PrimeInvestor Financial Disruptors smallcase

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Universal banks in India have traditionally been the go-to sector to play on any economic recovery. This was based on the thesis that credit is the oil that lubricates the engine of economic activity. Mainstream PSU and private banks, armed with CASA, would always hog the lion’s share of credit flow, with bank credit outpacing real GDP growth at 1.5-2x. 

But as the economy charts a recovery from Covid, all of these assumptions are being overturned. With corporates increasingly tapping the bond market and new-age fintech platforms deeply penetrating the retail and small ticket loan segments, universal banks are no longer the sole or even preferable choices for equity investors looking to bet on the future of savings and credit in the Indian economy or looking to play the financialization theme.  

Our financial disruptors’ portfolio is built on the back of this thesis.

Financial Disruptors Smallcase, PrimeInvestor Financial Disruptors Smallcase

Why not traditional banks

The basis of our financial disruptors thesis is rooted in trends that have played out over the past few quarters, which had already been slowly building up.

  • Slower growth, with credit moving to new avenues: One, banks have been unable to expand their non-food credit disbursements at the same pace as the acceleration in GDP. While India’s real GDP grew 8.4% in Q2 FY22, banks’ non-food credit growth lagged at 6.9% and credit to industry and services grew at a measly 2.5% and 0.8% year-on-year. RBI data in recent years has shown more than half of the lending and borrowing activity in the economy shifting to non-bank actors, with the ultra-low interest rates offered by the bond markets during Covid aiding this trend.  
  • Losing customers to fintech: Two, as universal banks have tried to shift focus from industrial to retail customers, they’ve come up against significant disruption there too. New-age fintech platforms, with pockets fattened by ample VC funding, have owned the customer experience through apps and digital sourcing of deposits and loans. These platforms are wooing away premium customers through open banking and APIs. Digital lending apps, peer-to-peer platforms and niche NBFCs offering payday loans, microfinance loans, gold loans and MSME and property loans to segments of the population hitherto under-served by banks have made inroads into high-yield borrowers. 
  • Fixed deposits have competition: Three, on the liabilities side, the phenomenal growth of digital platforms and transaction modes have spawned a shift away from traditional, low-interest bank deposit products to more tailored deposit offerings from NBFCs and Small Finance Banks, SIPs in mutual funds and direct investments in equities. The recent opening of bond markets to retail investors may only expedite this trend.  

Bottomline: Given these trends, we believe that entrenched universal banks are no longer the sole or even preferable choices to bet on the future of savings and credit in the Indian economy or looking to play the financialization theme. Yes, banks that collaborate with fintech platforms and adapt to the new business models may prosper. But those weighed down by archaic technology, unwieldy operations and staff costs and locked into old ways of doing things may face severe tests to their growth and survival.

Which financial disruptors?

Our portfolio is built to include companies that can see growth driven by the changing trends above. Our Financial Disruptors portfolio comprises of the following:

  • NBFCs that have built successful business models around lucrative niches in retail, small business or digital lending. 
  • Microfinance institutions that cater to the underserved population. 
  • Mid-sized banks that have shown vision in either adopting digital modes early or in tying up with non-bank partners and digital platforms for business origination.
  • Small Finance Banks which are stealing a march on traditional banks in terms of digital tie-ups and sourcing of CASA.
  • Rating agencies that act as a bond market proxy. 
  • AMCs that are increasingly wooing investors away from traditional bank deposits as well as being innovators within the mutual fund industry. 

PrimeInvestor Financial Disruptors smallcase by PrimeInvestor

This Financial Disruptors portfolio is primarily a growth-oriented portfolio, with stocks being filtered based on high net interest margins, yields on loans, and ROEs. Valuation has been a secondary consideration in this selection. The financial disruptors portfolio intentionally excludes large banks, not because they cannot join the digital revolution, but because they can lose out in the growth race as small finance banks and mid-sized banks with a small base can capitalize faster on a rebounding economy. This Financial Disruptors portfolio is suitable for aggressive growth-seeking investors willing to take on high stock price volatility.

The Financial Disruptors portfolio may, of course, see additions through fintech players that showcase a clear revenue model or financial asset managers that disrupt the traditional businesses of banks.

Performance of the Financial Disruptors smallcase portfolio

This Financial Disruptors portfolio is not one that can be back-tested for performance as we have built a portfolio for the future – made up of stocks that are expected to break the glass ceiling of traditional banking. To this extent, you could name this portfolio a dark-horse one. As can be seen in the performance graph below (as of launch), this portfolio underperformed the Nifty 50 by about 2.4 percentage points between August 24, 2021 to February 4, 2022 as some of these stocks have been out of favour in the market.

This period was taken based on the price data availability of stocks (one of the stocks listed in August 2021 only). However, our earnings growth data shows sound outperformance of peers for the chosen stocks and we think that is one metric that seldom fails. We will update this data once the portfolio gains track record.

FAQs on PrimeInvestor Financial Disruptors smallcase Portfolio

What is the universe of stocks considered in Financial Disruptors?

