March 2025 / Q4 FY25

01Strong Resilience Even During Drawdowns

While we have maintained long-term outperformance, Q4 FY25 was not without volatility. Our portfolio fell ~13% vs. BSE 500’s 4.39% drawdown — more aligned with the NSE Small Cap Index’s ~14% fall.

However, the portfolio showed strong relative resilience across multiple drawdown phases:

Drawdown Analysis

Why have we been able to cushion downside better?

Earnings Growth

In a market largely starved of profit visibility, our companies continued to deliver. The median PAT growth for the portfolio in the first nine months of FY25 stood at 19% YoY.

Valuations Remained Grounded

Most of our holdings were trading near their historical P/E averages, leaving little room for derating. This discipline protected us when reality caught up with stretched valuations elsewhere.

Cash as a Strategic Lever

We aren’t compulsive investors. Small caps are inherently volatile — and we embrace that by staggering our entries to turn volatility into opportunity.

02Separating the Wheat from the Chaff

Small-cap companies can be exceptional wealth creators — but without the right filters, they can just as easily destroy capital. In fact, 7 out of 10 small-cap stocks tend to be value-destructive, resulting in an industry-wide success rate of barely 30%. The reasons are often structural: poor governance, opaque disclosures, promoter misalignment.

Stocks like Gensol Engineering, AGS Transact, and Mishtann Foods — once retail favourites — are now down 92%, 95%, and 75% from their 52-week highs[4]. The headlines may cite volatility, but the real culprit is often a deeper flaw in business quality or management intent.

1Stay Within Your Circle of Competence

Bull markets are tempting. Everyone wants to ride the “next big thing” — the next fintech, the next SaaS disruptor, the next EV platform. But complexity often masks mediocrity.

We consciously avoid sectors where we can’t confidently model earnings or understand the core drivers — such as BFSI, direct real estate, and certain new-age business models.

Another equally important (and underrated) skill is the ability to filter out noise. Every day brings a fresh idea from brokers, analysts, Telegram groups, or fellow investors. Over time, we’ve trained ourselves to pause — to not act on anything until we’ve done the work ourselves and built independent conviction.

2Don’t Overpay for the Future

Even the right story can be the wrong investment — if the price is wrong.

We’ve seen this movie before. Earnings expected to grow at 30%, priced at 80×. Then one quarter disappoints and the rerating is brutal. These are precisely the setups we avoid — hot narratives priced 2–3 years ahead of reality. They often look expensive on current earnings and fragile on future ones. In small caps, obvious growth stories often disappoint the most. The industry may be right, but if the entry valuation isn’t, returns rarely follow.

Another example that comes to mind is a cloud computing SME — widely touted as “India’s AWS” — which gained popularity through finfluencers, WhatsApp forwards, and a fast-growing topline. Today, Varanium Cloud Ltd is down ~98% from its peak: from ₹374 (Jan 2023) to ₹6 (March 2025)[4]. The problem wasn’t technology. It was valuation chasing vision with no earnings to anchor it. We stayed away.

3Incessant Dilutions Are Never Investor-Friendly

We are wary of companies that frequently raise funds via equity. Repeated fundraising typically signals that the company is not generating enough internal accruals to fund its own growth. When a business is perpetually dependent on external capital, it raises critical questions — not just about capital efficiency, but also about the sustainability of its operating model.

Even in situations where an equity raise is justified, EPS accretion must remain a non-negotiable. Growth financed by dilution is not true value creation unless it translates into per-share earnings expansion over time.

We recently studied a hospitality company that consistently raised equity across reporting periods. Over this period, EPS CAGR was -4% (Mar ’21 to Dec ’24), even as the business kept raising capital. The dilution did not translate into profitability. For us, this is a red flag — not just for capital allocation, but for governance, alignment, and long-term value creation.

4Promoter Behaviour Is the First Financial Statement

In small-cap companies, promoter transactions often precede fundamentals. A silent exit can say more than any earnings call. We monitor this very closely at Equitree.

We were invested in a listed logistics company. One quarter, we noticed that the promoter had sold just over 2% of their holding. While the number itself wasn’t alarming, there was no change in equity share capital, and no accompanying explanation. That made us uncomfortable — and we chose to exit.

