Samvat 2080: Shankar Sharma says past is no indicator of future; small-cap, mid-cap have a strong case

One of Shankar Sharma's investments - Brightcom - has also been in the eye of the storm due to accounting lapses

History cannot be a perfect predictor of what the future holds for us, particularly in a country which is still in a strong growth phase like India is, said veteran investor Shankar Sharma.

Sharma was speaking at Moneycontrol’s Diwali special show, Samvat 2080.

He was explaining why he believes that small caps will surprise on the upside, even though the midcaps have not delivered returns that were significantly different from that of Nifty’s over the last twenty years. Sharma believes that regional markets are big enough for smaller players to service them and deliver a good margins.

Also read: Ace investor Shankar Sharma on where to look for winners in Samvat 2080 | Stock picks this Diwali

In the conversation, Moneycontrol’s N Mahalakshmi pointed out that data between 2003 and 2023 shows that the returns from mid-cap index returns and returns from Nifty have been pretty much the same, with the difference of maybe 1 percentage point, a delta that could make a substantial difference with the power of compounding.

But, she added, what works against midcaps is the periods of volatility or sharp down moves, which can take away from the compounding effect.

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He agreed that the observation was “100% right” and that, in the long term, the difference between the two were not sharply different and that there was more volatility in the small and midcap space.

But, he added, “History cannot always be a perfect predictor of what the future holds for us, particularly in a country which is still in a fairly strong growth phase like India.”

Sharma pointed out that India is today a $3.5-trillion economy which is adding $200 billion or thereabouts in GDP value every year.

He said that if we divided the $3.5 trillion to five regional parts of India, each region would roughly get an average of $800 billion or so.

“$800 billion-$900 billion per region… that that is four times the size of the country in 1989 (at $200 billion) when I started my business. The companies that are focused on servicing their neck of the woods (East, West, South, North or Central India) are now getting a market that's four times the size of the country that I came into as a as an entrepreneur. This (their addressable market) is about the same size as Saudi Arabia, which is around $850 billion, or the same size as Turkey with $900 billion… each part of India is equal to large countries and much larger than individual European countries. Therefore, small caps don't have to become pan India place for them to deliver very good top line.”

The bottomline, he said, is that they can operate (for example) in Kolkata and sell to the eastern region or operate in Kerala and sell in the southern region and so forth and yet have markets large enough to drive Rs 500 crore to Rs 800 crore topline.

Sharma said he has been focused on regional players pursuing regional growth and that that play has worked out “excellently” for him over the last few years. He added that he is not interested in pan-India companies.

Also read: Think stocks, not sectors, in smallcaps, says ace investor Shankar Sharma

He gave the example of a company he was interested in, which was a jewellery company in West Bengal. The company was opening shops in the smallest parts of the state where a big player may not find it economical to do so.

Sharma said, “For a small low-cost regional player, it is very profitable, and the company makes a decent margin selling just to the so-called underprivileged parts of India.