NSE-listed financial companies from sectors covering banks, small finance banks, NBFCs, microfinance institutions and other financial services with market capitalization above Rs. 1,000 crore.

How are the stocks screened?

Key parameters are used to screen stocks in the universe to assess their prospects to make it to the shortlist and from there into the portfolio. These include, but are not limited to:

  • Earnings growth 
  • Yield on advances/NIM or margins
  • Return on assets 
  • Return on equity
  • Asset quality 
  • Capital adequacy ratio
  • Valuations

These parameters help assess fundamental strength. Qualitative assessments on growth from here, profitability and asset quality trends are evaluated for each of the stocks in the final watchlist.

How are the stocks weighted?

Growth, business fundamentals and financial track-record are the key factors considered while fixing the individual stock allocation in the portfolio.

How often is the portfolio rebalanced?

When a stock in the portfolio goes beyond our internally defined valuation comfort zones or external events reduce the potential growth for the stock, we may consider exiting or reducing it or booking profits. Similarly, a stock fitting this theme that holds new potential may enter this portfolio. Rebalancing of the portfolio will be done in the above instances on a quarterly basis. The portfolio may also be rebalanced between quarters when needed based on external events.

Some stocks in the portfolio have run up sharply. Should those be avoided?

No. PrimeInvestor Financial Disruptors portfolio is a weighted basket of stocks and is meant to be bought as a portfolio and not as individual stocks. Holding them as a portfolio will help reduce risk and optimise return. PrimeInvestor’s research team will keep a tab of stock valuations, growth and upside potential to decide if a stock needs an exit or weight reduced.

What is the tax impact on the portfolio?

The taxation is the same as tax on individual stocks. Stocks sold within a year will be taxed at 15% on capital gains and those held for more than a year at 10% (after the first Rs 1 lakh in long-term capital gains). Apart from this, you will be paying tax on dividend income (treated as other income) received from this portfolio, at your tax slab. TDS shall also be deducted on such dividend income at applicable rates unless you are submitting Form 15G/15H.

What is the cost involved in buying this portfolio?

On the research side, you will be paying PrimeInvestor a quarterly or annual fee as mentioned on the Smallcase portfolio page. On your brokerage platform, you will incur brokerage cost, securities transaction tax (STT) and demat charges, similar to buying and selling of any stock.

What returns should we expect from this portfolio?

The aim of this portfolio is to generate returns that beats the Nifty Bank index over the long term. However, this portfolio will go through ups and downs and may not beat the Nifty Bank at all times. As an aggressive growth portfolio, you can expect it to fall more than the Nifty Bank in a market correction. Do not expect positive or even double digit returns year after year. We do not provide any assurance or guarantee of returns on the portfolio.

How should I invest in this portfolio - through lump sum or SIP?

As a themed portfolio, we prefer that you invest lumpsum in this portfolio. However, if your investment amount is high and in several multiples of the minimum amount then you can consider spreading your investment over a few months.

Is there a cap or maximum amount that I can take exposure to?

There is no maximum limit to this portfolio. However, as a themed portfolio, it is good to restrict this to 5-10% of your overall equity portfolio.

Does PrimeInvestor offer other Smallcases?

Yes, PrimeInvestor offers a diversified Core & Satellite ETF Smallcase. You can view details of the same here : PrimeInvestor Core & Satellite ETF smallcase.

This Smallcase portfolio has delivered negative or poor returns since I bought it. Can I get a refund?

No, there are no refunds. Equity investing is risky and themed portfolios are riskier still, and will see declines from time to time. These are suitable only if you can stay invested over the long term. If you can not tolerate sharp falls, it’s best to skip this smallcase and go for our Core & Satellite ETF smallcase.

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Please note that any specific queries on any of our recommendations will be answered ONLY through email. If you are a subscriber, please mail contact@primeinvestor.in.  Only general queries or discussions will be answered through the comment section of the blog. For full details, please refer to this post – How to communicate with PrimeInvestor.

4 thoughts on “PrimeInvestor Financial Disruptors smallcase”

  1. This is not in good taste. Are we paying the premium for this service to see the marketing collateral on your other product?

    1. Does that men, certain recommendations will be reserved only for Small case and will not be available for Prime portfolio?

      1. Prime Stock recommendations will continue as before WITHOUT any RESERVATIONS 🙂 Primeinvestor is our PRIME product 🙂 Smallcase is a portfolio of stocks that we manage as themes or strategies etc. That’s all (Prime stocks is individual stock recommendations. not portfolio). Smallcase makes portfolio rebalancing possible in an automated environment – something that we cannot do with our subscribers directly. Thanks, Vidya

    2. I am afraid your point is not fair. We offer various products. We let customers know what we are offering. How else does one run a business without marketing? 😊 What we are offering in Smallcase is a research product (with the benefit of automated rebalancing enabled by Smallcase to all RAs like us) offered by PrimeInvestor. It is not offered by someone else and we haven’t given away our customer base to market somebody’s product. If HDFC Bank or ICICI Bank or Zerodha introduce a new product or tie-up to offer a new product, they will mail you, right? This isn’t any different 🙂

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