Since then, the promoter has continued reducing their stake quietly. Over nine quarters, their holding has declined by ~20% — from 73.71% (Jun ’22) to 57.10% (Mar ’25) — all without any dilution. The share price continues to trade at the same levels.

5Resignations at the Top

Governance issues rarely show up first in the financials. More often, they start with resignations. At Equitree, we track auditor exits, independent director resignations, and CXO churn as early indicators of deeper problems. One departure may be unrelated. But multiple exits in a short span — especially at senior levels — often signal underlying misalignment, operational strain, or governance concerns.

A recent example was a newly listed auto OEM, where seven senior executives — including the CEO, CFO, CTO, and CMO — resigned within nine months. Some left within weeks of joining, others moved to competitors. Around the same time, the company drew attention for subpar product quality and lacklustre after-sales service. We weren’t invested. And this only confirmed why. The stock is down 60% since August 2024[5].

6Related Party Transactions

Some risks don’t show up in the income statement — they’re buried in the footnotes. Complex webs of related party transactions often blur the line between value creation and value diversion.

In one such instance, a promoter awarded himself a one-time “value creation bonus” of ₹19 crore (2%), triggered simply because the value of the parent’s stake in a subsidiary increased post-IPO. There was no operational milestone, no disclosed performance clause — just a payout routed via a group entity. All technically compliant. But from a shareholder lens, deeply misaligned.

These are the kinds of structures we consciously avoid. We’re not against promoter rewards — but they should follow real business delivery, not passive mark-to-market gains. That’s not alignment. That’s leakage. It also sets a bad precedent for the future.

7Tracking Promoters’ Interests Outside the Company

We invest in family-run businesses, but only when we’re confident that promoter bandwidth and incentives are fully aligned with the listed entity.

We recently evaluated a company co-promoted by four families, each of whom also ran their own unlisted businesses in the same industry. Structurally, it may have worked. But economically, it created a complex web — for us, and for any outside shareholder trying to make sense of where the promoter’s loyalties lay.

The related party disclosures were extensive but offered little real clarity. There were frequent cross-transactions, overlapping operations, and blurred boundaries between group entities. Value may have been created somewhere — but tracking where it accrued, and who it accrued to, was near impossible.

8Succession Planning

Succession planning is a key filter for us. We prefer investing in companies where the roadmap for leadership transition is clearly thought through — and more importantly, where there are no disputes within the promoter family.

Family disputes and unclear succession have historically been among the most destructive risks for long-term shareholders. The numbers may look fine for a while, but when leadership falters, the damage tends to be sudden and steep.

We passed on a well-established auto ancillary business for this reason alone. The promoter’s son wasn’t interested in the company. The son-in-law, though operationally involved, held no equity and had no real skin in the game. The setup looked functional from the outside, but felt fragile once you scratched beneath the surface.

9Reputation and Reference Checks

When it comes to promoter quality, not everything shows up in the financials. That’s why we routinely conduct informal reference checks through operators, suppliers, auditors, ex-employees, and industry peers — people who’ve seen the business up close and unfiltered.

We meet the promoters multiple times before investing. But we also make it a point to meet middle management — not just the face of the company, but the people who actually run it. These conversations often reveal more about culture, continuity, and internal dynamics than any investor deck.

We approach investing with an ownership mindset, which makes it critical to know who we’re backing. By leveraging our private equity network and industry scuttlebutt, we’re often able to steer clear of businesses that look good on paper — but raise questions on the ground.

In one instance, we visited a hospital chain where the promoter showed up with two armed bodyguards. He had recently produced a political biopic. The numbers were fine. The business had growth visibility. But the promoter’s presence told us enough to pass.

10On-Ground Checks: A Phone Call Can Save Your Portfolio

Before we invest, we go out and test the story on the ground. We don’t just rely on management commentary — we speak to dealers, distributors, franchisees, and even customers. It’s remarkable how much clarity a few calls can bring.

We also make it a point to visit the company’s plants, factories, and key facilities as part of our due diligence. It helps us assess not just the scale of operations, but the strength of the brand and its actual acceptance in the market.

In one case, we evaluated a fitness chain that appeared to be scaling rapidly. The reported numbers looked great. But when we called five of their Tier 2 and Tier 3 outlets, not one picked up. Online reviews were patchy. Front desk staff was untrained. The sales funnel, by every sign, was broken. The operating reality didn’t match the financial story. We walked away.

