How Smallcaps are Riding India's Tech Boom

Feb 27, 2024

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Smallcap Companies Set to Ride Tech Disruption

Warren Buffett once said...

  • Our approach is very much profiting from lack of change rather than from change. With Wrigley chewing gum, it's the lack of change that appeals to me. I don't think it is going to be hurt by the Internet. That's the kind of business I like.

In a recent episode of Shark Tank, the founders pitched a 100% natural and biodegradable chewing gum. The product is famous among celebrities already. It's selling on the internet and could be a potential threat to legacy chewing gum businesses.

If I was a market leader in domestic chewing gum business, this would make me worry.

Much as I would like to invest in businesses that profits from the lack of change, such opportunities are getting rarer.

A few years from now, they could be non-existent. As the wave of disruption catches up, the businesses can't afford to be in a no change zone.

The life cycles of businesses are collapsing from a century to a decade. What has shortened the lifespan is fast evolution and adaptation of technology.

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It could be related to the product itself, or in the way a product finds its way to the markets.

For legacy businesses, denial is a slow march to the graveyard.

Remember Kodak?

So, should you dump your investments in the conventional businesses and start chasing startups and new age companies?

The fortunes of Byju and Paytm hardly give confidence to pursue that route. And you don't have to.

For there are businesses embracing creative disruption and innovation. Without burning money, they are taking calculated bets on new technology and reinventing themselves.

Consider EV space.

After years of dragging their feet, legacy auto and auto ancillary companies are diversifying into the EV space. For some, it is self-cannibalization (better than fading into oblivion). For others, it's a shot at premiumisation in product range with nothing to lose.

Legacy FMCG companies like HUL are launching digital first brands.

Tiger Logistics, a typical logistics firm has launched a digital platform - Freightjar, for online freight booking and management. It allows transparency by showing real time freight rates, automates documentation and saves time. It has helped the company tap SME and MSME customers dealing in exports and imports.

An Indian smallcap company -PDS, is now a business case study at Harvard.

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The company has evolved as a plug and play platform that brings together the designers, vendors and global retailers and brands - allowing scalability in an asset light manner in a highly fragmented garment industry.

The company is also investing a small part of its capital in early-stage ventures. These ventures are related to fashion, technology, sustainability, circular economy, and innovation. These are strategic investments that help PDS deepen the relationships with existing clients and offer synergy in the main business. If any of these becomes big, the company will also have the optionality to monetize these.

The tech revolution is catching fast. Even the government has not been left untouched. The department of telecom has launched a Shark tank modelled initiative that would connect startups focusing on next generation technologies to VCs. The government has announced Rs 1 trillion tech fund to facilitate interest free loans for research and innovation. From Jai Jawan Jai Kisan... hailing technology (Jai anusandhan) is a big leap.

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These policies could be the much-needed fuel for the innovation centres in India. And a collaboration between corporates and innovation centres in India could pave the way for investors to ride this trend. A case in point is Laurus Labs' collaboration with an IIT-Mumbai start-up that is focusing on gene therapy. The management of Laurus aims to invest up to 10% of profits on disruptive technologies.

The examples I shared above are not recommendations. But they offer a beautiful template to investors to bet on tech space. Follow a strategy where you win big with heads, and don't lose much with tails.

The government's push behind railway, defense and green energy has led to massive wealth creation in the stocks from these sectors. I won't be surprised to similar trajectory for businesses that are reinventing themselves, with strong business fundamentals.

Warm regards,

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

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