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Good 3 year run, but lots of steam left in this segmentAjay Khandelwal, Motilal Oswal AMC, Mumbai

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Having built an active coverage of over 140 small cap stocks, MO has now launched its actively managed small cap fund. Earlier this year, it had launched a passive microcap fund.

Small cap index’s trailing PE of 24x may appear high – but needs to be seen in the context of an earnings upgrade cycle where next 2years’ earnings growth is projected higher than 25%. Balance sheets of small cap companies have also become much stronger – debt-equity ratio has come down from 0.7 to 0.3, allowing enough headroom to capitalize on growth opportunities.

High dispersion of earnings growth and PE multiples among small caps offer sizeable stock picking opportunities for active managers.

Growth runways are huge in several small cap dominated sectors including capital goods, hospitals, diagnostics. These are sectors that will become much bigger over the next decade, and leaders in these sectors will grow rapidly. Stock prices never go up in linear manner – but wealth creation potential clearly exists in these spaces, even after their initial run up in  last couple of years.

Financial inclusion, digital transformation, manufacturing/capex revival and consumption are key themes Ajay expects to be investing into, with this new fund.

The fund will have 30-35 stocks and each position will be between 1.5% to 4.5% weightage in the fund – thus enabling meaningful bet sizes while avoiding over-concentration which is a risk in the small caps space.

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Comments Posted
ritesh ARN NO :INV MUMBAI, 11 Dec 2023

Great Insights by Manager. Seems to be a very fund among the peers in small-cap category

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