Nilesh Shah on how to treat smallcaps and midcaps right now

Time of India

6 days ago

Nilesh Shah
, MD & CEO,
Envision Capital
, says despite concerns about the recent surge in midcap and
smallcap stocks
, the long-term outlook remains positive. Sustained economic growth of 6-7% in real terms and 10% nominally, coupled with a rise in per capita income from $3,000 to $9,000-$10,000 over the next 10-15 years, will fuel the growth of mid- to small-sized companies.
India will always be a small and midcaps market, it always has been. Yes, largecaps should be part of your core portfolio, but the big gains are always made when you catch them young and see them grow. What is your thought on how small and midcap should be treated right now and should you really be looking at that broad umbrella classification or is it really about stock picking within small and midcaps.
Nilesh Shah:
Stock picking is pretty much almost like eternal truth in the sense that stock picking is relevant for any investor, any fund manager, any CIO irrespective of whether it is largecap, midcap, or smallcap. The wonderful part about mid and smallcaps, at least for India, is that many years ago, many midcap and smallcap companies came out with IPOs prematurely because interest rates were high, and borrowing from banks or NBFCs was expensive. Also, the VC and the private equity system was not fully evolved as it is evolved today.
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So, a lot of companies just thought that going to the market was the best way to derisk the balance sheet and raise capital. In the process, what we have now is a universe of almost 4,000 to 5,000 companies which are publicly listed, of which we could probably classify under 200 as largecaps, maybe another 200 as midcaps; but the rest is all smallcap and microcap. So, to that extent, what we all have is the benefit of a very large universe.
The second thing and it is very important that while in between, all of us keep saying that midcaps and smallcaps have run up, it looks a little risky, but I clearly have the big picture in mind that as long as we keep growing at this 6-7% in real terms and 10% in nominal terms and till we do not get to a stage where from $3,000 per capita, we move to about $9,000 to $10,000 per capita, essentially it will be an environment where mid to small sized companies will continue to do well and continue to grow at a faster pace versus the big or the large stocks.
So, clearly the universe is very large and secondly, there is longevity to this opportunity that we are not going to go from $3,000 to $10,000 per capita in the next two or five years, and this is going to be maybe a journey over the next 10-15 years. Clearly, this is an opportunity for the next 10-15 years. So, even if there are these corrections of 5%, 10%, 15% or 20%, I do not think it should worry us as long as we have the very long-term and the big picture in mind.
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The last two-three years and especially last year, has been one of the largest public listing years for us. Even today, a smallcap is more of a timing kind of a product when to get in, and get out. The number of listings in the mid and smallcaps have only started increasing. Listing now is no longer premature like it used to be earlier and for a fund manager, a need for a buy and hold from an investment perspective for the next 10 years augurs well instead of trying to look at it from an in-out strategy. What is your view?
Nilesh Shah
: That is a great point and yes, surely, timing does help. But when we talk about the most recent IPOs and by that I mean the IPOs which have come out over the last one year, two years, or maybe even over the last three to four years, in the post covid era. They offer a very interesting opportunity set around
digitalisation
. Prior to that, when we in India used to talk about technology, we would talk about technology services companies or at best a handful of technology product companies.
But what we have seen over the last maybe three to four years is pretty much a flood of companies which have used technology to reach out to customers and offer them products and services and thereby basically significantly improve their go-to market strategy, achieving what probably earlier would have taken them a lot more time.
Clearly, we are going to see a new set of opportunities and I believe that the opportunity for digitisation or digitalisation using technology to reach out to consumers, to reach out to businesses, according to me, is phenomenally huge and as an area to really kind of pick and invest into. So, the mid and the smallcap space will continue to keep getting more diverse and continue to keep getting more enriching, thanks to IPOs.
While some of these IPOs have come in at relatively mature valuations, even post the IPOs, a lot of these companies have continued to grow and we have seen this over the last four years – be it an online broking platform, an online insurance platform or an online payments platform or an online food delivery and a quick commerce platform, all of these businesses have essentially kind of grown quite significantly, number one.
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Number two, post their IPO, a few of them did correct quite significantly. But if investors have done their homework well enough, those corrections have only created an opportunity to give a fresh entry or to even buy more into it and then be able to essentially ride it. I clearly believe that now the IPO valuations are not as cheap as what used to be many years ago, but they keep giving you opportunities even in the post IPO stage.
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