11Financial Forensics

At Equitree, our research team — all CAs and CFAs by training — brings a forensic lens to every annual report. We track year-on-year changes in receivables, inventory, depreciation policies, and cash flow conversion, but we also watch for inconsistencies — like employee costs shrinking while revenues grow, or electricity expenses falling despite rising volumes.

In one case, a dairy company took a large inventory write-off while peers didn’t. Around the same time, the CFO resigned without explanation. Either event could’ve been overlooked. Together, they told us to step away.

We benchmark tax paid vs. PBT, scrutinise cash flow quality, and study footnotes year-on-year. It’s not about catching fraud — it’s about recognising when something doesn’t feel right, before the market figures it out.

03Mistakes That Shaped Our Process

Some of our best filters were forged in hindsight. These are three mistakes we’ve lived through — and what they taught us.

Leverage Is a Silent Killer

We once invested in an agri-processing and equipment company with a debt-to-equity ratio of over 2×. The business was growing, but working capital was stretched. When receivables got delayed, the entire engine jammed: bank repayments were missed, the company’s credit rating was downgraded to “D”, and promoter-pledged shares risked being liquidated by lenders.

We exited at a loss — not because of the business model, but because our initial thesis broke and the balance sheet couldn’t take the stress.

Untested Business Models Can Test You First

We once backed a new-age company positioned as a cash machine, thanks to its expected negative working capital cycle. That advantage, however, never materialised. The promoter began experimenting mid-cycle — adding new products, reworking the supply chain, chasing scale.

Inventory started building. Margins eroded. And by the time the dust settled, the business had turned cash-negative and debt-heavy — structurally compromising the balance sheet.

Promoter Intent: The Final, Unforgiving Filter

We invested in a global pharma company with four USFDA-approved plants and a visible runway. But when a global private equity fund exited its quasi-equity investment, the promoter made a high-stakes call: instead of raising equity, he replaced it with high-cost debt — purely to protect valuation.

The bet backfired. Debt service began to strain operations. Eventually, the company had to sell off core assets just to meet obligations — leaving equity shareholders with nothing.

04Market Outlook: Navigating Uncertainty with Conviction

The single most significant overhang in the current environment is the uncertainty surrounding tariffs. We are now in the midst of the 90-day pause window[6], with multiple potential outcomes ahead. Attempting to forecast the trajectory — let alone the second- and third-order effects — would be speculative at best. In such moments, restraint and readiness are more valuable than prediction.

As bottom-up investors, our lens remains firmly on fundamentals. We’ve already assessed the direct impact of tariff-related disruptions on our portfolio companies, stress-testing their resilience in the event of a demand slowdown or margin compression. We shared a detailed note on this earlier and encourage investors to refer to it for specifics. As always, we’ll continue to track developments closely and respond with agility if required.

Having completed a thorough bottom-up review, we remain confident in our portfolio’s ability to weather near-term volatility. We expect our holdings to deliver approximately 30% earnings growth in FY26 (excluding any tariff impact), and the portfolio currently trades at a compelling 14.3× FY26E earnings.

We remain bullish on India’s long-term structural story. Short-term noise does not shake our conviction. If anything, it sharpens our focus.

Thank you, as always, for your continued trust. We remain steadfast in our commitment to navigating every phase of the cycle with discipline, humility, and a long-term lens.

For any feedback or queries, please feel free to reach out to us.

Sources

01

PMS AIF World × IIM Ahmedabad — “Best Small-Cap PMS (Absolute Returns), 5-Year Performance.” Equitree’s Emerging Opportunities PMS recognised on February 15, 2025.

02

Nuvama Custodian Services; Equitree Capital internal performance and NAV records (March 31, 2025). Returns are TWRR, net of fees and expenses, and not verified by any regulatory authority/SEBI.

03

PMS Bazaar — PMS Rankings (450+ entries) for 1-, 2-, 3-, and 5-year time frames as of March 2025.

04

TradingView price history — Gensol Engineering, AGS Transact, Mishtann Foods, and Varanium Cloud Ltd, drawdown levels referenced from 52-week highs through March 2025.

05

Public BSE / company filings — Ola Electric Mobility CXO resignations and share-price drawdown from August 2024 to March 2025.

06

White House Trade Proclamation, April 2025 — Reciprocal-tariff order, 90-day pause announced April 9, 2025.