Bihani eyes small caps despite market froth

Kotak Small Cap Fund has shown signs of revival, for which Harish Bihani should get his flowers. Since taking over in October 2023, the fund has managed to match and then outstrip the average small-cap fund's returns, though it has yet to beat the benchmark. The fund's resurgence coinciding with Bihani's entry is not entirely surprising. He brings over 16 years of experience in equity research and fund management, with stints at prominent fund houses such as ICICI Prudential Mutual Fund and SBI Mutual Fund. Given his expertise, he has been tasked with Kotak Pioneer Fund and Kotak Business Cycle Fund, in addition to the small-cap fund. As a result, he is currently presiding over Rs 20,000 crore of investors' money. During our exclusive conversation, Bihani, the senior fund manager at Kotak AMC provides insights into the current market bull run, his stock-picking philosophy and the reasons for the growing allocation to small-cap stocks. An edited version of the conversation follows. Since Covid-19, the market has rallied significantly, with instances of quickly recovering from dips. Could you share your insights on the current market dynamics and the key factors driving these resilient rebounds? The general opinion in the market is that valuations are expensive. However, one should look at them in the context of cycles - business, capital, earnings and behavioural. Since 2019, we are seeing an uptick in business cycles, as witnessed by the rising profit-to-GDP ratio. Currently, we think we're in the middle of an earnings growth cycle, and healthy growth should continue for the next couple of years. To understand business cycles better, we are also examining the net debt-to-equity ratio, which has been at its lowest in years across market capitalisation. Additionally, NPAs (non-performing assets) across banks are quite low and balance sheets are healthy, which should support the upcycle. The capex cycle is increasing across public and private sectors. After years of stagnation, real estate demand has revived post-Covid, which is crucial for the capex cycle. Moreover, friendshoring by multinational companies is on the rise. Despite the favourable