'Mid caps appear expensive, but deliver superior growth'

Summary: Mid caps look expensive until you adjust for growth. Mihir Vora's case for staying in mid and small caps through a sharp correction is built on one number most investors overlook when they compare valuations.

Amid sharp corrections in mid- and small-cap stocks, Mihir Vora remains anchored to growth rather than getting swayed by headline valuations. The CIO at TRUST Mutual Fund, who oversees assets of around Rs 3,000 crore, believes that while segments may appear expensive, their superior earnings trajectory continues to justify valuations on a growth-adjusted basis. His approach remains firmly bottom-up, focused on structural opportunities rather than short-term market moves.

In this conversation, Vora outlines the megatrends shaping India’s growth, from financialisation and premiumisation to manufacturing and digitisation, while emphasising valuation discipline and the need for investors to reset return expectations in a more normalised market environment.

In the last few months, markets, especially mid and small caps, have corrected sharply. Where are you finding pockets of value in this segment? Do you think this normalisation could continue for the next 6-8 months until earnings catch up?

As we entered the March 2026 quarter, the overall environment looked quite constructive. We were beginning to see early signs of a pickup in credit growth and some traction in private sector capex. These were encouraging green shoots, particularly before the recent Middle East-related geopolitical disruptions.

If I go back to our estimates from about a month ago, before the recent volatility, we were expecting earnings growth to remain strongest in the mid- and small-cap segments. Large-cap earnings growth was projected at around 13 per cent, mid caps were expected to grow at over 22 per cent and small caps in the range of 16-18 per cent. So, the core earnings momentum clearly remains in mid and small caps.

One important point is that when investors discuss the valuation premium of mid caps, they often do not account for growth. While mid caps may trade at a 30-40 per cent premium to large caps, their earnings growth over the next two years is almost double that of large caps. So, on a growth-adjusted basis, valuations are not as expensive as they may appear.

In fact, if you look at the CY25-27 period, earnings growth estimates are roughly 21 per cent for mid caps versus about 19 per cent for large caps. Valuations, on a two-year forward basis, are around 24-25x for large caps and about 27x for mid caps. So yes, mid caps appear more expensive in absolute terms, but they also offer superior growth. Importantly, the valuation premium of mid caps over large caps has already narrowed compared to earlier levels.

From a portfolio perspective, the opportunity set in mid and small caps remains aligned with broader structural themes. The composition of these indices differs—for instance, large caps have a higher weight in banks, whereas mid and small caps have greater exposure to sectors like capital goods and pharmaceuticals.

Our focus continues to be on long-term growth areas. The investment style remains growth-oriented, and we focus on structural opportunities across sectors rather than being overly influenced by short-term market corrections.

What could be the next big thematic driver for markets?

We continue to have tailwinds in certain long-term megatrends. Importantly, these themes are now more broad-based; they are not limited to just infrastructure, commodities or IT. We are seeing multiple structural drivers playing out simultaneously in India.

The first megatrend is around demographics and rising income levels. India remains a young country and will continue to add to its working-age population until at least 2050. In fact, India is among the few countries where this trend will persist for a long time. This has direct implications for the financialisation of savings.

As incomes rise, savings increasingly move into formal financial channels. So, segments linked to financialisation, such as asset management companies, insurance, brokerage houses, exchanges, RTAs, depositories and wealth managers, should see relatively faster growth. While banks and NBFCs will grow in line with GDP, the non-lending financial ecosystem could grow even faster, driven by this structural shift.

Another outcome of rising incomes is the premiumisation of consumption. Both services and goods are seeing this trend. On the services side, areas like hotels, airlines, travel, tourism and broader experiential consumption should grow faster. On the goods side, premium categories are outperforming—SUVs over entry-level cars, higher-end two-wheelers, EVs, premium liquor, jewellery and watches. As disposable incomes rise, consumers are clearly trading up.

The second megatrend is physical asset creation, which in our view is non-negotiable. Historically, India’s growth has been driven by consumption and services, but that model has its limits. To sustain higher growth, say 6.5 per cent to 8 per cent, we need a strong manufacturing and infrastructure base.

This implies continued focus on sectors like capital goods, construction, infrastructure, power (including transmission, distribution and renewables) and real estate. Government-led initiatives such as Make in India, along with spending on defence and railways, reinforce this direction.

We have already seen a strong cycle in these sectors over the last few years, followed by some correction. But the underlying structural story remains intact. India continues to face shortages across physical infrastructure—roads, railways, power, and urban infrastructure—and this gap will sustain investment and growth in these areas for years to come.

The third theme is technological disruption and digitisation. This is where new business models and new-age companies come into the picture.

These are businesses that are either creating entirely new categories or disrupting traditional models. We remain quite bullish on this space. However, our approach is very clear—we focus only on category leaders, not the second- or third-tier players.

What we have seen over time is that leaders in these segments tend to build strong moats. It is extremely difficult to replicate their scale, customer base, network effects and brand recall. Once that leadership position is established, it becomes self-reinforcing.

So, digitisation and technology-led disruption is the third key theme we like and continue to allocate to within our portfolios.

The 'buy at any price' philosophy became almost a religion between 2022 and 2024. Do you think that phase is over? At what point does valuation override conviction? Is there a price at which even your highest-conviction holding becomes a sell?

While a significant part of our portfolio is invested in high-growth companies with long-term potential, it is not entirely composed of such businesses. Even within this framework, we do have a clear sense of what constitutes a stretched valuation.

