Transcript

How to Find Multi-Baggers With Small & Mid Cap Valuations?

Akshara Menon: Hello, today we have Mr. Arpit Shah, co-founder of Care PMS. Hello, sir

Arpit Shah: Hello, Akshara.

Akshara Menon: It’s nice to have you today, sir.

Arpit Shah: Thank you. The pleasure is entirely mine. Thanks to you and the PMS Bazaar team for conducting this connect.

Akshara Menon: So, Care PMS is a boutique PMS with an AUM of about 1000 crores and runs two strategies: growth plus value and large and mid-cap. Can you tell us more about it?

Arpit Shah: Yeah, thank you. Care PMS, as you mentioned, is a boutique PMS company. Traditionally, we started with a small and mid-cap focus strategy, which we call our growth plus value strategy, which is around 95% of our exposure. Post-COVID, around July 2020, we started our other strategy, which is called large and mid-cap strategy, focusing mainly on the top 250 companies.

Arpit Shah: Among the top 250 companies, we invest only there. About Care PMS, our best part is about performance. We have delivered around 24% CAGR since inception, meaning that in three and a half years, your money is getting doubled, which is net of fees. Another part is probably since I am the founder director, we call it the most ethical company. We are a team of people based out of Mumbai.

Akshara Menon: That’s a lot about Care PMS. Now, there's no more one-size-fits-all-all for any investor. What is that unique strategy that you follow in your investment philosophy?

Arpit Shah: When we started the company, our philosophy was that there are many multi-baggers available in the market. We wanted to encash that part, and we were doing pretty well. We are still doing pretty well in that part. But now, as the market is getting matured, even we are becoming a little big; we are now managing about 1000 crores. So, we have launched one exclusive strategy as a large and mid-cap strategy, which focuses on the top 250 companies.

Arpit Shah: In our growth plus value strategy, we are trying to take around 70% exposure only to small-cap while we have recently added some large-cap companies like O&G and Seagale. These are the two options that we have on the platter, which can provide some kind of diversification for our clients.

Akshara Menon: When you talk about valuations, smaller and mid-cap sectors are generally overvalued or have best-wish valuations during a bull run. How do you see this factor?

Arpit Shah: At Care PMS, we have always remained very conservative as far as valuations are concerned. In a bull run, earlier people used to discount one or two years of earnings in advance. Now, people are discounting earnings from 2029. That is not how Care PMS will play. Of course, we invest in companies with a three to five-year time horizon in mind. We understand what story can unfold.

Arpit Shah: However, my valuation for the company would be based on the recent visibility of the financials. We would not pay a company to discount from FY29 earnings. There are many companies available at reasonably good valuations. There is sector rotation happening, and you get very good, reasonably valued industry leaders into particular sectors. So, one has to be very alert about what valuation they are paying. One should not end up overpaying for a particular company. We have seen this in recent history with defence and railway companies, where the visibility gets a little blurred, resulting in a sharp fall in those stocks.

Akshara Menon: When you say that the growth opportunities in top companies are limited, how do you see that, and how do you see the growth opportunities in the small and mid-cap space now?

Arpit Shah: Actually, there is a myth that top companies are A-grade. If we take the Nifty 50, financials and IT constitute around 50% of the total. There are many options available in the small and mid-cap space which are actually industry leaders and can be termed as A-grade companies based on financial criteria and valuation.

Arpit Shah: For example, one of our largest holdings is JK Paper. They are into copier paper and have diversified into packaging, now into corrugated boxes, and hold around 30% market share in the copier paper segment. We call this an A-grade company. Similarly, we have Dawat (L&T Foods), which has about 50% market share in branded Basmati rice in the USA and significant traction in Europe and India. These companies have excellent financials, good cash flow, and are reasonably valued. So, I don't see any problem with having industry leaders in small caps; they are worth holding.

Akshara Menon: Your growth plus value, which is your flagship strategy, has completed 10 years in this industry. I also see that there is no space for financials or autos in that strategy. These two sectors are expected to do well. Why haven't you given space for these two sectors?

Arpit Shah: We are sector agnostic, except for some prohibited sectors. We, being Jain fund managers, do not invest in sectors like liquor and leather. Otherwise, we are sector agnostic. A simple line answer is that we don't find value creation happening in the banking and finance segment or auto sectors and auto ancillary.

Arpit Shah: We have some exposure in Maruti and other companies through our large and mid-cap strategy, but in growth plus value, we find that there are multi-baggers available at reasonable valuations, which we can hold for the next 3 to 5 years. That’s the only reason we are otherwise open for all sectors.

Akshara Menon: You have been holding companies like JK Paper or L&T for a long period. Don’t you feel that timing is an issue? Missing profits,  booking profits get missed while holding for a very long period. Do you partially book profits?

Arpit Shah: At the time of purchase, we keep around a 12% allocation to one company. To identify the multi-baggers, what we do is see that multiple triggers are happening, and those triggers in any business cycle can happen over a period of time. As long as the financials are in my favour, valuations are in my favour, the triggers are happening, and we remain confident in the management, we don’t mind holding a particular company.

Arpit Shah: Particularly in small caps, based on my experience and observation, if I buy a company at 100 rupees with the anticipation to make it reach 500 rupees in 5 years, for 4 years and 9 months, it may hover around 120 to 80 rupees. That’s how small caps behave. Then, in the next 3 months, it may cross from 120 to 500 rupees.

