Clean balance sheets and niche plays driving microcap wealth: Aniruddha Naha

Aniruddha Naha, PGIM India AMC spoke to ET Now about the evolving smallcap and microcap universe, highlighting areas where investors might find long-term opportunities.

Leaner Balance Sheets and Emerging Businesses

“What is interesting in smallcaps is that leverage is almost gone. Managements have cleared up balance sheets, GST has forced companies to show true numbers, and new businesses are getting listed. The universe has nearly 3,500 companies. Within cap goods, water and recycling segments are attractive, and chemicals could generate wealth over time,” Naha said.

On recycling and water waste, he added, “The opportunity over the next 5–10 years is huge. We focus on good businesses with clean balance sheets and strong cash flows. Those dealing with the private sector have cleaner working capital cycles. Not everyone will win, but the runway for the right companies is massive.”

Competition and Technology Moats
Addressing risks from larger players, Naha noted, “Competition is inevitable when a segment grows. That’s why assessing a business’s moat is key. Technology can create barriers, and businesses that can defend themselves through it are attractive to us.”

Valuations matter too. “A few years back we weren’t looking at chemicals. Today, some speciality chemical companies that maintain margins through cycles are evolving and could be very interesting.” On subsegments, he added, “Refrigeration, coolants, and amines could be interesting. Only a few niche players are likely to deliver strong numbers over time.” Valuations and Market Opportunities
On small and midcap valuations, Naha said, “Small and microcaps often get bucketed together, but there are 3,500 companies to choose from. For example, a listed staple company is available at less than one times sales, with ROE and ROCE of 30%, debt-free and cash-generating. There’s still money to be made if you pick the right businesses.”

Financials: The Underappreciated Segment
Regarding financials, he said, “We have been underweight in lending financials for seven years. We like small and microcap non-lending financials like asset managers, where valuations are correcting. Banks and NBFCs may become interesting a quarter or two from now, especially in the MFI segment.”

Avoiding Overpriced Bets
Finally, on avoiding risk, Naha stated, “Expensive segments are the riskiest if interest rates rise. EMS looks expensive. We avoid companies driven by stories without numbers, even if they show growth.”