The story for mid- and small-cap stocks is all about zeroing in on superior growth prospects, and the recent correction has helped too, says Vinit Sambre, Vice-President and Fund Manager, DSP BlackRock. Edited excerpts from an interview:

What is your take on the direction of rural demand?

Rural demand is a combination of many factors.

On the crop prices our view is that we may not see any big up-move.

However, the monsoons have been good till now and the sowing data is also encouraging.

This will have an overall positive impact on the economy, sentiments, and hence demand.

What about the capex cycle?

We believe that government needs to play a bigger role in kick-starting the capex momentum and then the private sector will follow. There are many companies having decent cash surpluses and sitting on the fence. They are waiting for the momentum to start and some positive signal, which will have to come from the government. We have started seeing the capex pick up in some areas such as roads, coal, etc, and are hopeful of further improvement.

What is the outlook for mid- and small-cap stocks, given the way they ran ahead of large-caps?

In the last one year, the mid- and small-cap stocks have significantly outperformed and have run ahead of large-cap in term of valuations. But we believe it is typical of a bull market, where, once we have confidence in the broader economy, well-managed mid- and small-caps tend to outperform.

So really, the story in case of mid- and small-caps is about superior growth prospects in an expanding economy. In that scenario we still feel that mid- and small-cap stocks looks attractive with 2-3 year perspective. The current market correction is providing some opportunity to identify good companies at decent valuations.

DSP BR Mirco-cap focuses on the mid- and small-cap space. How do you balance out the risk?

We use bottom up stock selection while managing the fund. We pick companies with capable management, strong cash flows, good ROCE and competitive advantage. We follow a buy and hold strategy. We also look at some cyclical businesses which are at the cusp of turnaround where ROCEs are slated to move up in the foreseeable future. Since many companies within this category is not well researched and well covered the information availability is poor. Hence identifying the stock and understanding of the management becomes very important.

Secondly, the stocks are generally bought with long-term horizon as low liquidity restricts regular churn. Hence, we carry out detailed due diligence to mitigate these risks. Regular management meets and feedback from across the value chain improves our decision making process and reduces risk.