'Small caps today are better than a decade ago'

With around two and a half decades in the markets, Chandraprakash Padiyar has witnessed a transformation in small-cap investing. The Senior Fund Manager at Tata Asset Management has seen small-cap companies evolve from highly leveraged, cyclical businesses to more stable enterprises with stronger balance sheets. Overseeing the five-star rated Tata Small Cap Fund, Padiyar employs a balanced approach—half the portfolio targets rerating opportunities, and the other half focuses on established compounders. This strategy has helped navigate the recent correction while maintaining a high active share. In this conversation, Padiyar shares his perspective on small-cap valuations, explains his approach to managing drawdowns and highlights why manufacturing has become a sweet spot in his investment universe. Below is the edited transcript of the interview. Small-cap stocks have experienced a steep correction in the last six months, with the index falling around 23 per cent simultaneously. Are valuations now reasonable, or is there room for further correction? It is a mixed bag. In some parts of the small-cap universe, we still see valuation being on the higher side, whereas there is a part where valuations have become quite attractive. Nowadays, I find companies trading at 5-6 P/Es and also discover companies trading at 40-50 P/Es. I find high P/E stocks in the benchmark index, such as the NSE Smallcap 250 index, and that is why we believe it makes sense to invest outside the benchmark, which is why our active share is higher. Selective companies may be growing at a 20 per cent annually on earnings over the coming years. At the same time, there will be many companies growing at 10-15 per cent as well, and it will be strikingly different from the last four years when, across the board, companies grew by 25 per cent in the small-cap segment. You may have chosen or been less selective in businesses in an environment where companies grew rapidly year after year. But now I think that we have reached that point where a limited number of companies will be able to deliver higher growth on the base at which they have reached in the last year. So when this happens, selecting the right business will be important, rather than being in a higher sector or choosing which sector to allocate more. This is why we believe we are back to a stock selection environment in our economy or market. We hope that this will help us going forward. When a stock in your portfolio falls steeply, say 40 per cent, how do you ma