India’s Growth Story Driven by Smallcaps

Before diving into the newsletter, we would like to invite you to our booth at the Source X Exhibition at Pragati Maidan, New Delhi from 17th to 19th January. We’ll have our smallcase managers there and you can directly chat with them in person. Find more details here. 

You can directly drop in there and say hi but register as a visitor to avoid any queues here. Onto the newsletter now!

Markets and most investors are going around looking for opportunities in large-caps. The market is excited about large caps now and concerned about small caps after seeing the rally that the last year has brought. But is it the time for large caps? The common consensus is that large cap is the space to be in right now. 

However, we at Green Portfolio disagree with this. Yes, 2023 has been the year of small and mid-caps and thus markets and investors are now concerned about overvaluations in the space but we firmly believe that there still is an immense scope for value addition in small-caps, far more than large caps. I know this is very confusing for you. On one hand, you have been reading about overvaluations in small caps and opportunities, and now I am here saying that it’s not true. Don’t worry, as today, I am talking about how the overvaluation of the index is not representative of the whole space and where the opportunities for great value addition lie (and I will justify everything with numbers).

Not Walking the Talk – An Irony

Here’s something ironic – markets are talking about large caps but numbers show investments in small caps. Look at this:

In the last few months, money has been largely withdrawn from large caps and allocated to small caps. But don’t just follow the herd and invest in any space or company blindly, take the time to do your due diligence or take the help of an investment advisor like Green Portfolio or anyone else before putting your funds into the markets. 

Outperformance of the Smallcap Index

The Smallcap index has seen a huge bounce in numbers this year. One of the indices almost doubled too but does it mean that the good times for smallcap are over now?

Well, let me start by comparing the indices and our portfolios. I have taken the Price to Earnings ratio since it is the most easily understandable and widely used metric for comparison. However, you should note that it is only one of the plenty. 

The PE ratio for the Nifty indices lies well above 20. Take the Nifty Smallcap 50 index and you’ll notice that its current is almost 30, while on the other hand, the index for our Smallcap Compounders Smallcase is only 18.65. That’s because we don’t invest in index companies, or see the smallcap space through the lens of indices, we analyse singular companies and stocks and that’s how we find big opportunities in the smallcap space. 

Companies in Small and Mid Caps vs Large Caps

All the growth, rallies, and bull runs we are seeing in the markets are driven by India’s growth story. Markets are giving returns only because the economy is growing. And this growth is driven by smallcaps and midcaps. Here’s another angle to look at it. 

You’d think that large caps have companies that work in all possible sectors, particularly the growing and upcoming sectors because large caps have more resources than small caps. However, look at the visual above and see how there are very few companies in large caps for up and coming high growth sectors like Defense, EV, Ed-tech, and more. Note how these are the sectors where growth is expected in double digits against conventional industries where most of the large-cap business lies. Take Ed-tech, a sector where a whopping 16% growth is expected but there is no big company getting in on this opportunity, however, small and midcaps are bouncing on it. 

Government Support

Now the question is – how are small and midcaps able to do what large caps are not doing? And the answer is pretty simple here – the government has got the back of MSMEs. 

Government Initiatives like the Atmanirbhar Bharat, Production Linked Incentive (PLI) Scheme, etc have helped encourage and boost the reshoring opportunity here in India. An allocation of almost 2 lakh crore rupees has been made for PLI schemes for different sectors from auto to drones to telecom. And it’s the smallest manufacturers that are taking the biggest advantage of the PLI Scheme Benefit. 

A lot of our companies are beneficiaries of the PLI schemes. Here are a couple of those beneficiaries: 

Conclusion

Equity markets are stock pickers markets. Opportunities do lie in all small, mid, and large-cap spaces but it is the small-cap space that has the most space for value addition and it’ll only grow in the future as the MSMEs take advantage of government schemes, geopolitical advantages like China plus one and Euro plus one and more. After all, the small caps of today are the large caps of tomorrow. 

Liked this story and want to continue receiving interesting content? Watchlist Green Portfolio’s smallcases to receive exclusive and curated stories!

Green Portfolio is a SEBI Registered (SEBI Registration No. INH100008513) Research Analyst Firm. The research and reports express our opinions which we have based upon generally available public information, field research, inferences and deductions through are due diligence and analytical process. To the best our ability and belief, all information contained here is accurate and reliable, and has been obtained from public sources we believe to be accurate and reliable. We make no representation, express or implied, as to the accuracy, timeliness, or completeness of any such information or with regard to the results obtained from its use.