Why small and microcaps are rocketing

These stocks are running up for a reason — strong and simultaneous government initiatives in multiple directions — something we have never seen before. In the last Budget, the government had allocated a stupendous Rs 10 trillion for infrastructure, of which, the railway ministry’s allocation was Rs 2.40 trillion, a 75 per cent leap over that in FY23. The Defence Production and Export Promotion Policy 2020 (DPEPP) has set a revenue target of Rs 1.75 trillion by FY25, implying a 15 per cent CAGR (compound annual growth rate) between 2019 and 2025. Procurement from domestic industry would double to Rs 1.40 trillion by FY25. The government shipyards (Garden Reach, Cochin and Mazagon) have their order books full for the next few years and are getting more and more enquiries.

The allocations made through the Budget are being spent liberally. If pipes and tubes are doing extremely well, it is because of the Jal Jeevan Mission and, of course, civil construction, which is the basis for infrastructure building. Companies doing government work are actually getting paid quickly, which is also a major departure from the past. A small listed company, Zen Technologies, which has forecast a sharp rise in its revenues, told analysts that it got paid within 45 days of invoicing, thanks to the efforts of the defence ministry. These are the reasons why companies from three segments — defence, railways, urban infrastructure (including road, power, metro rail projects, water and sanitation) — are a mad bull market.

But what explains the vertical rise in small- and micro-cap companies? In the past two decades, four sectors grew massively due to demographic tailwinds: Software, pharmaceuticals, consumer goods, and financial services, including banking. They also benefited from the lack of government intervention. India’s private sector has never previously benefited from well-managed, strong, and secular growth due to government schemes and spending. In the past, growth due to policy initiatives was limited to roads, power, and mining. In each of these sectors, shady business houses walked away with large, gold-plated projects with the help of collusive bureaucrats and bankers. But they often failed to deliver due to inefficiency and corruption.

Today, massive spending on defence and metro rail projects, and the tremendous push for renewable energy and production-linked incentives (PLI) to boost manufacturing in 14 sectors have led to more broad-based and significantly larger opportunities for all. Private companies operating in these areas are small to medium enterprises, because they never before had a growth opportunity that is a significant multiple of their current operations. This has led to a sharp upsurge in the stock prices of this group of companies as the market is confidently discounting several years of growth. For the past year or more, we are witnessing a new paradigm of growth, a development model that PM Narendra Modi had talked about, but did nothing to unleash in the first six-seven years of his leadership.