50% return in 11 months! Here’s how this Singapore-based fund spotted microcaps in Indian equity market

NAV Capital Emerging Star Fund, Category 1 FPI based out of Singapore, has become a name to reckon with its recent investments in the SME space. The latest shareholding data showed that the global fund held as many as 12 listed companies which include multibaggers SME like Droneacharya Aerial Innovations and Annapurna Swadisht. According to NAV Capital, the fund has managed to deliver over 50 per cent return to investors in dollar terms since its inception in June 2022. NAV Capital, Dubai is an investment advisor to NAV Capital VCC, Singapore which invests globally including India.

In an interaction with Business Today, Vineet Arora, Managing Director, NAV Capital said the fund intends to deploy Rs 500 crore in the Indian SME space over the next one year. At present, the fund’s total investment in unlisted and listed space stood at around Rs 200 crore. He further throws light on the investment strategy of the fund. Edited excerpts:

BT: Can you provide insights into the lesser-known stocks that have delivered significant returns to NAV Capital’s Emerging Star Fund over the past few years?

Arora: Whilst we have been investing a lot in the sector over the past few years, we have invested EFC (I) Ltd, Annapurna Swadisht, Droneacharya Aerial Innovations, Anlon Technology, EFC (I) Ltd, Remus Pharma and Crayon Advertising to name a few. Since these companies have got serious capital for the first time, one needs to be patient for returns as it takes time to deploy the capital and results to show up

BT: Could you shed some light on your stock-picking strategy and the factors you consider when selecting stocks?

Arora: When you look at a mature business with a balance sheet of Rs 2,000 crore plus, investing is easy as established data points are available. But for us, when we look at the company, we look at the P/E factor, which, let me redefine as, promoter and entrepreneur. It’s like when you go to a race, it’s important to find the right horse and the right jockey.

The key is highly committed promoters and very ethical managements who are committed to drive efficiencies of the business. Whilst we move fast, the engagement usually lasts about six months before we make any investments into a company and due diligence is done over various factors, a lot of which are subjective as data points are scarce. We focus on niche business and promoters with a good track record. We do a lot of due diligence before investing in any company by meeting the competitors and other market players before investing. Also, when we invest we take a substantial amount and stay invested for a fairly mid-long term. Think, we have now mastered the art of investing in microcaps in Indian markets and we believe some of these companies will become large caps as they expand their business.

BT: NAV Capital’s Emerging Star Fund is known to pick stocks in the SME space. How can an investor invest in this fund, and what is the minimum investment limit?

Arora: We take pride in bringing global investors the world to India’s small and medium enterprises. We believe this will sector will drive India’s growth to the next level and in line with our Prime Minister’s vision to grow and develop this sector. Most of our investors come from across the globe and the fund is open to investments from non-Indians and NRIs. The minimum ticket size is $100,000.

BT: As of March 31, NAV Capital Emerging Star Fund held over a one per cent stake in Angel Fibers, Axita Cotton, Droneacharya Aerial Innovations, and EP Biocomposites, among others. Could you explain the investment rationale behind these companies?

Arora: We hold more than one per cent in more than ten companies. Since the markets are dynamic, their continuous evaluation and views change. Amongst the Indian companies, we hold Annapurna Swadisht, Trident Lifeline, Droneacharya Aerial Innovations, Vital Chemtech, EFC, Brantford, Anlon Technology Solutions, EP Bio, MoS Utility, Crayons Advertising, Remus Pharmaceuticals, Amicorp FS (UK) plc which is listed on LSE, VinSys Technology, Pentagon Rubber, among others.

We follow a sector-agnostic approach to investing as even in a sector considered a laggard, one can find companies that are growing better than the sector and increasing their relative market share at a much faster rate than the sector. We have exposure to aviation services and new-age industries like embedded fintech, drone tech, semiconductors and traditional sectors like pharmaceuticals, advertising, convenience snack food (FMCG), infrastructure, software, corporate trainings etc.

BT: How do you perceive the future of the Indian SME space? What precautions should one consider when investing in the SME sector?

Arora: A few years back when I used to say that SME is once in a lifetime chance to make money for the next 5-7 years, I used to get looks of skepticism. I still maintain the same due to various factors. Having said that, each investment comes with its risks. One has to carefully analyse the business, promoters, how the company is positioned within the industry etc. Since the sector is still in its infancy, liquidity is still a challenge hence position sizing is very critical. One needs to have a curated portfolio of 20-25 names and monitor continuously.

The sector overall has undergone a big change with next-generation technocratic taking charge of the business. Also, reforms by the government like UPI and digital payments have become a blessing in disguise and gave a huge push to smaller companies by bringing them into the mainstream. GST reforms helped the companies to come in mainstream and they started organising their finances in a more structured manner. Further, the Make in India or Atmanirbhar Bharat drive of the government gave huge tails winds to the sector. China Plus wave which has forced manufacturers to look outside China and India with highly educated and skilled force has a huge edge in the sector too.

BT: Which other global markets do you find attractive, and what are the reasons behind your assessment?

Arora: The key is to follow the rotation between sectors, asset classes and markets. The money flow always rotates like a big giant wheel. We find the US, China and Japan fairly attractive. India remains the market we are extremely bullish on. The RBI has been very pragmatic and ahead of the curve as compared to other global central banks and that is showing relatively muted inflation and a resilient Indian economy.

BT: What are your predictions for the broader markets, considering that midcap and smallcap companies have outpaced the benchmark equity index BSE Sensex in 2023 so far?

Arora: Indian markets lagged global markets in the previous 10 years till 2020 because of which the current rally started with a global catch-up. If one is hunting for multibaggers, they are always found in the tail and for that one has to cast the net wide. My view is that small and midcap will continue to outpace BSE Sensex but since they have a higher beta, one has to be willing to accept a larger risk and portfolio drawdown if markets were to fall. Having said that, with the interest rate cycle close to peak, India is poised to outperform global markets and small and midcap should do better than broader markets.