After 180% returns in 20 months, this Singapore-based FPI sees a 40% downside in microcaps

Singapore-based NAV Capital Global Opportunities Fund aims to maximize its return while prioritizing sustainable value through strategic risk management and curating diversified portfolios across various asset classes. Its active 'beta management' ensures optimal risk-return balance, while active 'alpha management' seeks to outperform within designated risk parameters. The fund delivered a return of 98 per cent in 2023, while it has delivered a return of 180 per cent since inception.

Managed Vineet Arora, MD and head of asset management, the fund had multibaggers such as Dronacharya Aerial Innovations, Annapurna Swadisht and EMS in its portfolio, and has also added Felix, Fonebox Retail, Addictive Learning, Australian Premium, Platinum Industries, taking the total number of holdings to 20. It is aiming to triple its portfolio to Rs 2,000 crore by end of the current calendar from Rs 700 crore. Edited excerpts:

BT: How has NAV Capital invested in India. Do you intend to put money in the SME space only?
Arora: NAV Capital Emerging Star Fund has AUM of around Rs 700 crore and 90 per cent of this fund is invested in India. We expect to touch around Rs 2,000 crore by the end of CY24. The fund focuses on identifying companies with strong growth and 'Moat' and we are sector agnostic. We invest in both SME and Mainboard companies as long as they meet our investment philosophy and criteria.

BT: What has been your investment rationale?
Arora: In the past few months, we have invested in Felix, Fonebox Retail, Addictive Learning, Australian Premium, Platinum Industries, to name a few. Each of these has a unique 'Moat'. For example, Addictive learning runs a large platform called Law Seekho with 25 lakh unique users every month and a global scalable platform set for a strong growth. There are about 10,000 small law firms in the US which can’t afford a paralegal, a void filled by Law Seekho.

In addition, we have added companies like EFC (India) Ltd, Goodluck Industries, Alliance Integrated and few others. We are actively looking at mainboard companies as well. We have recently topped up our investment in Fintech/SaaS platform Arthmate, which is currently unlisted and is set to create a huge impact in the MSME sector. A unique platform where 30 per cent borrowers are women and empowering the society.

BT: What are the key factors that you consider when picking a company?
Arora: Our investment strategy is simple. We look for well-managed companies, with a good/unique offering product and good management as custodian who are prudent. Of course, this includes understanding the company’s business model, its products and services, potential target markets, the industry that it functions in, its financial health, and the background of its promoters and management. Thorough research helps one identify the pros and cons of investing in a business and make a rational investment decision.

The key is that our investing mindset is like private equity investors, albeit in public markets, where we open our ecosystem to our investee companies to derive synergies and best practises from each other, without any strings that come with private equity investors such as board seat and business interference and that creates a win-win for all stakeholders.

BT: What are the key factors to assess risk? 
Arora: In terms of risk, asymmetric information is one investment risk and we try to manage by spending a substantial time to do our in-depth research tracking attributes of the specific sector that the company operates in. We try to keep the balance of qualitative and quantitative assessments. We leverage on our origination team and business experts in that sector who can underwrite the business model. Any company where Promoter/ Management is focussed on valuation is a big red flag.

BT: Despite being a global fund, your picks have been mostly in SME space. Do you see this space being overheated or lacking liquidity?
Arora: For India to achieve a national vision of a $5 trillion economy, the MSME sector needs about $300 billion in lending/capital. There are over 700,000 MSME companies in India which form the backbone of our economy and of these around 60,000 are listable on SME. So far only about 1,500 have listed in the last 12 years.

Data points are very clear that we have barely scratched the surface. To us, this is the story of Bharat for next decade.The space has become a bit overheated as suddenly everyone is taking notice of the growth here. Whilst liquidity is low, it's improving significantly at a fast pace. One needs to be patient rather than trying to make a fast buck.

BT: SEBI has been strict on price manipulation in the SME space lately, with a number of companies being under scrutiny. What is your take on it and do you believe that SME space warrants an extra sense of caution?
Arora: We will give full marks to SEBI for bringing tighter scrutiny to the sector. Small caps become easy to manipulate, especially when there is a frenzy. One has to look at the financials, promoter backgrounds, the names of larger investors and their track record, valuation etc before making the investment decision.

In our opinion, after completion of one year of listing, SEBI should make it mandatory for SME companies to publish results quarterly, just like the main board. This will bring in a lot more transparency and corporate governance.

BT: Other than India, which other global markets appear attractive to you? Do you think India will be able to command its premium valuations over global peers?
Arora: At this point, Bharat is a clear outlier in the global economy. The US markets have done well but you look deeper, the rally has been very narrow and driven only by Big Tech, whilst back home in Bharat, its been very broad-based. We will remain overweight on Bharat in the near term. Bharat has always commanded a significant premium over global markets and in my opinion that will continue.

We have investors from over 30 countries spanning continents and everyone is bullish on Bharat. Having said that, the opportunities can come up anywhere in the world and we remain vigilant. We have had some exposure to Big Tech and that has performed quite well for us.

BT: Do you think that party in Indian SME space will continue in the coming days? What will be your advice or suggestion to the retail investor who is looking to enter or invest in the SME market?
Arora: It’s not a party. It’s a paradigm shift happening in Bharat's economy, and the key factors have been GST reforms, Digital payments, ease of doing business and Make in India push accompanied by China + 1 factor. Summation of this is new Bharat. Whereas US and China have been on digital payments for decades, India started with UPI and other forms literally in 2018 and today more than 90 per cent of GDP is in Digital payments as compared to less than 50 per cent for China and even lesser for US and that combined with tax compliances due to GST is a huge paradigm shift.

One always needs to be cautious and be prepared for 5-10 per cent pull-backs and if you are an investor in SME/Small microcaps, please be prepared for 30-40 per cent drawdowns in similar conditions. Our sincere advice to retail investors is, please don’t get carried away, do thorough due diligence, don’t speculate and if you don’t have the stomach to take 30-40 per cent drawdowns, stay away from small and micro-caps.