PMS Bazaar recently organised a webinar titled “Is Large-Cap Alpha Changing? What Does It Mean for Investors,” which featured Mr. Naveen Chandramohan, Founder and Fund Manager, ITUS Capital. This blog covers the important points shared in this insightful webinar.

The webinar blog covers insights from Mr. Chandramohan, which include insights on navigating Indian equity markets amid valuation shifts, changing investor flows and macroeconomic uncertainty. It examines the role of large-cap stocks, the risks of chasing small-caps, sectoral opportunities and ITUS’s portfolio strategy. It also highlights practical investment principles, including earnings evaluation, liquidity management, disciplined stock selection and timely exit strategies for sustainable long-term returns.

Key aspects covered in this webinar blog are

• Understanding the return profile and market dispersion
• Debunking large-cap and passive investing misnomers
• Sector performance, capital flows, and liquidity realities
• The ITUS portfolio construct and core investment questions
• Navigating market macros: Interest rates, foreign inflows, and portfolio consistency
• Understanding the global rate hike cycle
• Deciphering the FII sell-off and structural DII inflows
• Reassessing consumption, manufacturing, and the “China plus one” myth
• Risk management and the ITUS portfolio philosophy
• Sectors to watch and the art of exit strategy
  

Summary: Mr. Naveen Chandramohan emphasised that successful investing requires disciplined stock selection, valuation awareness and effective risk management rather than chasing small-cap trends. He highlighted the importance of evaluating earnings growth, pricing power, liquidity and long-term business fundamentals across market capitalisations. Discussing macroeconomic trends, FII outflows and interest rates, he stressed the resilience of domestic inflows and the need for portfolio consistency. He identified export-oriented businesses, manufacturing, pharmaceuticals, chemicals and consumer discretionary as potential opportunities, while advocating timely exits and partial profit-booking.

Mr. Naveen Chandramohan started by stating  two prominent narratives have dominated the landscape over the past few months. First, many investors believe that large-cap stocks hold no meaningful role in modern portfolios. Second, there is a widespread perception that India is transforming rapidly, making small-caps and micro-caps the primary sources of new alpha. Addressing these claims, Mr. Chandramohan examined whether this argument actually makes sense for the first time in India, exploring the underlying reasons and counterarguments.

Understanding the Return Profile and Market Dispersion

The ongoing debate largely stems from the unique return profile observed in Indian markets. For the first time, the micro-cap index has risen while moving in tandem with a declining large-cap index. Naturally, this prompts questions about whether businesses genuinely improved as market capitalization decreased.

When breaking down returns, Mr. Chandramohan explained that performance depends on two main components: corporate earnings estimates and valuation multiples.

• Earnings Outperformance: Corporate earnings in India outperformed initial expectations by roughly 3% to the upside.
• Valuation Derating: In contrast, valuation multiples have contracted significantly, leading to negative overall returns.
• Long-Term Trend: This derating is not a short-term anomaly; it has shaved off approximately 6% IRR over a seven-year period.

Furthermore, 2026 emerged as a standout year where two-thirds of the index companies beat the index itself. While the Nifty 50 delivered negative returns, the median return remained flat, highlighting that the dispersion between the highest and lowest performers was remarkably high.

Debunking Large-Cap and Passive Investing Misnomers

Mr. Chandramohan pointed out that large caps are often misunderstood. Within the Nifty 50, a small group of stocks—primarily one bank, a few IT companies, and Reliance—contributed to the majority of the downside, while the remaining 45 stocks stayed flat. Therefore, assuming that large caps are automatically safe is a misconception.

Another common myth is that because large caps are heavily covered by analysts, passive investing is the best way to handle them. However, if less coverage equates to higher alpha in small-caps, then the vast dispersion seen in large-cap stocks proves that active bottom-up stock selection is equally critical. Large-cap alpha is officially shifting from broad market exposure to precise selection.

Sector Performance, Capital Flows, and Liquidity Realities

Looking within the broader index, sector performance has varied wildly:

• Re-rated Sectors: Select sectors like auto and pharma have re-rated against their 10-year median valuations.
• De-rated Sectors: Banking, IT, and FMCG have experienced significant de-rating. However, Mr. Chandramohan cautioned that cheap valuations do not automatically equate to buying opportunities, as banking and IT have remained undervalued for nearly three years.

Investor behavior has also shifted dramatically. Small and mid-cap flows over the preceding 12 months reached roughly six times the volume of inflows into large caps—a phenomenon unseen in 24 years. Meanwhile, large-cap funds witnessed outflows for the first time in three and a half years.

Liquidity remains a critical metric that investors often overlook. When evaluating fund investments, Mr. Chandramohan stressed that participants must consider how long it takes to liquidate substantial positions during market downturns, noting that micro-cap stocks can take significantly longer to unwind safely.

The ITUS Portfolio Construct and Core Investment Questions

At ITUS, the investment philosophy centers on growth, pricing power, and disciplined risk management. By maintaining a large-cap exposure between 50% and 55% with a lower portfolio beta around 0.8, the strategy avoids excessive exposure to high-risk segments while remaining underweight on pressured sectors like banking and IT.

