India will see decent tangible benefit coming through GST, as there is a change of heart in the unorganised segment after GST and demonetisation , portfolio manager ­ equities,told Prashant Mahesh. Janakiraman, who manages midcap funds, says if one looks at relative valuations, then mid and smallcap stocks are not expensive in comparison to large caps.Edited excerpts:The procedural part has gone off well, though the reconciliation of bills with counterparties is yet to happen. Many of the companies we have spoken to are reasonably satisfied with their experience. There were apprehensions about whether the system will be robust enough to accommodate huge volumes which come at the same time. All those fears have been laid to rest. Now, one will have to wait for the reconciliation part which is yet to happen.We see decent tangible benefit coming through GST, as there is a change of heart in the unorganised segment post demonetisation. When I talk to smaller companies or chartered accountants who deal with such companies, I see readiness amongst smaller firms to enter the formal economy. That is the bigger eventual gain for the economy, while the efficiency gains for larger companies is a medium-term story.You will see acceleration in GDP relative to Q1, but whether fiscal 2018, is a year where you will see acceleration in annual GDP is something I'm not very certain of at the moment.There is a general observation that small and midcap stocks are expensive because of outperformance in the past three years. However, the picture is a bit more complicated beyond that initial general observation. Where I would like to bring another perspective is that the kind of growth we are having in the economic cycle is largely driven by domestic demand. Small and midcap segment is more exposed to domestic demand. They are far more material beneficiaries of this kind of growth compared to large caps.Clearly, that is one reason why the market is also focusing on mid and small caps as you are seeing far better earnings growth there compared to large caps.If I drill down one layer and see how expensive small and midcaps are in comparison to large caps within the same sector, then the question of overvaluations is not large. As a category if you look at it, the overvaluation may appear to be high, but if one looks at relative valuations in the same sector, then mid and smallcap stocks are not expensive in comparison to large caps.In 2013, the valuations were far more attractive and the opportunity available to investors was much more attractive, and the return expectations were much higher. Given the rally that has happened, return expectations of investors have come down compared to 2013. Given the larger sluggish earnings growth and reasonable full valuations, we expect 12% earnings growth for next three years and this is the equivalent return we expect from Indian equities.The challenge of finding good quality companies at acceptable valuations is much more now. But it was much higher a year back. In the past one or two quarters, there is a lull in midcaps and there is some sanity coming to valuations. Good quality stocks have corrected and some de cent IPOs are coming. In the small cap space, we have used the IPOs well. That's how we are managing the situation.If you break down returns for the past 10-20 years of our schemes, a bulk of returns is driven by underly ing earnings growth. For the companies we own, I break down the five year returns earned into two components -earnings growth and and PE rerating. Where I find that PE rerating is the more dominant driver of stock returns, those are areas where I am careful. I try to take re medial measure, which could be re ducing exposure or exiting the stock.What I focus on is risk-adjusted returns and this becomes much more important in the case of midcap stocks. This quality-oriented philosophy gives you best probability in terms of risk-adjusted return through a cycle, but there will be phases of cycle, where this approach will underperform and we are upfront with that fact, especially in high-beta markets . There have been three occasions over the past 20 years when our underperformance was there, but we recouped that quickly. So, such phases will come, but we will stick to our approach.