This Next Big Thing in Investing Could be an Investor's Biggest Risk

In my recent articles, I have been warning of froth in mid and smallcap valuations.

The buying interest that has led to a huge rally in this space is also likely to be its biggest undoing.

But that's not the only thing where warning bells are warranted.

Another aspect of investing that bothers me is thematic investing.

As per the industry studies and research, in 2024, thematic or sectoral funds have fetched the highest inflows.

Green energy, EVs, AI, semiconductors, smart meters...

With a bit of creative storytelling, any stock you pick can be made to fit a theme. But it does not, by default, deserve a space in your portfolio.

I'm skeptical of high flying narratives. I would like to have some comfort on business resilience and execution along with the tailwinds, and not just tailwinds. The opportunity size alone is not enough, execution is the key.

Deepseek was all it took to cause the biggest one day loss in Nvidia.

Another case in point is the smart meter story where execution is way behind targets. As against a target of 25 crore smartmeters by 2025, just 1.8 crore meters have been installed.

On the (lack of) resilience front, Borosil Renewable - India's first and largest solar glass manufacture is a good example. With so much happening on the solar energy front, the business was expected to do well, and its valuations were bid up to 70 times PE and beyond.

While the solar story is going strong, tailwinds did not help because of erosion of pricing power amid imports from China and other emerging economies.

Both the business and stock price performance disappointed. The profits have shrunk, the debt has gone up, and the return ratios have turned negative.

In the end, the success of the business has boiled down to regulations and not so much on solar theme.

And that could turn out to be the story of a lot of tips being circulated in the name of thematic investing.

Another story that deserves some skepticism is the wind story. Its contribution in India's energy basket is expected to go up from 48 GW to 100 GW by 2030. The leading market players like Suzlon are reporting the highest ever order book.

Yet, on the execution front, something seems missing.

On the installation and commissioning front, the industry is falling short of expectations, on account of transmission delays and land related challenges.

In the first nine months of FY25 approximately 2,277 MW have been commissioned, falling short of expectations. The pick and shovel suppliers for this industry (rental crane providers) are also wary of taking a higher exposure to the segment due to slow execution.

Here is what the management of a rental equipment provider has to say about why they are cautious on increasing exposure to the wind /renewable energy sector...

"So, one area that we did see with renewable energy, especially wind, at the start of the financial year, there was a lot of positivity towards the opportunity there, but the projects at the ground level did not really take off at that speed at which it was anticipated probably.

So, we have also been very careful and cautious about pushing for growth there, and that is why we still remain at 5% of our equipment rental revenue from the renewable energy sector, of which it is actually a mix of solar and wind and almost equally divided between solar and wind.

We have been cautious there and we continue to remain cautious because that is one sector we still feel is not very clear on the demand cycle that was earlier anticipated."

For the direct players on EV, a muted subsidy environment and charging infra challenge has been a big spoiler for the growth that was projected a few years ago.

In short, one must be mindful of risks emerging from disruption, competition and regulations while betting on the next big thing.

In thematic stocks, there are likely to be cases of both value accretive and value destroying growth (especially at the valuations that a lot of celebrated players are trading at).

The latter is the kind of growth that comes with huge investments and offers poor returns on capital employed.

I would not be surprised if the much-hyped thematic stocks suffer both derating and compression in earnings.

I'm sure there are some future big winners that would emerge from these themes. So do keep track of themes and players in it by all means. But when it comes to investments, you need to know more. The next big story is not enough.

Warm regards,


Richa Agarwal
Editor and Research Analyst, Hidden Treasure
Equitymaster Research Private Limited (formerly Equitymaster Agora Research Private Limited) (Research Analyst)