In conclusion, Mr. Chandramohan advised investors to evaluate any portfolio strategy by asking five fundamental questions:

1. Earnings: What rate are the underlying businesses growing at?
2. Valuation: What premium is being paid for those earnings?
3. Liquidity: How much flexibility is sacrificed to exit positions if facts change?
4. Risk: What specific threats could permanently impair the portfolio?
5. Time: What is the actual definition of a long-term horizon?

By understanding market cycles, accounting for external variables such as oil prices and technological shifts, and focusing on careful stock selection, investors can successfully navigate market volatility and generate consistent, sustainable returns.

Navigating Market Macros: Interest Rates, Foreign Inflows, and Portfolio Consistency

In a recent interactive session, Mr. Naveen Chandramohan addressed several critical macroeconomic developments, foreign institutional investor (FII) trends, and the core philosophy behind portfolio construction at ITUS.

Understanding the Global Rate Hike Cycle

Addressing concerns regarding recent interest rate hikes by the Reserve Bank of India (RBI), Mr. Chandramohan noted that this move should not be viewed in isolation. With nearly every major global economy—barring deflationary China—experiencing inflationary pressures, benchmark yields have climbed worldwide. Consequently, the RBI had little choice but to raise rates, with potential further adjustments anticipated in upcoming meetings.

However, a rate-hike environment does not automatically translate to a bearish outlook for equities. Drawing a parallel to the robust Indian bull market of 2003 to 2007, he emphasized that rate hikes must be evaluated alongside core economic growth. As long as nominal GDP expands, businesses with strong pricing power tend to thrive, requiring investors to position themselves strategically in areas of genuine growth.

Deciphering the FII Sell-Off and Structural DII Inflows

Commenting on the unprecedented scale of recent FII outflows, Mr. Chandramohan explained that foreign investors manage global capital allocations based on relative growth and thematic shifts, such as the rapid rise of artificial intelligence (AI). Because India held a smaller allocation within the global AI ecosystem and faced headwinds in traditional strongholds like banking and IT, foreign capital naturally reallocated elsewhere.

Conversely, domestic institutional investor (DII) inflows have emerged as a structural pillar for the market. Analyzing systematic investment plan (SIP) data, he pointed out that a significant portion of incoming capital originates from micro-tickets, reflecting a deep, behavioral shift in domestic savings that will likely sustain market liquidity regardless of foreign capital movements.

Reassessing Consumption, Manufacturing, and the "China Plus One" Myth

Refuting the notion that India's consumption sector is struggling, Mr. Chandramohan clarified that the apparent underperformance of certain consumer brands stems from heightened competitive intensity and broader distribution channels via quick commerce, rather than a dip in actual demand.

Regarding the manufacturing sector, he expressed caution regarding the popular "China Plus One" narrative. While supply chain diversification and a depreciated Indian Rupee against the Renminbi have provided short-term tailwinds, long-term success will ultimately depend on sustained policy execution, governance, and competitive capabilities rather than short-term market trends.

Risk Management and the ITUS Portfolio Philosophy

At ITUS, portfolio management prioritizes risk control and consistency over chasing speculative multi-baggers. Rejecting the concept of analyst "conviction" as a substitute for risk management, Mr. Chandramohan explained that position sizing serves as the primary tool to handle uncertainties where top-down and bottom-up perspectives diverge.

With a portfolio currently comprising around 40 stocks—maintaining a balanced exposure of approximately 55% in large caps, 30% in mid-caps, and 12% to 13% in small caps—the strategy aims for high-teens IRR over a three-to-five-year horizon. By avoiding cash timing and focusing instead on business cycles, earnings visibility, pricing power, and prudent liquidity management, investors can navigate market volatility effectively without taking uncalculated risks.

Sectors to Watch and the Art of Exit Strategy

Looking ahead to the next three years, the market expert suggested that investors consider companies with dollar-denominated earnings, particularly those with export-oriented businesses. He also highlighted companies that could benefit from inflation and higher rates, especially those with strong gross margins supported by manufacturing intellectual property or established consumer brands. Manufacturing, pharmaceuticals, chemicals and consumer discretionary were among the sectors he believed could perform well, while emphasising the importance of identifying suitable companies through a bottom-up approach.

On exit strategies, he explained that exiting an investment was more of an art than a science, shaped by experience rather than tips. He stressed the importance of continuously learning, accepting mistakes and exiting positions when the investment thesis no longer holds.

Mr. Chandramohan also advised investors to consider booking partial profits when returns were driven significantly by price-to-earnings (P/E) multiple re-rating rather than earnings growth. While acknowledging that returns often result from a combination of both factors, he suggested that taking some money off the table after substantial valuation-led gains could be a prudent move.

Mr. Chandramohan covered all the topics mentioned above in-depth and answered questions from the audience toward the end of the session. For more such insights on this webinar, watch the recording of this insightful session through the appended link below.

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