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India Midcaps: A great way for NRIs to build money

NRI Herald Australia, 19 September 2022

Several NRIs have left India in the last five decades in search of higher education, development, and employment possibilities. However, for the majority of them, their emotional attachment to their native nation remains strong.


Raj Subramaniam, who's been named the new CEO of FedEx, joins a historic line of NRIs and OCIs who have thrived and garnered major acclaim in their home nations for their important contributions in varied industries such as banking, consumer enterprises, health care, and technology.


Several NRIs have left India in the last five decades in search of higher education, development, and employment possibilities. However, for the majority of them, their emotional attachment to their native nation remains strong.


As a result, NRIs often aim to keep a base in India, and not unexpectedly, NRIs account for more than 15% of yearly real estate transactions in metro areas (in absolute terms, it is around US$8-10 billion).


The most appealing element of investing in India is the market's outsized alpha possibility as contrasted to all other equity markets in the world, given that the Indian market still seems to be fairly under-researched and under-brokered.


Whereas these alpha chances exist throughout the market cap range, the SMID (small and mid) section of the Indian equity market is especially fruitful for idea creation and bottom-up stock-picking due to its relative inefficiency.


Although the preceding is valid for many other marketplaces, it is exacerbated in India due to the diverse and growing number of listed enterprises with various business strategies.


Furthermore, each industry has a separate mid and small-cap section. In the industrial sector, for instance, there seem to be enterprises in sub-segments such as commodities, light industry, lubricants and varnishes, and capital goods. There are also several opportunities in the consumer industry, including personal items, food and beverages, paintings, retail, and jewelry.


Several sub-categories' leading companies are mid-caps with a considerable growth runway. Consider QSRs (Quick Service Restaurants).


For instance, the largest listed company in this classification is a mid-cap; this section remains under-penetrated, in the initial stages of adoption, and represents a sizable opportunity because it is well-aligned with India's fundamental drivers—high internal growth and favorable demographics.


The same is true for diagnostic firms in healthcare, which were the first to be listed a few years ago. It's just a matter of time before India's economy, which is currently worth $3 trillion, expands to approximately $5 trillion, with several of these areas experiencing rapid development.


An NRI investor could more easily relate to a few of these themes since they have previously seen them play out elsewhere.


India likewise boasts a thriving startup environment with more than 100 unicorns (the third highest in the world). Many of these unicorns will be listed in the next few years, with the majority of them falling into the midcap category.


Although it is correct that midcaps have a higher alpha production potential, stocks that are a play on the same opportunity set might perform substantially differently. Over a 10-or 15-year period, midcaps have delivered annualized returns ranging from 12-17%. However, at the granular level, certain company values have multiplied many times.


The above phrase also implies that investments in some stocks have been fully wiped away. According to research, a mid-cap is more likely to become a small-cap than a large-cap. The most important factor to consider here is the management's past history, governance, and implementation ability.


The midcap area has numerous chances for alpha production, but investing in this category would require active monitoring, which many NRI investors may find difficult to accomplish on a regular basis.


That's where people may depend on a professional manager's guidance to invest in actively managed investments. After all, in-house research capabilities are critical not just for identifying winners but also for averting corporate governance catastrophes.

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