Why I Believe It May Be Time to Delve Into (Selected) Small Caps... - Views on News from Equitymaster

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The Equitymaster Research Digest

Why I Believe It May Be Time to Delve Into (Selected) Small Caps...
Jun 8, 2016

I have to be honest...the crux of this article is a borrowed idea. I came across a not-so-old Forbes article, in which the author interviewed Kenneth Andrade (of IDFC AMC fame) to get his views on all things investing.

Mr Andrade briefly focused on the area he is known best for - mid and small caps. One of his comments caught my attention:

  • If you break down the BSE small-cap index, over 50 percent of these companies are either debt-free or paying back debt at an aggressive pace. So the clean up has already been done. Even if markets go nowhere, anyone who is shrinking capital employed is an interesting play, especially if you have a universe where 50 percent of the companies are doing the same thing.

I found this quite interesting...but at the same time perplexing. It's easy to miss this when looking at the broader data points. Data points such as the following:

Have Small Cap Cos Been Paying Off Their Debts?
(Rs m) FY10 FY11 FY12 FY13 FY14 FY15
Cash flow from operating activities 397,622 198,119 375,788 424,609 496,173 449,605
Capex (576,762) (854,846) (832,756) (758,617) (673,970) (449,329)
Debt (repayment)/ increase 299,505 670,784 734,360 621,493 460,686 383,617
Dividend paid out (37,126) (48,785) (53,739) (47,344) (48,816) (49,960)
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