PMS Bazaar recently organised a webinar titled “What Can Go Wrong in Small and Midcaps?” featuring Divam Sharma, CEO and Co-Founder, and Anuj Jain, CIO and Co-Founder, both from Green Portfolio. This blog covers the important points of this webinar discussion.

• Investment Philosophy
• Market trends: The surge in small and mid-caps
• Investing in small and mid-caps: Opportunities and responsibilities
• Exploring opportunities in emerging sectors: A strategic approach

Investment Philosophy

Early Entry into Below-the-Radar Companies:

Divam Sharma stated that Green Portfolio focuses on below-the-radar companies. They are stock pickers, entering companies early in their trajectory, often before major institutions make their move. This strategic approach minimises portfolio overlap with peer institutions and has led to the creation of numerous multi-baggers.

Strategic Focus on Manufacturing and Traditional Investments:

Green Portfolio's investment strategy revolves around a ground-level and traditional fundamental-driven research methodology. The team concentrates on manufacturing-oriented investments, aligning with government initiatives such as PLI and the China Plus One theme. The firm, while not opposed to banking and IT, prefers traditional businesses for long-term investments.

Tailored Portfolios and Discretionary Cash Holdings:

Green Portfolio sets itself apart through discretionary cash holdings and frequently updated model portfolios. Clients benefit from slightly customised allocations, reflecting their timelines and opportunities. The PMS approach involves a niche allocation strategy, ensuring that each investor's portfolio aligns with their unique circumstances.

The Small and Mid-Cap Focus

Market Trends: The Surge in Small and Mid Caps:

The presentation delved into the recent surge in small and mid-cap investments. Over the last year, micro-caps, small caps, and mid-caps have experienced substantial growth compared to large caps. Mutual fund data reveals consistent inflows into small caps over 15 consecutive months, showcasing a robust appetite for these segments. Domestic institutions and retail investors have led the way, with FII ownership in small-cap companies decreasing, making way for increased interest from local investors.

Fundamentals: The Case for Small and Mid-Caps:

Despite the increased demand for small and mid-caps, the fundamentals remain strong. These companies exhibit comfortable debt-to-equity ratios, and during the COVID period, many promoters reduced debt, focusing on deleveraging. Over the past three years, small and mid-caps have shown higher sales and profit growth than large caps, making them an intriguing investment proposition.

Divam Sharma highlighted the substantial capital infusion in small and mid-cap companies, showcasing their proactive approach to raising funds. Green Portfolio has successfully executed over 17,000 crore of QIP (qualified institutional placement) and over 10,000 crore of rights issue raises in small and mid-caps, significantly surpassing the 32,000 crore raised in large companies. 

PLI Scheme: Catalyst for Growth in Small and Mid-Caps:

The co-founders shed light on the positive impact of the Production-Linked Incentive (PLI) scheme on the small and mid-cap sectors. The PLI scheme has catalysed growth across various industries, particularly in manufacturing. The scheme, covering more than 20 sectors, has witnessed small and mid-cap companies securing licenses, triggering significant expansions. Sectors such as auto, drone, battery, electronic systems, food processing, and medical devices have seen notable growth, positioning these companies as direct or indirect beneficiaries of the PLI.

Key Growth Sectors in India: A Compelling Case for Investment:

Sharma emphasised the promising growth outlook for various sectors in India. With a burgeoning middle-class population contributing significantly to consumption, coupled with increasing export opportunities, sectors such as retail, defence, electronics, and electric vehicles (EV) are forecasted to experience rapid growth. Many of these high-growth sectors are dominated by small and mid-cap companies, making them attractive opportunities for investors aiming to capitalise on India's growth story.

Investing in Small and Mid Caps: Opportunities and Responsibilities

While acknowledging the immense potential for alpha generation in small and mid-cap investments, the co-founders highlighted the importance of responsible investing. Cautioning investors, they emphasised the need for regular monitoring and understanding of fundamentals. 

Sharma elaborated on Green Portfolio's distinctive investment philosophy. Focused on below-the-radar companies, the firm places emphasis on early trend identification, utilising both quantitative and qualitative data. Rigorous risk management involves scuttlebutt, cross-checks, channel checks, factory visits, and regular communication with company management. The approach centres on long-term earnings prospects, aligning with the belief in patiently waiting for the compounding story to unfold.

Unveiling the Challenges Faced by Small Shareholders:

Anuj Jain provided valuable insights into challenges faced by small shareholders through real-life examples. The examples underscored the need for investors to scrutinise indicators and governance practices in small-cap investments.  Jain emphasised the complexity of assessing risks and the importance of recognising warning signs, even when a company appears promising on the surface. By sharing these real-life scenarios, Jain aimed to guide investors in making informed decisions and navigating potential pitfalls in the dynamic market environment.

Exploring Opportunities in Emerging Sectors: A Strategic Approach

Identifying Growth Sectors: Telecom, Chemicals, and Pharmaceuticals:

Divam Sharma elaborated on the promising sectors where Green Portfolio identifies potential investment opportunities. Despite the challenges and fluctuations in the market, the team at Green Portfolio remains vigilant and strategic in their approach.

Telecom Sector: 5G and Private Wireless Networks:

Sharma highlighted the potential in the telecom sector, particularly with the emergence of 5G technology and private wireless networks. The anticipated increase in spending in the sector, as indicated by the CAGR figures, presents investment opportunities. With 5G penetration still at a nascent stage in India, Green Portfolio sees opportunities in equipment manufacturing, optic fibre cable players, and other related segments.

Chemical Sector: A Structural Opportunity:

The chemical sector, though facing short-term challenges, is viewed by Green Portfolio as an opportunity.  Sharma emphasised the potential for India to scale up its chemical manufacturing and export capabilities. The sector's lower valuation compared to the overall Mid-Cap Index PE is seen as an attractive entry point for investors. Despite challenges such as falling volumes and margin pressures, the long-term growth prospects remain robust.

Pharmaceutical Sector: Resilience and Growth:

While the pharmaceutical sector faced challenges, including issues with the US FDA, Green Portfolio sees significant potential for growth. The sector's resilience during the COVID-19 pandemic and the impetus provided by initiatives like PLI and FDI investments signal a positive trajectory. With expectations of the sector multiplying three to four times by 2030, Green Portfolio aims to capitalise on the growth potential, both in domestic consumption and export opportunities.

Divam Sharma and Anuj Jain provided an in-depth explanation of the above-mentioned topics in the webinar. They also answered questions from the audience toward the end of the session.

For more information, watch the recording of this session through the appended link below:

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