to Paharia, there was a point in 2024 when nothing could go wrong for India, but now, everything seems to be going wrong. "I think the reality lies somewhere in between," he said, likening stock valuations to a pendulum swinging between extreme optimism and extreme pessimism.

 

The Nifty 50 traded at a one-year forward price-to-earnings ratio of 19x on Apr. 30, Motilal Oswal Financial Services said in a report. However, broader market valuations are still a cause for concern, with the Nifty Midcap 100 and Nifty Smallcap 100 trading at forward multiples of 27.6x and 22.6x, respectively--premiums of 16% and 30%, respectively, over their historical averages.

 

Paharia attributed part of the divergence to differences in investor behaviour, with foreign investors largely favouring large-caps and domestic investors gravitating towards small-caps and mid-caps. Numbers capture this trend better: in 2026 so far, foreign institutional investors have net sold $21 billion of Indian stocks while domestic institutional investors have been net buyers of $33 billion, according to Motilal Oswal.

 

"At one particular point in time, specifically in 2024, India's valuation was at a meaningful premium to most of the other emerging markets and even some of the frontier global developed world," Paharia said. "From that point onwards, we saw a massive reduction in foreign flows, specifically in large-caps, and valuations have corrected meaningfully."

 

HEADWINDS, LAX IT INVEST

While the market continues to grapple with the uncertainties stemming from the war in West Asia, Paharia dubbed its fallout a "transient" risk. "India is a net importer of oil, and that creates challenges of a higher deficit on the external front," he said. "It is effectively a tax on either the consumer or the government, whoever absorbs it, but it is effectively a tax, and that is concerning." However, he warned that an extended impasse between Tehran and Washington may deepen the damage for corporate India.

 

A far more worrying "structural" trend, according to Paharia, is the rapid proliferation of artificial intelligence, one that India's famed information technology firms are severely underprepared for. Companies in China and the US have made gargantuan investments towards AI. Quizzed on whether Indian technology firms are investing enough in this department, Paharia said: "They are not investing. Enough is not a question at all. They are not investing."

 

Paharia called on companies to migrate up the value chain, which is moving to highly complex, sophisticated activities which generate significantly higher revenues and profits from low-margin simple tasks. "While it is not impossible, it is already a process which has started," he said. "That's an area which we need to be fairly well cognisant of, and we need to be aware of and could have a short-term or near-term impact as well."

 

Paharia blamed the situation on the business models of Indian technology firms, which have been built on an income statement model rather than a balance sheet model. The focus of the former is to generate revenues and profits, whereas the latter model focuses on investing capital to build assets that can be monetised over a longer period. "That has been their (Indian tech firms') model, which has not been bad," he said. "It has served the purpose. But at this point of time, in this day and age, it is having a negative impact." Legacy technology firms which fail to adapt to changing global needs are at risk of being "disrupted". Such companies risk declines in both revenue growth and profitability, he said.

 

However, Paharia also said that historically, various companies in India have been able to adapt to changes and turn adverse situations into opportunities. "So at this point in time, we don't know which companies are able to do this because people talk about a lot of things. We don't focus on what you (the companies) are saying, we focus on what you are doing," he said.

 

The growing proliferation of AI also has a role to play in the valuations of Indian markets. Paharia referred to "AI trade", a structural trend where the capital shifts collectively into companies that build, support, or directly profit from artificial intelligence infrastructure. "Maybe people are right now investing in those trades (AI trades) and treating India as a trade on the opposite end of AI," he said. "So if AI does well, India does badly, and vice versa."

 

BETS, VIEWS

Predominantly known for its flagship mid-cap fund, PGIM Mutual Fund has only one thematic fund in its kitty, a healthcare fund. "It is one of the spaces where we are very positive on," Paharia said. Healthcare services as an industry are compounding at a rapid pace because of the higher demand for these services. "The returns on capital are strong. There is demand potential, and the valuations from my point of view are fairly reasonable," he said.

 

Additionally, PGIM India Mutual Fund is also "fairly positive" on consumer discretionary firms, and not just the traditional ones. The company has bet on select new-age companies, such as those offering quick commerce services. "They are right now disrupting the market, and the return on capital on this business is absolutely very strong," Paharia said. "Businesses which they are disrupting actually have much lower returns on capital. So it's the best of both worlds for them."

 

The fund house is currently underweight on India's IT companies. "Our biggest underweight today, in fact, for the last year has been the IT services sector," Paharia said, drawing attention to his views on artificial intelligence being a structural pain point. PGIM India is also underweight on pure commodity companies. These companies may be performing well because of geopolitical tensions, but their longer-term core fair value growth potential is fairly limited, he said.

 

Despite the ongoing uncertainty, Paharia is focused on playing the long game. "My objective as an investment manager is to identify companies or a set of companies and sectors which can potentially do better over a three- or five-year time period for my investors. That is my goal, and I'm focused on that," he said.

 

Paharia went on to flag the dos and don'ts for retail investors in the current scenario where volatility and risk are in abundance. "I think there is too much participation in the markets," he said. "I would say that people should ideally be coming through a professional investment adviser or taking professional advice. Markets are not places where you invest on your own because just like you don't fight your own case, you seek a lawyer."

While Indians have traditionally favoured fixed deposits over equity investments, the investment preference has seen a considerable shift, especially after the COVID-19 pandemic. However, many retail investors flocked towards bets that are risk- and returns-intensive. The fund manager called on retail investors to prioritise asset allocation in the current scenario. "Risk means losing money... it means losing capital. And that is why equity delivers higher returns. There are transitory periods where you don't need money," he said.

 

PGIM India Mutual Fund began operations in India in 2007 as a 50:50 joint venture between the US-based Prudential Financial Inc. and real-estate major DLF Ltd. At the time, Prudential Financial could not use its own brand name in India because ICICI Prudential had already secured the rights to the "Prudential" name in 2000 through its joint venture with the UK-based Prudential plc.

 

The Indian partnership then changed hands in 2014 when Dewan Housing Finance Corp. Ltd. replaced DLF. In 2018, Prudential Financial took over 100% ownership of the firm in India. In April this year, the TVS Venu Group announced that it would acquire Prudential Financial's entire stake in PGIM India Asset Management.  End

 

Edited by Rajeev Pai

 

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