Buoyed by world-leading economic growth, favourable government policies, the entrepreneurial vision of Prime Minister Narendra Modi, and a massive influx of foreign investment, India’s small and medium-sized businesses (SMEs) are expected to soar to new heights on their way to becoming the leaders of tomorrow.
In its January 2016 Global Economic Prospects, the World Bank expects India to be the brightest star in the global economy, growing by a robust 7.8% in 2016 and 7.9% in the following yeari, creating perfect conditions for SMEs which typically grow at a faster pace during periods of strong economic expansion.
Facilitating the success of SMEs
Widely regarded as the “engine” of growth, the some 40 million SMEsii in India are benefitting from major government reforms and policies aimed at supporting their development. In addition to several institutions such as the National Small Industries Corporation Limited, the Small Industries Development Bank of India, the National Commission for Enterprises in the Unorganized Sector, the National Bank for Agriculture and Rural Development, and various Public Sector Banks which foster the development of SMEs, the country’s Ministry of Micro, Small and Medium Enterprises is dedicated to ensuring the adequate flow of credit from financial institutions/banks to SMEs; and provides support for technology upgrades and modernization, integrated infrastructural facilities, modern testing facilities, quality certification, access to modern management practices, entrepreneurship development and skill upgrades, product development, design and packaging, assistance for access to domestic and export markets and capacity buildingiii to ensure the success of SMEs.
The implementation of specific government initiatives such as Make in India, Digital India, Skill India, the National Institution for Transforming India, and the plan to build 100 smart cities – have also created an abundance of new opportunities for SMEs.
More important, the growth of SMEs is being fuelled by the initiatives of its energetic, globe-trotting Prime Minister who has visited 30 countriesiv since coming to power to seek opportunities for domestic economic expansion. He has so far engineered a myriad of transactions in a range of sectors such as manufacturing, energy, industrial development, technology, nuclear power, among others.
Dynamics of SME market
Currently, there are over 700 publicly-listed SMEs in India, with twice as many mid-caps, compared to small caps. Collectively they represent 27% of the country’s total market capitalization. Comparatively, there are about 100 large cap companies.v
Companies classified as large cap in India must have a market capitalization of US$2.9 billion or greater. Companies classified as mid cap range in size from US$600 million to US$2.9 billion, while those classified as small cap range in size from US$80 million to US$600 million.vi
The share of SMEs as a percentage of all listed companies has grown at a rapid pace, more than doubling in the last 15 years. In fact, SMEs have grown at a higher rate compared to large caps for every 5-year period for the past 15 years.vii
Indian SMEs are fundamentally sound businesses which have large regional dominance and are spread across more than 20 sectors - among them pharmaceuticals, automotive, industrials, technology, housing, infrastructure and electronics - providing scope for broad diversification.
Why invest in SMEs
From an investor’s perspective, SMEs provide great upside potential during periods of economic booms such as the one that India is currently experiencing. Indian small caps have returned 22.6 percent on an annualized basis over 3 years, while mid caps have gained 14.4 percent over the same time frame.viii SMEs are also under-researched, under-followed and under-owned. As a result, their price tends to be lower than their intrinsic value. Now is a great time for investors to capitalize on the attractive valuations and capital appreciation potential of SMEs.
SMEs generally grow at a faster pace because they are more nimble and entrepreneurial and are typically not constrained by hierarchical decision making structures, offering tremendous opportunities to create and build wealth.
In addition, given that most Indian SMEs are driven by local market dynamics and are less dependent on global market trends, they benefit directly from the demand of India’s rapidly expanding middle class, which is one of largest in the world.
Investors also have the scope to make even greater returns as SMEs attract increasing attention from multinational institutions and become targets of mergers and acquisitions.
Outstanding performance of selected SMEs
While SMEs are considered to have a higher beta, they can offer significantly higher returns over the long-term. In fact, Indian SMEs have the potential to provide enhanced returns which have become scarce in the current global environment of low growth.
For example, in 2015 some top-performing SMEs included the healthcare provider and branded generic drug manufacturer, Alembic Pharmaceuticals Limited gained 80%; the housing loans provider, Can Fin Homes Limited rose 171%; and the textile manufacturer, K.P.R. Mill Limited returned 174 percent.xi
Though not large in size, many Indian SME companies also have a competitive advantage in their respective market space. For example, the mid-cap company Solar Industries India Limited is the largest explosives manufacturing company in India; Bayer Crop Science Limited is the largest manufacturer of agrochemicals; IRB Infrastructure Developers Limited is a leading private developer and one of largest toll road operators; Britannia Industries Limited is the largest biscuit manufacturer; MRF Limited is one of the largest manufactures and sellers of tyres and SKS Microfinance Limited is one of the largest microfinance companies.x
The opportunity to create wealth
India’s small- and mid-cap sized companies (SMEs) are like hidden gems waiting to be discovered. As the potential leaders of tomorrow, SMEs are a dynamic and vibrant sector of the Indian economy that offers tremendous opportunities to create and build wealth. In fact, the sector is positioned to outperform in the wake of India’s world-leading economic growth. As the market continues to expand, these hidden gems have the potential to generate ‘multi-bagger returns’. Furthermore, these hidden gems trade just outside the major indexes but are future blue chip names. Accessing them early is the key to capitalizing on their success.
Finding these gems, however, requires diligent, on-the-ground active portfolio management, by local experts who are familiar with the market. That is why Excel Funds has partnered with a world class sub-adviser, Birla Sun Life AMC Limited, headquartered in Mumbai, to invest in the Indian market.
Birla Sun Life AMC Limited is a premier fund manager in India with USD 20 billion in AUM, and possesses one of the largest and most sophisticated portfolio management teams in the industry. Birla Sun Life’s history with Excel Funds dates back to 1998 with the launch of the Excel India Fund, which is the largest and longest-running India-focused mutual fund in Canada. The Excel India Fund, sub-advised by Birla Sun Life, was a 2015 Lipper Fund Award recipient in the Geographic Equity Category for best risk-adjusted performance over 3 years.
Excel Funds is constantly finding innovative ways to invest in India and continues to be one of the only mutual fund companies in Canada that offers retail investors direct access to the local equity markets in India. Through its award-winning partnership with Birla Sun Life, Excel Funds strives to provide Canadians with investment products that harness the growth and earnings potential of well-researched Indian SMEs.
About Excel Funds
Founded in 1998, Excel Funds Management Inc. offers an award-winning suite of emerging market strategies, catering to a broad range of investor profiles and objectives. Leveraging a global network of over 500 portfolio managers and 200 research analysts, our team has firsthand knowledge of the markets in which they invest – providing us with a true competitive advantage over our peers. Our investment philosophy is grounded in disciplined fundamental research and continuously seeks out new growth opportunities in the emerging markets and beyond. Our on-the-ground sub-advisers and proprietary asset allocation models contribute to the firm being recognized as “The Authority in Emerging Markets”.
- World Bank: Global Economic Prospects, January 2016
- South Asian Focus, December 15, 2015
- Birla Sun Life Asset Management Company Limited
- Bloomberg data, annualized total performance in CAD terms, as at 12/31/15. Small caps represented by MSCI India Small Cap Index. Mid caps represented by MSCI India Mid Cap Index.
- Morningstar data, total performance return, calendar year 2015.
- Birla Sun Life Asset Management Company Limited