Execution, not valuation, is real risk in smallcaps: Equitree's Bharaddia

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Algorithmic or momentum-driven strategies often generate trading profits, but they rarely create wealth, said Pawan Bharaddia, co-founder and chief investment officer of Equitree Capital in an email interview with Devanshu Singla. He also explains why governance and execution risks are rising in smaller companies, and where long-term investors can still find meaningful opportunities. Edited excerpts:

 

How do you assess the markets right now, especially the mid and smallcap segments?

 

The mid-and smallcap segments have witnessed significant volatility over the past year. Market valuations across segments remain high, but the differentiation beneath the surface is critical. As of Q1FY26, midcaps are trading at 51.6x TTM P/E versus a 10-year median of 35.4x. Smallcaps stand at 35.2x against a median of 26.7x, while largecaps are at 38.7x compared to 30.5x.

 

Despite these premiums, India’s small and midcap profit pools are expanding faster than large-caps, driven by the manufacturing, capital goods, and infrastructure upcycle. This makes the segment a fertile ground for investors adopting a private equity-style, long-term approach focused on business quality rather than short-term price action.

 

September 2025 quarter earnings have shown improvement in large-and midcaps but selective strength in smaller names. How is this influencing your stock pick strategy?

 

Our investment philosophy remains long-term, seeing earnings through a structural lens rather than a cyclical one. While Q2-FY26 earnings have reflected resilience across several midcaps, the smaller companies may show temporary softness.

 

We are comfortable holding businesses that go through a rough quarter or two, as long as the underlying thesis - industry tailwinds, management execution, and capital efficiency - remains intact. However, if a company’s challenges stem from structural or management lapses, we do not hesitate to reallocate capital. Our “business-first, stock-next” approach helps us stay insulated from market noise.

 

In the current scenario, where are you placing your bets? Which sectors are you bullish on from the medium-to-long-term perspective?

 

Our highest conviction lies in sectors aligned with the country’s structural transformation such as engineering, industrial automation, infrastructure ancillaries, auto components, and niche consumption. These businesses are benefiting from domestic capex recovery and India’s rising global competitiveness.

 

Additionally, the consumption layer—particularly affordable discretionary segments—remains a long-term play on India’s per capita income growth. As real earnings rise and rural demand revives, we expect a broad-based consumption recovery over the next two years.

 

What is the biggest risk that the market is underestimating as we head into CY26, particularly for smaller companies?

 

The biggest underappreciated risk lies in execution, not valuation. As the opportunity landscape expands, several small and mid-sized companies are attempting to scale aggressively but often lack execution capabilities, governance frameworks, and management depth. We have seen in past cycles that capital misallocation can erode long-term value, even when end-demand remains strong. For investors, differentiating between “growth availability” and “growth deliverability” will be crucial. As liquidity-driven inflows chase perceived smallcap stories, the quality dispersion widens, leading to pockets of overvaluation. Growth should not come at the expense of balance sheet stress. Execution, therefore, remains our biggest monitorable heading into CY26.

 

With rising investor participation in PMS and AIFs, how do you differentiate between genuine long-term capital and short-term performance chasers?

 

We are seeing increasing differentiation between investors seeking long-term compounding and those chasing tactical performance. While short-term investors treat stock prices as the scoreboard, long-term investors focus on business fundamentals. Wealth creation is an outcome of owning quality businesses through cycles. Clear communication, transparency, and measured positioning help attract partners who understand that interim volatility is the cost of long-term compounding. This alignment has been a key reason behind consistent performance and low churn.

 

What’s the strategy behind picking stocks with strong fundamentals and low valuations instead of relying on algorithms or theme-based strategies?

 

Algorithmic or momentum-driven strategies often generate trading profits, but they rarely create wealth. Our approach is to identify early-stage, under-researched companies where business fundamentals are improving faster than market perception. We follow a private equity-style investing framework in public markets. We conduct deep due diligence, engage with management, and evaluate capital allocation discipline. This ground-up approach helps us find value where algorithms cannot—especially in small and microcap segments. While this approach may appear slower initially, our 5-year CAGR of 43 per cent (as of Oct 31, 2025) stands as evidence that patient, research-intensive investing can outperform even in a technology-driven market.

 

How do you see Sebi’s recent scrutiny and disclosure norms shaping the future of the AIF industry in India?

 

Sebi’s regulatory tightening is both timely and healthy. Enhanced disclosure norms and compliance scrutiny will help separate serious, research-driven fund managers from product manufacturers who rely purely on distribution push. Standardisation of performance reporting, risk metrics, and valuation practices ensures that investors can make informed decisions. In the long run, such oversight will bring greater institutional participation and position Indian PMS/AIFs as credible vehicles for long-term wealth creation.