Valuation Cannot Be Only Criteria To Evaluate Small-Cap Firms, Says Bhavin Shah
Past track record, execution of guidance, industry growth outlook, and growth opportunities are some of his selection criteria.
Despite the high valuation of small-cap companies, one cannot overlook factors like profitability, growth potential and return on equity, according to Bhavin Shah.
"We cannot just look at the valuation in isolation, but must look at profitability, growth, return on equity together," said Shah, founder and fund manager of Sameeksha Capital Pvt., on NDTV Profit's 'Portfolio' show.
Given all that and with the buoyant economy one cannot conclude that when small-cap goes up there will soon be a period of correction, according to Shah, whose firm manages about $125 million in assets.
"We exited small-cap companies where there was limited incremental upside. But where we still see the growth potential, we continue to hold on to them."
Sameeksha Capital has a huge portion of its capital invested in the small-cap space. The fund has about 58% of its allocation in the small-cap companies, and 13% in large-cap stocks. The fund also has about 21% of its capital in cash.
The fund manager has a very intense selection process for the companies he chooses to invest in.
Past track record, execution of guidance, industry growth outlook, and growth opportunities are some of his selection criteria. "We are particularly cautious on past corporate governance issues of the companies."
"We always have an indication of incremental returns in 2-3 years. If that is not happening, we will take a relook at the reinvestment and exit the position," Shah said.
Sameeksha Capital's one-year portfolio returns stand at 39.6%, while S&P BSE 500 has given a return of 9.6%.
They have been thinking about increasing exposure in the large-cap space and in the financial sector specifically, Shah said. "After the state election results, we have started to deploy some more capital in large caps and reduced our cash level."
