At SmallCap Spotlight at BSE, Rishi Gupta of Shepherd’s Hill explains why the platform, SmallCap Spotlight was created – to address the lack of access to small cap company stories. He outlined how investors aim to protect capital, beat inflation, and outperform equity indices by identifying strong businesses through both quantitative analysis (financials, cash flows, ratios) and qualitative insights (business model, management integrity, capital allocation). SmallCap Spotlight focuses on founder journeys, challenges, and opportunities – not stock prices – offering a neutral, trust-led platform to understand India’s many under-covered small-cap companies driving the economy forward.
Welcome everybody to SmallCap Spotlight, as Mubina said Rishi Gupta from Shepherd’s Hill
But before we get to SmallCap Spotlight let me tell you a little bit about what we do at Shepherd’s Hill and how we think about investing and businesses and the reason for that is SmallCap Spotlight actually grew out of a pain point that we had and maybe some of you have faced this issue as well.
So what is our main task as business or financial analysts right? We want to essentially enable the efficient allocation of the savings of society towards the users of capital which is nothing but the companies or businesses and savings of society is nothing but savings of individuals right whether it is through mutual funds, pension funds, insurance companies things like that.
And as an individual saver what are my main objectives – I want to protect capital because this is hard-earned money and I don’t want to waste capital away. I want to protect against inflation as years go by my purchasing power will reduce and the inflation has been around 4 to 6%, in that range. And you want to beat the low-cost equity index. Now historically, equities in India has given us about 12% over the last many decades and in my opinion, it is the most consistent and reliable way to achieve that level of return. We can use gold, we’ve recently seen a run in gold and we can use that as portfolio insurance but at least I don’t know of a consistent and reliable way to analyse an asset class that doesn’t have any intrinsic earnings power, so our work is cut out – we have to protect capital and we have to beat 12%.
How do we do that? We build a portfolio of companies we need to select good companies and we need to select them at reasonable or cheap prices, let’s leave prices aside for today. That’s a whole separate topic. Let’s focus on good companies, we can do that quantitively, we can do that qualitatively.
Quantitatively we can look at the balance sheet. We can look at debt levels, we can look at book value growth over time, we can look at capital expenses, whether companies are capital-heavy or capital-light. We can look at mergers and acquisitions, has the management been disciplined and concerned about that. You can look at write-offs on line items like loans and advances and if there’s a history of that then that needs to be looked at. And we need to look at working capital so for a high growth company has a high working capital you’re going to need more funds. In the P&L we can look at gross margin, and we can look at fixed costs, look at the operating leverage there, we can look at interest coverage ratios along with the debt on the balance sheet and we can look at depreciation along with capex on the balance sheet.
And then finally we come to cash flow statement where we need to look at whether the margins and earnings of the P&L have actually been translated into cash it’s not necessary that that’ll happen, you might have a high margin business that has high working capital and high capex and it won’t translate.
Then you can combine these three statements and come up with ratios like return on asset, return on equity. So, this will give us an overall view quantitively of the company but everything is not quantifiable.
In qualitative analysis the analyst can ask a simple question like what does the company do? What is the competitive strength? What impact the product or service has in the life of a customer, what is the competitive scenario but also what is the risk of stagnation maybe there’s technical obsolesce that might come in so these are all things that we have to look at.
We have to look at management whether they conduct themselves with integrity and honesty, treat all shareholders fairly and we have to look at whether the management has created a team around it to take the company forward for the next few years.
One additional point to look at is – yes, the management might be able to run the company well but are they good capital allocators because this is something that is an advanced skill and you might have a management that runs the business well but then is redeploying their funds into you know a diversified low return segment.
So, and these qualitative factors can be sometimes more important and they can also give you context for the numbers that you have analysed. And really the best way to get a good grasp of these factors is to talk to the executive team or management themselves, right? They have lived it; they have done it their whole careers. They have built these companies they have given employment and actually collectively they are responsible for taking our economy and country forward.
So it’s not just the analyst that should be interested, the general intelligent business viewer or reader would love to hear from these people and that is the problem statement right because as we all know SEBI and AMFI have categorised companies by market cap as large cap, mid cap, and small cap large being top 100 mid being 101 to 250 and 251 onwards I think BSE today has about 5,000 listed companies, they are all small cap.
Keep in mind that number 251 is 30,000 crore market cap right. So, that’s the problem statement because media coverage that you see around us on the big channels and historically about 90% of that is on these top 250 companies and maybe there’s a good reason for that because 90% of the funds in the market are in those companies but like I said these are interesting stories as an analyst and as the general public and that access is not there other than AGMs and maybe a few quarterly calls but otherwise that access really isn’t there and so last year we thought of trying to fill that gap in a little way and we started SmallCap Spotlight with the view of giving this platform to companies like you companies for being here, we really appreciate it. And also for us analysts and people in general to just ask the questions and learn about these amazing stories.
We do have some guidelines, so we like to hear about your story, about your philosophy, about your journey. We want to know about the challenges and the opportunities you’re facing in the business but at SmallCap Spotlight we are not interested in stock prices, we are not interested in market movements, we are not interested in macroeconomic predictions right. And then at Shepherd’s Hill we have a couple of rules because we are incubating SmallCap within an asset manager, so we don’t give this platform to our existing portfolio companies and from the time we interview the company to 30 days after we publish we don’t invest in the securities so that gives sort of a neutral platform and builds trust.
So, with that thank you for being here. Welcome to everybody Mr. Haribhakti and Dr. Malpani. Thank you for gracing us with your presence. All the companies thank you for being there we really appreciate it.
Thank you