Arpit Shah: What is in my control are watching the financials, watching the valuations, and whether the management is committed. Those are the things I can control. So, we don’t mind having a longer-term horizon in mind. We never try to time the market. Even today, when our portfolio companies are at lifetime highs, we have almost more than 90% invested. That has been the history of Care PMS since its inception; we have remained fully invested. We don’t want to time the market; instead, we’d like to give time to the market.

Akshara Menon: These days, there is more attraction toward small and mid-caps compared to large caps. Many multi-cap PMSs or flexi-cap PMSs are giving more weight to small and mid-caps, while the weightage towards large caps is significantly reducing. Don’t you think that when there is overcrowding in small and mid-caps, large caps are being undervalued? Don’t you see opportunities in large caps now?

Arpit Shah: It’s, of course, an individual’s call. Large caps have limited options. What we are seeing in large caps is that FIIs have been continuously selling in India for more than two years, with negative sentiment. Their largest holdings were in the banking and financial sectors and IT. We see that some selling pressure is due to that.

Arpit Shah: However, in the small and mid-cap space, you find great opportunities. For instance, we are very bullish on the agri-related companies. There are hardly any opportunities available in large caps. To participate in the next sector rotation and the next growth stories, you have to look beyond large caps.

Arpit Shah: What we have seen in the past, like in the defence sector, we won’t name a single company that was in large caps in the defence sector, but we have seen how the sector as a whole has performed, along with mining companies.

Interviewer (Akshara Menon): Mr. Shah, you mentioned being bullish on the agriculture sector and the rural economy. What data points and factors do you consider important for this sector?

Mr. Arpit Shah: We are indeed very bullish on the rural economy. Historically, government decisions significantly influence sector rotation. After the elections, we noticed that India lost many rural seats, and the government’s failure to double farmers' income has been a major concern. Following the election results, we observed a change in the cabinet, specifically in the agriculture minister's position, which we see as a positive trigger. Additionally, after a couple of years of poor monsoon, we expect an above-normal monsoon this year, which is crucial for rural demand. The government’s recent focus on farmers, including raising the Minimum Support Price (MSP) for various crops and introducing 110 new seed varieties, further supports our optimism. We have started investing in fertilizer stocks and dairy and seed companies, aiming for at least a 20% allocation in that sector.

Akshara Menon: Can you elaborate on your investment in the seed sector? What influenced your decisions, particularly regarding companies like ONGC and Cauvery Seeds?

Mr. Arpit Shah: Great observation! ONGC and Cauvery Seeds are distinct in their approaches. We had a good run in the last two years, and pre-election, we decided to focus on preserving our growth. To achieve this, we increased our cash level from around 3-4% to about 7-8%. We also diversified from small-cap to large-cap stocks without deviating from our growth-plus-value investment philosophy. We recently bought ONGC, Gale India, and Ultratech Cement as part of our large-cap strategy, ensuring that sharp market movements have less impact on our portfolio. In the agriculture sector, the focus on climate change is evident, and with government incentives, farmers are now more inclined to adopt higher-yield seeds. Cauvery Seeds is well-positioned in this regard.

Akshara Menon: Sector rotation is vital in the market. Given that many PMS strategies focus on sectors like FMCG and capital goods, how do you differentiate your approach? Have you ever invested in a sector that was unpopular at the time?

Mr. Arpit Shah: Regarding FMCG, we previously invested in KRBL Limited, which is classified under fast-moving consumer goods due to its staple product, basmati rice. This rice is a key product in many GCC countries, and KRBL holds a significant market share there. We achieved over 5x returns because the company’s earnings were growing, and it shifted from being viewed as a commodity to a more favourable FMCG valuation. We tend to be value-conservative in our evaluations, which allows us to identify companies with long-term growth potential, like Arvind. Traditionally a textile company, Arvind's new management has successfully expanded into advanced materials, growing their top line significantly while maintaining strong margins.

Akshara Menon: You mentioned maintaining a cash position. Why do you believe it’s important for fund managers to hold cash during a bull market?

Mr. Arpit Shah: Cash calls are essential for various reasons. For example, some small-cap companies were trading at high valuations, so we chose to hold cash instead of deploying funds during the market's rise. Even when the market reaches all-time highs, it’s prudent to conserve previous gains. Throughout my 13 years in this industry, we’ve typically remained fully invested, but currently, we have about 8% cash as we look for new opportunities.

Akshara Menon: Thank you, Mr. Shah. We are nearing the end of this session, but let’s move on to a rapid-fire round. What are three factors you consider when investing in a stock or sector?

Mr. Arpit Shah: The management, the financial health of the company, and valuation.

Akshara Menon: What advice would you give to Gen Z investors?

Mr. Arpit Shah: Gain knowledge before investing, build a strong temperament, and if you can’t do both, consult a fund manager.

Akshara Menon: What factors do you consider when exiting an investment?

Mr. Arpit Shah: Valuation, changes in fundamentals, and identifying a better opportunity.

Akshara Menon: What is something we might not know about you?

Mr. Arpit Shah: Personally, I’m quite introverted and shy, but as an investor, I’m aggressive. I view myself as a visionary because I built this company from scratch to over 1000 crores. I have a strong risk appetite.

Akshara Menon: As a first-generation entrepreneur in this industry, how would you like to be remembered?

Mr. Arpit Shah: I prioritize ethics, which is non-negotiable. Secondly, I want to be remembered for my performance and, lastly, for leading Care PMS from its inception to over 1000 crores, with hopes for even greater growth in the future.