Andrei Stetsenko (Gymkhana Partners): Beating The S&P Using Indian Micro Caps

Episode Summary

Executive Summary: Andre Stetsenko explains how Jimkhana Partners finds mispriced Indian small- and micro-cap stocks by focusing on governance, local context, and overlooked balance-sheet or holding-company value. He argues India’s growth, reforms, and domestic savings shift create a long runway, while patient value investing in less-covered names can outperform broader indices and the S&P 500 over time.

Main Topics: Why India is the target market (Priority: 5/5): Stetsenko explains why India beat out other emerging markets: strong demographics, urbanization, domestic market scale, rational reforms, and a rare combination of producer and consumer attractiveness. How Jimkhana finds mispriced small-cap opportunities (Priority: 5/5): The fund intentionally avoids the crowded top 50–100 Indian stocks and instead searches the broader universe of 5,000+ listed companies for undercovered, undervalued businesses. Corporate governance, local knowledge, and research process (Priority: 5/5): A large part of the process is screening governance, building local networks, using on-the-ground insight, and learning cultural nuances that outsiders might miss, such as adverse selection in certain business models. Holding companies and balance-sheet value unlocks (Priority: 4/5): A major source of alpha is undervalued listed holding companies that trade at large discounts to the market value of their underlying stakes, often with little attention from analysts. Performance, volatility, and tax/currency effects (Priority: 4/5): The conversation covers why 2018–2019 were difficult years, how taxes and currency moves affected returns, and why the fund sees volatility as an advantage for long-term investors. Emerging structural themes: financialization, defense, solar (Priority: 4/5): Stetsenko highlights long-term growth areas including financial savings migration, defense/aerospace indigenization, and solar supply chains, especially where Indian companies can benefit from domestic and global shifts. Patience, concentration, and portfolio structure (Priority: 3/5): The fund holds roughly 60 positions, with heavy weight in the top 20. Positions are often held for years, reflecting a long-term, low-turnover approach rather than technical trading.

Key Arguments: India offers an unusually strong emerging-market setup because it combines favorable demographics, urbanization, a huge domestic market, and meaningful long-term economic upside. The best opportunities are often outside the crowded large-cap names, where fewer analysts and weaker data coverage leave mispricings. Local context matters: cultural norms and market structure can make some apparent opportunities, like online dating, fundamentally unattractive. Undervalued holding companies are compelling because investors can buy quality underlying assets for less than their market value, with discount narrowing as upside optionality. Governance screening is essential in India because family-controlled/promoter-run businesses can range from excellent to problematic, and diligence must be highly granular. Long-term investing benefits from India’s volatility because patience allows buying during panic and selling into exuberance. India’s reforms, especially GST and financial market formalization, are helping listed companies gain share from informal competitors. Structural shifts in savings, defense procurement, and solar/energy demand may create durable multi-year opportunity sets for Indian public equities.

Data Points: Listed companies in India: Over 5,000 - Stetsenko says India has a very large investable universe beyond the crowded mega-cap names. Major investable large caps: Top 50 to 100 stocks - These are the names most global investors own, leaving the rest of the market less crowded. Fund portfolio positions: Roughly 60 - Jimkhana holds many names, but the top 20 positions still represent the majority of capital. Top 20 position concentration: More than 60% of capital - Shows the portfolio is still meaningfully concentrated despite having around 60 holdings. Sub-$1 billion market cap exposure: ~75% of portfolio - The strategy focuses on smaller Indian listed companies. Sub-$250 million market cap exposure: 34% - A sizable portion of the portfolio is in very small companies. Portfolio forward P/E: ~15x - Stetsenko says the portfolio trades at roughly half the multiple of the broader India small/mid-cap index. MSCI mid and small cap India forward P/E: ~30x - Benchmark cited as much more expensive than the portfolio. S&P 500 / MSCI India valuation comparison: ~20–25x - Used in discussion to show Jimkhana’s portfolio is cheaper than major benchmarks. Maharashtra Scooters underlying holdings value: A bit over $4 billion - Sum of stakes in lender, insurer, and scooter maker. Maharashtra Scooters market cap discount: Roughly 55% of underlying value - Used as example of a listed holding company trading at a large discount to sum-of-parts. Tata Chemicals Tata Sons stake: ~2% to 3% - Stated ownership of Tata Sons, whose stake may be worth about the company’s market cap. 2018 fund return: -20% - One of the hardest years due to taxes, currency weakness, and financial-sector stress. 2019 fund return: -11.7% - Continuation of the difficult period after 2018. 2013 fund return: -1% - Example of a small down year. 2015 fund return: -2.8% - Example of another relatively small drawdown year. 2022 fund return: -7.3% - Another negative year, but much smaller than 2018–2019. 2025 YTD return as of July: -1.9% - Current year performance snapshot mentioned in the discussion. Long-term capital gains tax change: From 0 to 10%+ - India reintroduced LTCG taxes in 2018, hurting performance. Rupee depreciation: ~10% - Currency weakness versus USD weighed on dollar-denominated returns in 2018. India household savings in financial products: About one-third - Used to illustrate the financialization trend in India. India household savings in non-financial assets: About two-thirds - Mainly gold and real estate, according to Stetsenko. U.S. household savings in financial products: About two-thirds - Contrast used to show how far India can still move toward financialization. U.S. household savings in equities / financial products: Roughly 40–50% in equities - Illustrates the U.S. end-state India may partially converge toward. India’s share of household savings in stocks/mutual funds: About 10% at most - Shows the low base for growth in Indian financial products. India trip frequency: Twice a year - Stetsenko and his team travel regularly to build local knowledge and source ideas. Typical trip length: ~2 weeks - Each research trip to India is roughly two weeks. India IPO cadence: Every trip, at least a few recent IPOs - Signals a very active primary market and continuing idea flow. Indian stock price limit move example: 5% daily for ~2 weeks - One aerospace supplier reportedly hit the maximum allowable move daily, tripling in about a month. Largest common daily move limit: 20% - He notes India has daily price bands of 10%, 5%, or 20% depending on the security. Adani corroboration: Multiple sources fully corroborated allegations - Stetsenko says local sources verified press claims regarding Adani scandals.

Pivotal Quotes: "Volatility is your friend." — Andre Stetsenko: He explains why long-term investors can exploit India’s frenetic market swings. "We are basically choosing to give ourselves an even harder benchmark than we have to." — Andre Stetsenko: On benchmarking performance against the S&P 500, including tax considerations, rather than using a softer comparison. "If you are a high-quality marriage candidate in India, your parents set you up." — Andre Stetsenko (relaying local analyst insight): Used to explain why matrimony.com/online dating is a weak business model in India due to cultural norms and adverse selection.

Implications: Listeners should see India as a deep, complex alpha source where local knowledge, patience, and governance discipline matter more than broad macro narratives. The podcast suggests smaller Indian equities may remain underfollowed and structurally attractive as reforms, savings shifts, and industrial themes play out.