Small Pays Off Big

Great things often start small, and the equity market is no exception. In 1981, Infosys was founded by a group of seven entrepreneurs with a modest capital investment of just `10,000. This serves as a testament to the potential for growth and success that small companies possess. There are numerous similar stories of companies starting small, often from humble beginnings in nondescript locations, and eventually making a big impact in the stock market. Interestingly, Small-Cap stocks often go through cycles of investor favour that may not align with the frontline market sentiment. While discussions about the health of the equity market typically revolve around the Nifty 50 or Sensex, it is important to recognise that the fortunes of small-cap stocks can differ significantly. 

In a recent example we saw that between February 2018 and January 2020 the Large-Cap index gained strength and the Mid-Cap index remained flat while the small-cap index saw a major fall of around 35 per cent. Nonetheless, post the pandemic fall, small-cap covered most of its lost ground in 18 months and stocks from the small-cap category gave multi-bagger returns. Therefore, small-cap is a different beast and its performance chart may paint a unique picture, reflecting its own set of opportunities and challenges. If you have the knack of identifying the trend early you will hit the bull’s eye in terms of investment returns.

Even in the current scenario we are witnessing signs of small-cap companies outperforming their larger counterparts. Small-caps have trailed large-caps significantly in recent quarters due to factors such as high interest rates, persistent inflation as well as concerns of recession in developed countries, geopolitical tensions and lofty valuations. Data from the past few quarters reveals that the BSE Small-Cap index has consistently underperformed the BSE Sensex. However, since the beginning of this financial year we have observed a remarkable outperformance of the small-cap index. 

Out of the 250 companies comprising the Nifty Small-Cap index, shares of 214 companies have, on an average, increased by 13 per cent in the last two months. Thus, we may be witnessing a resurgence of interest in this segment. To capture this phase, we have released a special issue focused on small-caps, which serves as our cover story this time. For the benefit of readers and investors, we have compiled a list and provided detailed information about the leading small-cap companies, ranking them on the basis of various parameters. It is important to note that this list is not a recommendation but rather a starting point for further research before making investment decisions.

Furthermore, investing in listed small and medium enterprises (SMEs) can also offer tremendous returns. Over the past year, companies listed in this segment have, on an average, delivered a remarkable 95 per cent return. For the convenience of our readers, we have also included a list of the leading SME companies along with their detailed financials. I am not aware of any other publication that provides such rankings for SMEs. Therefore, once again, you can utilise this information at your own discretion. As investors, we constantly strive to strike the right balance between risk and reward. In the realm of small-cap markets, the potential rewards can be substantial. However, it is important to note that small-caps also carry the risk of significant value erosion. To manage this risk and position for the potential rewards offered by the right opportunities, proper diversification among a basket of smallcaps is essential. To conclude, size does matter but ignoring the small ones would not be a wise move!

RAJESH V PADODE
Managing Director & Editor