Amidst all the circumspection around markets right now, Utsav says in 2028, when you look back to today, you will think that markets gave me a long enough period of time to buy good companies at reasonable valuations – and I missed them because I focused too much on the surrounding noise.
He says that too much focus on PE and PEG risks missing out on some of the biggest wealth creation opportunities that markets are giving us. We need to look not just at 12 month forward PE multiples, but business growth and earnings trajectory over the next 5 years or more.
PGIM India Small Cap Fund’s portfolio stocks are expected to grow earnings at over 30% for the next 2 years, which is sizably over the small cap index earnings growth estimates. At a 46PE, the portfolio sports a PEG of 1.5, in line with market.
The small cap universe has expanded very significantly in recent years from 250 stocks to over 800 stocks now, with a continuous flow of new listings across diverse industries– some of which hold significant promise of high growth. This makes the small caps space a stock pickers paradise.
Utsav is investing in businesses that supply to AI focused data centres, in SAAS companies, consumer tech companies, CDMO and hospitals.
He invests in 2 types of companies – the first segment is fast growing companies that may already be well discovered by the market but continue to grow fastest in their respective sectors. The second is companies with optionalities – established companies that have been investing part of their internal accruals in new businesses which are now going live – and which hold promise of accelerating the earnings growth trajectories.
These could be pharma companies who have been investing in new molecule development or large businesses getting into interesting defense niches etc.
In terms of IPOs that he is looking forward to in the coming quarters, he is keenly tracking some niche defense startups and some high quality SAAS companies that he believes show the potential for multifold growth in the years to come.
He advice to investors who are considering investing in smallcap funds is 3 fold:
1. Please avoid itchy fingers. Small caps are volatile – don’t jump in and out as they go through the roller coaster ride. Stay disciplined with SIPs in small cap funds and you will be sorted for a long long time.
2. Please look at rolling returns rather than point-to-point returns when considering fund performance. You want to ideally own funds which display more consistency in performance.
3. Please look for funds that don’t make outsized bets in a quest for even more alpha – these can either go spectacularly right or wrong. Look for funds that first focus on capturing the small cap opportunity and then look for some more alpha.