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'Small-cap companies will continue to grow in the range of 25-50%'
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Though the small-cap space is in a tremendous upward trend, important points to note are the sustainability and the fundamentals of the companies demonstrating good returns on theprice front. RajagopalR, vice-president & CIO, DBS Cholamandalam Asset Management Ltd (DCAM), which also has a small-cap fund, gives his views on the investment situation in the small-cap space. He spoke with Rajesh Naidu of The Financial Express. Excerpts:
If one looks at the two-year Sensex, mid-cap and small-cap movement, it is seen that small-caps have demonstrated a solid and consistent growth in comparison with mid-caps and the Sensex. So what are the lessons (in terms of investment opportunities), an investor can learn from this journey?
Yes.itclearlyindicatesthatthesmall-caps have higher potential returns over a longer time frame. It thus indicates that small-cap investment is to be viewed by investors as an opportunity to invest over a larger time frame (3-5 years) for substantial appreciation.
Do you maintain the view that the small-caps domain would see a continued rally?
In the short term, volatility might work against the investor but yes, over the next few years small-caps, as a category, are poised for attaining higher levels.
Which are the small-caps that you thinkhaven'treceiveddueattention?
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trend in the movement of smalcaps vis-a-vis the Sensex and midcaps. Does a dive or upward movement in the Sensex bring about a change in mid-caps' performance?
If the past is any indication, whenever the mid-caps and small-caps have lagged behind their large-cap counterparts, they have sooner or later caught up and marched ahead of the returns of large-caps.I believed iatt his would con-tinue. Despite volatility in the short- to medium-term, the small-caps would outperform others over a longer horizon.
What is your take in terms of returns, performance and sustainability of small-caps in the coming quarters, considering the Sensex gaining momentum? What is your advice to investors, both intending to take exposure and are exposed to small-caps?
Smaller companies have higher growth rates. If the management can scale up then these high growth rates are sustainable for a very long time. Hence the return expectation could be in-line with the EPS growth for these companies. We believe that the small-cap companies will continue to grow in the range of 25-50% depending on the addressable business opportunity. I would urge the investors to allocate a percentage of their overall investments in the equity market for the small-cap space. It is advisable to come through a dedicated small-cap fund offering by mutual funds. This will mitigate their volatility risk.
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► Rajagopal R
Which are the small-caps you are bullish on?
Small-cap investment process is necessarily a bottom-up approach. Their sheernumbermakes it very tedious and impossible for any investor to scout for stock in this category. Our approach has been to narrow down to say 50-60 stocks across sectors from a domain of 500 stocks or build a diversified portfolio. We like stocks like Empee Distillar-ies, Elecon Engineering, Visaka Industries, Deep Industry, and Jyothi laboratory, Sical, KEI Industries, etc.
Ideally, what are the factors (both positive and negative) one should take into account while investing in
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liquidity, scalabil-
ity, etc. WeLook for five basic criteriabe-fore investing - management quality, business niche, scalability, profitability and value unlockingproposition.
Since most of these companies would need capital for scalability of operation, they will tap both the debt and equity markets from time to time for proper debt-equity mix. Tapping the capital market could be through public issue/QIP's/ private placement, etc. We see good potential going forward in small-cap investments. In the past, some of our picks like Deep Industry, KEI, Tata Sponge, etc, have delivered high returns and some of them we believe still have potential to become multibaggers.
Do you foresee or have noticed any
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