Insights from smallcase Managers: Navigating Market Dynamics into FY25
On the final day of the financial year 2024, the Indian stock market soared to new heights, with the Nifty 50 index closing above the 22,300 level. FY24 was an exceptional year for Indian stocks, marked by double-digit growth that surpassed the performance of previous years.
As we bid farewell to the past financial year and usher in the new one, let’s take a moment to reflect on the events of the preceding year and set our sights on the future.
Here’s what some of our leading smallcase managers have to share about the highlights of the past financial year and their insights into what lies ahead.
Sectors and industries to track in FY25
Naveen K R, Senior Director, Windmill Capital
When sectors like realty begin to do well, generally they are on an uptrend for a long time. Hence, I would assume the real estate sector to keep performing well with both public and private capex coming through. A lot of new things are seeping into sectors like energy & automotives, so it will be interesting to see the prospects of them in the coming year.
Sonam Srivastava, Founder, Wright Research
In FY25, our focus seems to be shifting towards MNCs, large caps in consumer staples, banking, finance, and autos. This aligns with a potential tilt in our smallcase allocation strategy towards larger, more established companies. The optimism likely stems from their stability, especially during pre-election years, along with their maturity and consistent growth potential. Additionally, consumer staples and autos might benefit from a growing economy and rising disposable incomes. This sector focus suggests a potential reduction in exposure to small and mid-caps compared to FY24.
Ashwini Shami, EVP & Portfolio Manager, Omniscience Capital
The banking sector fundamentals are currently strongest in years with the capital adequacy ratios being at decadal high and the gross NPA at decadal lows. We are already witnessing double-digit growth in the bank credit. The valuation for both private and public sector banks is attractive and there is a good potential for re-rating that can take place on the back of further improvements in RoEs and growth rates. IT is another sector with strong growth coming from digital transformation and Artificial Intelligence, specifically, Generative AI areas. The expected US interest rate cuts and the strong outlook for the US economy bode well for the IT sector.
Arvind Kothari, Founder & Director, Niveshaay
Favourable government policies, increased capital expenditure, indigenization, import substitution, and the “China Plus One” trend continue to influence sectors such as capital goods, defence, electronics, renewables, and textiles. We are also optimistic about the consumption sector due to its pivotal role alongside manufacturing in propelling growth within any nation. The power sector is witnessing a substantial rise in investment, both internationally and domestically, driven by the energy transition towards renewable sources.
Sectors & investing themes which performed well in FY24
Naveen K R, Senior Director, Windmill Capital
While most of the sectors picked up their performance in the last fiscal year, few outliers were – Realty, Energy, Autos. We have a bunch of tracker smallcases that track most of the important market sectors and the smallcases attached to the above-mentioned three sectors have had the best performance.
Sonam Srivastava, Founder, Wright Research
Momentum, as a market trend, played a significant role. The concentrated momentum strategy captured favourable market movements, reflected in its strong performance. Additionally, our focus on small and mid-cap companies drove returns, as these sectors likely experienced positive tailwinds. Furthermore, the “New India” theme, indicating a focus on specific industries or companies aligned with India’s growth trajectory, proved successful. Top stock picks in sectors like infrastructure, manufacturing, and PSUs (Public Sector Undertakings) likely contributed significantly.
Ashwini Shami, EVP & Portfolio Manager, Omniscience Capital
Our offerings on railway infrastructure, power, mobility, defence, IT, AI and financial services have all seen spectacular value unlocking as seen in the valuation multiples. The fundamentals have remained strong for these companies and the growth possibilities are expanding for all these sectors. Our dividend strategy was another winner. While other dividend strategies would only focus on high dividend-yielding stocks, Omni Super Dividend strategy captured some undervalued names with strong balance sheets, sustainable cash flows and strong earnings growth potential.
Arvind Kothari, Founder & Director, Niveshaay
Our investment strategy centres on targeting high-growth sectors poised to outperform, driven by favourable industrial conditions. The themes that worked well for us include the transition towards green energy, increased government spending, efforts towards indigenization, import substitution, and the ongoing China Plus One trend. Sectors like renewables, capital goods, defence, and electronics are particularly influenced by these dynamics. Within the consumer discretionary space, the premiumisation trend thrived, supported by projections of a substantial expansion in India’s luxury market by 2030.
Explore the FY 2025 smallcase collection!
Potential shifts in sector allocation one can expect in FY25 compared to FY24
Naveen K R, Senior Director, Windmill Capital
FY2024 was yet another blockbuster year for mid & small caps. Perhaps, with valuations slightly stretched for them, investors would look to shift their allocation where there is comparatively more room for growth coupled with comfortable valuations.
Sonam Srivastava, Founder, Wright Research
Instead of the initial emphasis on small and mid-caps in FY24, we can expect a decrease in their allocation. This shift prioritises sectors with lower risk profiles, like large caps, offering more stability during elections. Additionally, established companies in these sectors likely boast strong fundamentals and consistent growth potential.
Ashwini Shami, EVP & Portfolio Manager, Omniscience Capital
In FY24 we have seen significant repricing in mid & smallcap space. In the coming year, we expect the focus to shift to large caps. Beyond the capitalisation, we believe that the market will continue to concentrate on mispriced growth vectors such as banking, cleantech, power, infrastructure and technology. Amrit Kaal initiatives focusing on logistics, manufacturing, sunrise sectors and improving the broader physical and digital infrastructure in India are expected to remain at the forefront of the policy framework for the government and hence.
Arvind Kothari, Founder & Director, Niveshaay
As we enter FY25, it is imperative to exercise greater care in our investment selections and to give proper consideration to valuations and growth trajectories. It appears that certain micro-cap stocks are currently overvalued, indicating the necessity for caution when making investment decisions. We anticipate that the momentum in the same sectors’ business will persist, and it will require diligent effort to identify further opportunities within these sectors.
smallcase performance highlights in FY24
Naveen K R, Senior Director, Windmill Capital
As markets were on an uptrend in the last fiscal year, momentum-based strategy smallcases, like Value & Momentum, performed very well for us. Not to mention, smart beta strategy smallcases also displayed their versatility where Quality- Smart Beta smallcase was the pick of the lot.
Sonam Srivastava, Founder, Wright Research
Our smallcases achieved strong results in FY24, exceeding the performance of most benchmarks. Our newly launched smallcase, Alpha Prime, also delivered stellar performance. Notably, thematic approaches like concentrated momentum and new India manufacturing thrived, exceeding the Small Cap Index by a substantial margin. This overall success can be attributed to our initial focus on momentum and smallcaps, alongside the effectiveness of specific themes.
Ashwini Shami, EVP & Portfolio Manager, Omniscience Capital
We have seen value unlocking across our smallcases with significant outperformance compared to the respective benchmark indices. All of our core as well as specific growth vector-oriented smallcases have seen upward re-rating and strong fundamental performance in the last financial year and the recommended asset allocation to a mix of core and multiple growth vectors has done well for investors by providing lower volatility and yet capturing the growth.
Arvind Kothari, Founder & Director, Niveshaay
All of our smallcases have yielded commendable results in FY24, as well as the Smallcap Index. FY23 was not great for small caps, and many companies were available at reasonable valuations last March. We started FY24 by guiding all investors to make lump-sum investments to reap the benefits. Following that, there was a great rally in overall mid and small-cap companies. The small-cap index has demonstrated a 75% return over the past year. And all of our smallcases have performed better than the indices.
Explore the FY 2025 smallcase collection!
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