Small caps and Midcaps rally has been a point of contention coming into 2024. Even the microcaps have done phenomenally well, forging fund managers, and market experts to term this space as “overvalued” or “unjustified”. 

India is developing rapidly and the market interests are evolving as a result – there can be no debate here. Besides rising liquidity in the market, foreign fund flow, and sheer earnings, why is it that small caps are racing past the large caps? 

We identified 3 main pillars, on which we will shape our argument. 

Firstly: Stronger balance sheet and fundamentals
Secondly: Smallcaps consist of companies that represent a growing India
Thirdly: PLI Beneficiaries are plenty in the small/mid cap space. 

In terms of sales and profitability during the last 3 years, companies below INR 20,000 Market cap, have been able to outperform the latter group. Here is a table that attaches figures to our statement.  

Key Metrics*  Debt-to-equity 3 Year Sales Growth 3 Year Profit Growth 
Smallcap + Midcap 0.30x 15.1% 28%
Largecaps  0.28x 14.0% 20%

*Based on median of 1,880 stocks in (small + mid).
*Based on median of 300 stocks (large).

Lingering on the first pillar, small/mid cap companies have raised tremendous amount of capital to strengthen their financial position. The capital they raised through QIP (qualified institutional placement) and rights issue mainly went towards capacity expansion or paying of debt rather than into unproductive areas. 

Key Metrics QIP Right Issue
Smallcap + Midcap ₹17,300 Crores ₹10,000 Crores
Large Cap ₹32,800 Crores  

The Nifty 50 index, a synonym for India’s large cap’s consist of Financials, IT, Automobile and FMCG. Just the first two sectors take up 50% of our largest index. What about super growth sectors like medical devices, EV, defence, AI, electronics manufacturing, and ed-tech? We identified India’s top growth sectors, away from the conventional and boiled it down to the below chart. There are plenty of companies doing wonders in the new age sectors that are part of the small and mid-cap space. When will the rally account for this? 

Growing Sectors  No. of stocks in Small + Mid No. of stocks in Large Forecasted Industry Growth
Retail  35 4 10%
Defence 19 7 15%
Electronics Mfd. 13 1 16%
EV 7 9 49%
Ed-tech 11 16%
Healthcare 51 7 18%

PLI Scheme, which rewards companies for increasing sales is a huge reason why many smallcap companies have benefitted. Infact, when we invest, we prefer companies who would be most likely getting approval for PLI. Again, there are plenty of companies that have been approved under different sectors for the PLI Scheme. 

Industry Smallcap Midcap
Auto & Auto Components 2 10
Drones 1
Battery Storage 1
Electronic Systems 1 3
Food Processing 2 9
Medical Device 1
Speciality Steel 2 7
Pharmaceuticals 2 3
Telecom 3 5
Textile & Apparels 5 6
White Goods 1 3

When we study companies, we adopt a special lens. Our interpretation is unique and this uniqueness has enabled us to not just outperform the benchmark but outperform the outperformers too. 

What makes us different: 

  1. Focus on Under-the-Radar Companies: Specializing in lesser-known firms, with an average portfolio market capitalization of INR 12,000 Crores.
  2. Manufacturing-Oriented Fund: Prioritizing investments in the manufacturing sector for robust and tangible growth opportunities.
  3. Minimal Exposure to Banking and IT: Distinctly low to zero investment in banking and IT sectors, setting us apart from conventional index strategies.
  4. Ground-Level, Research-Driven Stock Selection: Employing in-depth, on-the-ground research to drive our stock selection, ensuring informed and strategic investment choices.
  5. Discretionary Cash Holdings: Adopting a cautious approach by holding liquid cash in client portfolios when suitable opportunities are scarce, emphasizing capital protection.