In one of his interviews, Jim Collins said, “Every giant company was once a start-up. Right in the middle of that progression is where the magic, or tragedy, really happens.”
For a mid-market or mid-cap company, scaling up can be a slippery slope. On one side, you are battling larger companies with more financial muscle and on the other end, you have young frisky start-ups threatening to disrupt your existing business landscape. And not to forget the unrelenting scrutiny of your financial performance by analysts and investors quarter after quarter, if you are listed. Thus, you’re juggling to cope with competition, disruption and liquidity challenges as you try and scale up your business.
And just as we are partial to Jim Collins’ quotes, the market also took a shine to mid-cap companies over the past five years. So, it is not surprising that nearly 50% of our list comprises mid-caps. Add the small-caps in, and that covers three-fourths of our catalogue. This is despite the slaughtering they underwent a little over a year ago, when valuations hit frothy levels in December 2017. In terms of multiple, the CNX Mid-cap Index was quoting at 45% premium to the Nifty (See: Wealth erosion).
Things were heady till the global liquidity crisis hit and Sebi’s reclassification pushed funds to rebalance their portfolios, putting an end to the mid-cap party. Over the past year and a half, investors took refuge in large-caps on increasing concerns of economic slowdown globally. Manish Bhandari, CEO and portfolio manager of Vallum Capital Advisors, agrees. “The huge divergence of return between the large-cap and small-cap index is largely explained by concentration of capital in a few large-cap names at the expense of a wider basket of opportunity,” he says. But, even in that gloom, there were mid-caps with differentiated strategy or product offerings that bucked the trend. Bhandari notes that the market goes through such periodic divergences until investors separate capitalisation from business risk. He adds, “Investors need to evaluate risk-reward ratios in each set, carefully. Over a long period, value converges to well governed companies and businesses.”