Story of the year

By Harini Dedhia

Dear Investor,

We are seeing a resurgence in a flight to ‘blue chip’ narrative of investing. While the headline index has been flat for the past 1 year, small and midcap indices are down 5% each; The median midcap and smallcap stock are down 12.6% and 15.9% in 1 year. The median drawdown from a 52 week high which is where a lot of ‘stuck’ positions are bought is 20.2% and 25.6% for midcap and smallcap respectively. This drawdown from 52 week high reflects the true pain endured by individual portfolios, resulting in the return of the bluechip narrative. There is a clarion call to return to investing in the large established companies with a track record of ‘quality’.

Index	1Y Index Return	Median 1Y Return	Median drawdown from 52W High
NIFTY	-0.4%	-6%	-8.80%
BSE MidCap	-5.2%	-12.6%	-20.2%
BSE SmallCap	-5.2%	-15.9%	-25.6%

Data as of 17th September 2025

The animal kingdom however, has taught us otherwise. If we look at evolutionary history, the current three longest surviving species on land are velvet worms (400mn years, 1-5cm weighing 5-6gms), tuatara (200mn years, 40-50cm weighing 1kg on an average) and ants (120mn years). Large animals on an average are more prone to extinction due to two major reasons.

First, large animals require a lot of resources (food and space) to survive and thrive. As their numbers start thriving, there isn’t food present in their territories to sustain them and they start moving into others’ territories. This puts an easy target on their back leading to eventual extinction even if they do manage to find the food.

Large companies are similar in that to survive and thrive they need to fight for growth at a higher base, but it becomes difficult to come by. Indian IT companies are a classic example of the same (see table below for TCS’ sales growth). At a higher base, it becomes difficult to sustain growth- there isn’t enough food to go around. With lower growth, the rate of return on stock prices diminishes as well.

	USD Revenue (in bn)	5Y Sales CAGR
2005	1.9
2010	6.3	27.1%
2015	15.5	19.7%
2020	22	7.3%
2025	29.8	6.3%

When paucity of growth forces the giant into other territories, typically capital destruction follows or declining return on capital at the very least. A prime example of this would be when the largest cement manufacturer and the largest petrochemical company in India ventured into the telecom sector. One destroyed capital and the other saw their incremental return on capital drop. To reinvest capital at that scale allows for lower return on capital but stock price returns are a factor of growth and return on equity. But both diminish with scale.

The second reason that pushes larger species to lower numbers or extinction is longer reproductive cycles. The gestation period to produce one offspring, or the next generation increases with the size of the animal. This is akin to large companies facing difficulty in innovating. Innovation necessitates disrupting their existing established business. It is therefore more measured or slower (and rarer) to come by.

Nokia introduced a smart phone to the market in 2004. In 2007 the first iPhone was launched. While Nokia innovated, their smartphone was an iteration of the form factor everyone was used to at the time. The iPhone had the ability to be completely unique in its large screen with a single button form factor- truly opening the possibilities of the world of apps we have on our phones today. Within a year, the iPhone overtook Nokia in sales. Nokia didn’t do anything wrong, they were simply not fast enough to respond to the change in the market- too stuck to their then profit making form factor. Lack of speed at scale results in diminishing returns in stock prices.

Index	10Y Index Return	% Stocks Above Index	10Y Median Return
NIFTY	12.20%	56%	13.3%
BSE MidCap	15.90%	26%	9.2%
BSE SmallCap	17.40%	33%	10.3%

Data as of 17th September 2025

This reflects in the 10Y performance of smaller companies (as a category) vs. NIFTY50. However a word of caution here- while worms and ants have survived the longest on land as a species, the individual lifespan is much shorter. The large companies, while too big to dance, might also be too big to fail, at least in the short to medium term.

While betting on small and midcap as a sector yields significant outperformance vs. large companies, the hit rate is much lower. The percentage of stocks that outperform the index is much lower in smaller companies as seen in the data above. Active investing will gain larger importance in the next 3-5 year run in the equity markets. Small and midcaps will continue to be relevant for wealth creation as they have been in the past.

As always, we thank you for your continued support and faith in letting us be your partners in your wealth creation journey.

Best,
Harini Dedhia
Head of Research and Portfolio Manager