Up to 900% return in 1 year! Smallcaps in a young and vibrant bull market: Shankar Sharma

The S&P BSE Smallcap index touched a fresh record high on Monday, but the rally is far from over as smallcap stocks are in a young and vibrant bull market, Shankar Sharma of First Global said in an interview with CNBC-TV18.

The smallcap index has been on investors’ radar for the past few years. While it has rallied over 40 percent, some of the stocks have risen up to 900 percent during the same period.

Stocks which rose in the S&P BSE Smallcap index include names like Indiabulls Ventures which rose 942 percent, followed by HEG which gained 666 percent, Graphite India (up 484 percent), and Avanti Feeds which soared 365 percent.

Investors get attracted to smallcaps in a high growth environment. And, even though, expectations of sharp growth rebound is not expected due to demonetisation and implementation of the goods & services tax (GST), smallcap stocks will still hog the limelight.

“I had a view of policy that there would be some growth, but not enough to propel the whole basket of largecaps. But, smallcaps don’t need that. Smallcaps need 3-4 percent GDP growth for Rs 100-500 crore company to go to Rs 1,000 crore company,” said Sharma.

“I made a distinction long time back that forget about largecaps and smallcap is the space where one needs to go. But, interestingly after huge outperformance, I don’t think that smallcaps are in a mature bull market,” he said.

Explaining the rationale, Sharma said that smallcaps just took out the high of 2008 three months back. Even though it looks like they have done very well but they have done very well after hitting the bottom.

The real bull market starts when you take out long-term high, which they just did and if they double and triple from here on then we will talk about bull market becomes aged, he explains. Right now it is a young and vibrant bull market in smallcaps.

Sharma prefers to pick stocks which are contra buys. He looks for stocks where there is trouble which could be fixed. “If there is a business problem or a business issue, I like to see if those issues can be fixed or overcome,” he said. Jaguar solved the problem for Tata Motors.

Commenting on the infrastructure space, Sharma said infrastructure companies look interesting but you need to be stock specific.

The only trouble with the infrastructure sector is that companies in this space they don’t have any asset. Therefore the trouble is that there is very little which somebody can recover.

“I had a firm belief that India’s NPA problem is unlikely to go in a hurry because most of the exposure lies in sectors which don’t have many assets to repay. Chose stocks in which you have confidence that debt can be addressed and not by large equity issuances,” said Sharma.