Why Porinju Veliyath is betting big on small and micro-caps

Founder of Equity Intelligence Porinju Veliyath.
Founder of Equity Intelligence Porinju Veliyath.


The founder of Equity Intelligence, who has zero investment in real estate, is also bullish on India’s growth story.

The markets are in a tizzy—a fallout of the war between Israel and Gaza after Palestinian militant group Hamas launched a surprise attack on Israel over the weekend. Oil prices surged and markets tumbled in early trade on Monday, even as the death toll from the Middle-East conflict rose to more than 2,000. For investors, such global geopolitical events typically have a negative impact on their investment portfolios. And that is the reason why financial experts always promote diversification of assets to counter risks. Yet, it is not uncommon for fund managers to allocate 100% of their personal investments in equity. Porinju Veliyath, founder and portfolio manager, Equity Intelligence, does just that. But, his equity portfolio stands apart for one reason. It is concentrated in small- and micro-cap stocks, the most volatile segments in the markets.

The reason for Veliyath’s confidence in the small-caps stems from, what he says, abundant value opportunities in the space. He believes that growth is imperative and not a choice for small companies. He also avers that it is among these small companies that one can find the multi-baggers. Among his small-cap picks, Hindware Homes, Tata Elxsi, CDSL, PDS, Raymond, Gati, and West Coast have proved to be multi-baggers.

In line with the ongoing small-, mid-cap rally, some of his stock holdings have increased in value by up to 30 times in the last three years. The same is playing out in the PMS (portfolio management services) and AIF (alternative investment fund) schemes of his firm Equity Intelligence. “We have stuck on to our strengths, delivering 61% CAGR (compound annual growth rate) in PMS and 69% CAGR in AIF since March 2020 (when the covid pandemic was at its peak)," he said in an interaction with Mint for the Guru Portfolio series. In this series, leaders in the financial services industry share how they manage their own money.

Graphic: Mint
View Full Image
Graphic: Mint

“I have no plans to retire. When you enjoy what you do and do what you enjoy, there is no need for retirement," says Veliyath. Edited excerpts from an interview:

How is your personal equity portfolio divided in terms of market segments?

I’m invested 100% in small-caps. We (Equity Intelligence) have been traditionally oriented towards small- and mid-caps as that is the space where we find abundant value opportunities.

This is against the general advice given by financial experts against keeping all the eggs in one basket. How do you carry on during bear markets?

I will never advise others to follow my investing style. Investing one’s savings differs from person to person; every person and family has different challenges, requirements and financial goals. If you are reasonably wealthy and well-invested in equities in India, travelling is a good option during the bear markets, which is short and medium-term corrections.

With 100% equity exposure, how do you cope with volatility?

If you are betting on the fundamentals of the company, then volatility is not a risk but an opportunity to buy at a bargain price—just that you should have the mindset to buy when others are panicking, and sell when others are euphoric

How has your personal portfolio performed in the last one year?

My personal money is mostly invested in micro- and small caps, which have been doing very well. In fact, some of them have gone up 20-30 times since the covid pandemic. But, to be honest, I don’t calculate annual performance and all that.

How much has your firm’s AUM (assets under management) increased in the last one year? How have your firm’s AIF and PMS schemes performed in the last one year?

Our AUM as of September is 2,100 crore. For the one year ending September, PMS is up by 39% and AIF by 31% against Nifty’s 16%.

Investors are flocking to small-, mid-cap funds given the current rally. Are you seeing the same play out in Equity Intelligence’s case? Is there heightened interest from new clients or keenness in existing clients to invest more? If yes, how do you manage such situations?

Yes, we are happy to see both happening. I would say we are more cautious this time around, having gone through the winner’s curse in 2018 and having learned from that experience well, I would say we are better equipped this time around.

What caution are you practising?

Shifting from richly valued, currently fancied stocks to some of the underpriced, ignored stocks due to temporary headwinds is a good strategy to be cautious in this market.

In a tweet, you said this is the first time in your career you have seen such a sustained bull phase in small and mid-caps. How long do you expect the euphoria to last?

Well, the keywords were “robust and sustained"—never ever have the hopes around India down, and it is unlocking its potential as an economic superpower and is being backed by the fundamentals on ground. I am not talking about the numbers , but the body language, the confidence that we see around. If there is a will, everything else follows. It’s not just about the stock markets . The pendulum will always swing to the extremes but remember it’s still morning as far as the India story is concerned and there is still a long way to go to reach noon.

Do you think small caps are now overvalued and a correction is due in small-, mid-cap space?

I can’t generalise and say all small caps are overvalued. Yes there are pockets of froth in fancied segments like defence and public sector units. But at the same time there are a lot of good, ignored ideas with real potential. So, I would say there are a lot of opportunities for smart stock picking left.

Corrections have been happening in the small-cap space for a while. Some of them will do time-correction. I am focusing on select stocks that have symptoms of structural changes, especially in governance.

Which sectors are you bullish on and which ones do you feel bearish about?

We are sector agnostic, bottom-up value investors. In general, we avoid sectors which are too hot and fancy and focus on sectors which are not in the limelight due to temporary headwinds.

Do you have any small-cap picks that turned multi-baggers in the last three years’ rally?

Many of them. Investors, small or big, have experienced multiple multi-baggers in the last three years. In the personal account, Orient Bell, Hindware, PTC Industries, Thejo Engineering, and Raymond are some of the past multi-baggers. I prefer not to mention the micro-cap names.

Do you have any unique money ideas to share?

There is a cultural change happening in Bharat, thanks to the ongoing governance reforms and good work by the regulator. There are no more incentives for those family-run listed companies to remain unprofessional. In fact, many new generation scions want to go professional, creating wealth through the market cap route, than ‘traditional’ ways. Investors should explore wealthy companies with a future relevant business model turning around. If everything is perfect about a company, it will be richly valued and you can’t make alpha.

You have said you don’t maintain an emergency fund. How do you use equities for liquidity?

Just pluck the ripened fruits when you need. Now, with T+1 settlement you get the payout the very next day if at all there is an emergency. And some money will always be there in my wife’s handbag.

Do you consider your real estate properties as investment?

I have zero ‘investment’ in real estate. I own and live in my apartment in Kochi and a weekend home with farmland in the village where I was born and raised.

Did you ever consider renting a house instead of buying one?

I prefer to own a house like all my fellow Indians. However, renting a house could make better economic sense for the youngsters who change jobs and cities often. By renting houses, young entrepreneurs and startup guys, too, could save capital for building their business in the initial phase.

What does your retirement kitty look like?

I have no plans to retire. When you enjoy what you do and do what you enjoy, there is no need for retirement. Life is a flow; you swim as it goes. However, I would advise all to plan it well, especially if you are a salaried professional.

Catch all the Business News, Market News, Breaking News Events and Latest News Updates on Live Mint. Download The Mint News App to get Daily Market Updates.