If market euphoria pushes valuations beyond even our optimistic assumptions, we start trimming positions. That's one trigger.

The second and more important trigger is a change in the investment thesis. Every investment is based on a set of assumptions around growth, scalability and execution. We continuously track these through quarterly results, management commentary and interactions. If we see repeated disappointments or a lack of delivery against these assumptions, our conviction weakens. And if that conviction breaks, we exit, irrespective of valuation.

It's also important to note that price, in isolation, is not the sole decision-making factor. Because we use a terminal value framework, what may appear expensive to others may still look reasonable to us, given the long-term growth potential we are underwriting. That said, we are not blind to valuations; we always have a framework to assess them.

In terms of portfolio actions, we are quite active. While we invest with a long-term perspective, we recognise that markets can become irrational both on the upside and the downside. Even in companies where we see a long growth runway, there will be phases of euphoria and correction.

For instance, we have been structurally positive on themes like EMS and semiconductors, given strong policy support. However, when valuations in some of these companies moved beyond our optimistic scenarios, we trimmed or exited positions. So, discipline around valuation and thesis remains central to our process.

The flexi-cap fund delivered negative returns in 2025, while the category average was around 5 per cent. What went wrong? Was it a sector-allocation issue, specific stock calls or a style bias that the market punished? And what has changed since then?

First, it’s important to look at performance in the right context. We launched the fund in April 2024, so we are still close to completing two years. Over this period, we have done reasonably well, outperforming the benchmark and ranking in the second quartile of the peer group.

The one-year performance appears weak primarily because the return period is distributed unevenly. The first 8-10 months post-launch were very strong for us. From April 2024 to around January-February 2025, we were among the top-decile performers. This was driven by our exposure to high-growth segments such as defence, capital goods, construction, consumer durables and capital-market-linked businesses, all of which performed very well during that phase.

However, the market environment has changed since early 2025. There was a sharp correction, particularly in mid- and small-cap stocks. Given that flexi-cap funds have the flexibility to invest across market caps and that our style is inherently growth-biased, we tend to have higher exposure to mid- and small-cap stocks than both the benchmark and peers.

The universe itself explains this bias. There are about 100 large-cap stocks, around 150 mid-caps and nearly 800 small-cap stocks with market capitalisation above Rs 2,000 crore. The opportunity set for high-growth businesses is significantly larger in the mid- and small-cap space, which naturally shapes our portfolio.

What happened, therefore, was largely a style-driven impact. The same segments that drove strong outperformance in the initial months corrected sharply, which affected one-year returns. The shorter performance window captures more of the correction phase and less of the earlier outperformance.

Encouragingly, as the cycle has begun to stabilise, performance over the last six months has improved, and we have started to see relative outperformance again. So, this is more cyclical rather than structural, and the core portfolio construct remains intact.

Will you continue to maintain a higher exposure to mid caps, or will you tilt more towards large caps, given investor expectations of stability in a flexi-cap fund?

Our portfolio construction is primarily bottom-up, driven by stock selection rather than top-down allocation targets. That said, the allocation across market caps is dynamic and evolves based on risk-reward.

Over the past few months, we have increased our exposure to large caps. This is largely a response to heightened volatility in mid- and small-cap segments, driven not just by the natural correction but also by external factors such as geopolitical tensions and global uncertainties.

So yes, while our inherent bias remains towards growth, which often lies more in mid and small caps, we are pragmatic in adjusting exposures when risks rise. If we see earnings downgrades, elevated valuations or higher volatility in a segment, the portfolio automatically recalibrates.

At the same time, as markets stabilise and the growth opportunity in mid and small caps becomes more attractive again, we would be open to increasing exposure there.

So it’s not a static stance, it’s a continuous, dynamic process, guided by bottom-up opportunities but balanced with an awareness of market conditions and risk.

You’ve launched a mid-cap fund at a time when valuations are still at a premium. Is this driven by a genuine conviction that there is enough opportunity to deploy fresh money?

Our approach is largely bottom-up. While category norms require a minimum 65 per cent allocation to mid caps, our actual portfolio construction is driven by stock-specific opportunities rather than top-down valuation calls.

Even within the portfolio, allocations reflect relative opportunities. For instance, a meaningful portion of our mid-cap exposure comes from capital market-linked businesses and financials. That’s because, in these segments, mid-cap companies currently offer a better growth and risk-reward profile compared to what is available in small caps. So, the allocation is not about broad market conviction, but about finding better bottom-up opportunities.

Many investors who entered markets after 2021 have seen high returns and now expect returns of 20-25 per cent regularly. What would you advise such investors?

This is a very real challenge. Data suggests that nearly 70-80 per cent of mutual fund and demat accounts have been opened in the last 5-7 years. Many of these investors have not experienced a prolonged period of muted returns.

The key advice would be to study market history. Sustained 20-25 per cent annual returns are an exception, not the norm. Such phases have occurred, but they are rare and typically followed by periods of consolidation.

That said, we have already seen meaningful time and price corrections across segments. Valuations and expectations are now more normalised. From these levels, a reasonable expectation would be around 12 per cent returns from large caps and about 14-15 per cent from mid- and small-cap segments over the medium term.

If investors can compound at 15 per cent over a five-year period, that is actually a very strong outcome. The key is to reset expectations and stay aligned with realistic earnings growth rather than past peak returns.

Also read: 'Markets could remain weak if earnings don't recover'