Envision Capital’s Nilesh Shah On What Will Propel Small, Mid Caps In Next Few Years

The growth for mid and small caps will be aided by four factors—a broad-based economic growth, shift from owner-driven to professional-led firms, goods and services tax, and digitisation, Shah said.

Data is becoming all-pervasive and that is helping small and mid-sized businesses reach out to consumers and households in smaller cities, towns and villages, he said. “Smaller companies are getting access to one large market of 200 to 300 million households due to e-commerce, creating a level-playing between large and small businesses.”

Small and mid-cap firms, he said, seem to be favourably placed and the valuations are attractive, putting them in “a sweet spot over the next several years in India”, he said.

Here’s Shah’s take on key themes:

Technology

India's technology service sector enjoyed strong margins in the last year, according to Shah. The shift to cloud services, he said, has led Indian information technology companies to partner with global cloud service providers like Amazon Web Services, IBM Corp., and Microsoft Corp., providing revenue tailwinds.

With private equity firms investing, and acquisition and merger of small and mid-sized IT firms leading to consolidation, the stock prices are getting impacted, he said.

Shah said HCL Technologies Ltd., among the large IT companies, has been the best performing stock and is available at reasonable valuations.

Tech IPOs

Although skeptics looking at traditional metrics may argue tech companies are overvalued, Shah said people who are bullish believe that like in the West, India may now experience valuations growing.

He said Nazara Technologies Ltd., which completed its initial public offering, will be a very big business considering the size of the market India has to offer. If valuations of similar high-potential businesses make sense, investors would prefer to invest in their IPOs.

Specialty Chemicals And Pharma

As long as an investor pays a reasonable price and does not overpay, Indian speciality chemicals and pharmaceuticals as businesses have a long-term and structural opportunity to offer to the rest of the world, Shah said. Pharma businesses have scaled up and made a dent into large, regulated markets, which may be indicative of a long-term solid double-digit growth, he said.

AMC Business

Millions of people in India are turning from being savers to investors, according to Shah. Asset management is not just a multi-year but a multi-decade opportunity, he said. A mutual fund business offers a high return on equity and doesn’t require capital for growth, offering a return on capital of more than 30%—rare for any other type of business, he said. Envision Capital is invested in HDFC Asset Management Co, he said.