Under 30? Which pockets of small and midcaps should you be hunting?

Synopsis

Nilesh Shah from Envision Capital suggests that young India offers significant investment opportunities, particularly in digital platforms, premium consumer goods, nutraceuticals, and infrastructure. He advises investors to study successful market strategies from other countries and focus on long-term, capital-efficient growth. When investing in mid and smallcaps, prioritize governance, a strong balance sheet, and a viable business model to mitigate risk.

Nilesh Shah, MD & CEO, Envision Capital, says Young India presents hope as well as opportunities for investors. Digital platforms and premium consumer goods are key areas. Nutraceuticals and infrastructure development also show promise. Renewable energy and manufacturing sectors offer growth potential. Investors should study successful market strategies from the United States, China, and South Korea. Focus on long-term, capital-efficient growth for optimal investment outcomes.

Shah further says that in order to mitigate risk in mid and smallcaps, keep an eye on three components – governance, balance sheet, and business.

Next India is the B30 segment, the below 30 year olds which are going to really chart the next 20 years for the country and they are the ones who are the new investor pool and that is the segment that can be penetrated going forward. For someone who is below 30 right now, starting his career pretty much and wanting to invest, any pockets within small and midcaps that one should be hunting?
Nilesh Shah: Oh, absolutely and it is essentially young India which offers both hope and opportunity. Clearly young India is doing things in a very different way, be it their own earnings, be it their own consumption, be it their own savings and be it their own investment. The biggest mantra for any young investor is to see what that young investor does in his daily life. And to that extent, clearly be it areas around digitalisation or the whole digital platforms and two, basically the consumer or the consumption-oriented areas, especially the premiumization which is basically sweeping the entire consumption landscape.

It is no longer just about those soaps and shampoos; it is about sunscreens and many other things. The second area is nutraceuticals and protein products. The third area is what is really happening in the world of infrastructure. Clearly, the pace at which infrastructure buildout is happening, the kind of strides that we are making in the areas around renewable energy, are some of the areas. So, be it energy, be it manufacturing, or infrastructure, these are also very big opportunities. They may not be the 10 20-year opportunities, but they seem to be the opportunity for the next three to five years.

The best way to look at it is what happened in some of the big markets, what happened in the United States 40-50 years ago, what happened in China 30 years ago or in South Korea. Clearly there are enough playbooks globally for us to basically study, see and see what can potentially happen in India, that is probably what the young investors out there need to really look out for. Look out for long-term secular capital efficient growth opportunities, that to me is probably the best way to kind of really address your investment landscape.

When you look at investing in small and midcaps, what are those risk frameworks that people need to put in place from an investment perspective? You have to have the stomach to hold through the down cycles also. How do you get your risk appetite right and how do you identify the framework?
Nilesh Shah: There are three broad areas where one needs to be really focused on as far as risk is concerned. Number one is essentially the governance of the company, the governance standards, and that should be a non-negotiable, number one. Number two essentially are risks coming in from the balance sheet. In terms of debt levels, whether the business can generate the cash flows. And third, the risk to do with the businesses itself, which means the product, the product market fit, the right to win, the growth opportunity, the addressable market.

These are some of the areas that to do with the business and along with that comes in competitive intensity. So, from a risk framework point of view, one should really look at these three components – governance, balance sheet, and business - -and if one is really focused on these three things,one can surely mitigate risk. That is extremely important.

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