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Small Cap Investing

August 19,2019 Stallion Asset Blog

The Small Cap Index is down 35% from the Top & is at similar levels that was seen 12 years ago in 2007. A lot of Smart money is looking at this space carefully, but let me remind you what Mr. Vijay Kedia had to say about it, “90% of Stocks in India are Bhangaar Cap”. There are 100’s of Strategies that work in Small Cap Investing & the below blog is just to show what we at Stallion Look for while investing in a Small cap Company.


“A Business starts with solving a massive problem of its Customers & Sustains if he can solve it in a way that the competitors cannot solve the same way.”


Do you know any business that has ever scaled up without customers not loving the product? The First Question  we ask whether the customer really loves the product the company sells, for example Dmart Increased Profits from 5 Crores in FY2009 to 920 Crores in FY2019 because customers really loved the prices at which Dmart sold its products & it sustained growth because competition couldnt sell it at that price.


The Second Most Important thing is the Business Model – We at Stallion Asset believe an Investor will make money only, if the entrepreneur understands the balance between the 3 rules of the gameI call them the Three ‘S’


Rule Number 1 – Speed

Rule Number 2 – Scalability

Rule Number 3 – Sustainability


Typically if your speed is very fast, you will face problem in Sustainability in 9 out of 10 times. If your speed is fast but your business is not scalable, you have a problem again. An Entrepreneur has to take a Call on Speed, Increase Market Size (scale) & Sustainability in all times.When I run my Research business at Stallion, I have a 4th thing to think about which is “Cyclicality”. Even if you have speed & your scaling well the markets can go through tough 1-2 years & it can screw the sustainability.


There is no business which can scale if the customer doesn’t like the product/Service, Entrepreneurs need to focus on consistently solving the problems of their customer & Increasing his wallet share.  If you look at 25 Largest gainers in the US Markets in last 10 years, majority have come due to a New Product, solving a new Problem of its customer via technology or Biotech innovation. For Example – You can Blitzscale & Burn Money only when you know that you will create so much value for the customer that he would keep giving you recurring revenue. Amazon spends 8000 Rupees for an Acquisition of a Customer but makes only 75 Rupees per transaction on a customer in India but amazon knows that for next 10-20-30 years you will keep buying it from Amazon.


The Third Most Important thing is the Promoter – Don’t start your research via PE Multiple, Believe me in Small Caps the only ‘P’ that matters is the Promoter.  The three most important things to look our for in a Promoter is Capital Allocation, ability to Solve Customer Problem & Integrity.


You need an Entrepreneur who understands what market Leadership means, Believe me Its worth whatever the cost it takes to become a Market Leader. In a consumer facing business the only way to become a Market Leader is to really be customer focused.  You Need an Entrepreneur who understands the Value of Market Leadership & Allocates capital Accordingly. What we are taught in school is that good capital Allocation is  Reinvesting capital at 20-25% ROIC, for us at Stallion GREAT capital allocation is not just reinvesting at 20-25% ROIC but also Creating market leadership or Monopolies while growing fast.


For Example – Ritesh of Oyo is an amazing example who has Blitzscaled into Market Leadership with 4.5 Lakh Room already & Adding 50,000+ Rooms a month in an Industry where nobody has ever made High ROCE. His business model is fantastic & Probably for next 10-20 years there would absolutely be no competition for Oyo! (A Great Platform with Network Effects)


Integrity – Most Indian Entrepreneurs are Jugaadu, can you really trust this guy with his ethics especially in a bear market where Twitter Gurus calls everyone chor if the stock goes down 30%+.


Conclusion – You need some luck in SmallCap Investing but the bet in a smallcap is on the person running the Show, his understanding of business, The Customer Problems he is solving & his ability to scale up !


Stallion Asset is a Equity Research Analyst, Plans Start 4999

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