Quarterly Update: Process, Survival & the Path Ahead

How we are protecting capital, staying invested, and preparing early for the next small–microcap upcycle.

We recently held our first-ever quarterly client meet, and it felt important to extend the same transparency to our wider reader community. This Substack note summarises the key discussions, updates, and insights we shared during that session.

Over the last three weeks, we have gotten a chance to speak to many investors, from HNI investors to large family offices in Delhi and Mumbai. And across every single conversation, one emotion has quietly dominated: discomfort.

While Nifty (large cap index) is making fresh highs and giving the illusion of a strong market, the on-ground reality is starkly different. Pain in the broader markets (small, micro caps and SME) is visible everywhere with liquidity drying up, forced selling, sharp de-ratings, none of which reflect in the large-cap indices.

In this environment, within our recommended basket of nine companies, we are seeing something quite encouraging: a clear, broad-based improvement in business fundamentals, accompanied by fresh interest and coverage from other investors. As a result, 3 of these businesses have already begun to stand out and attract meaningful attention in the market and have generated strong returns. A larger set is holding their ground well despite the volatility around us, displaying the operational stability we look for in downcycles. Only one name has experienced a sharper correction, and that too due to temporary, well-understood factors rather than any structural concern, something we had already accounted for in our sizing and risk assessment.

Taken together, this distribution, early emerging leaders, a sizeable core holding steady, and only one name facing short-term pressure, is an outcome that aligns with how we intentionally construct portfolios in the small, micro and SME ecosystem.

This kind of resilience in a hostile microcap cycle is not luck. It is process. It reflects the core philosophy we follow at Nine One Capital: protect capital in downcycles, compound fundamentals consistently, and position early for asymmetric upside when the cycle turns.

This post is a detailed walkthrough of our first-ever quarterly client meet - the results, the thesis updates, the research pipeline, the market view, and the internal initiatives we have rolled out to strengthen the edge our clients receive.

Our purpose in publishing this is simple: to help our readers appreciate the value of process and valuation discipline, why the same matters most right now when protection of capital and survival should be the key focus.

Discussion on Portfolio Companies

Before we walk through the portfolio, a quick reminder that we will not be naming any companies here. The objective is simply to highlight the key fundamental developments across the businesses we track, and how they strengthen our conviction in the underlying theses. None of the commentary below should be interpreted as a buy or sell recommendation, but rather as a transparent update on the companies we continue to monitor closely.

1. High-Growth Electronics & Tech Manufacturing Play

• First-half revenue and PAT is more than full year FY25 numbers, but second half is set to scale meaningfully, with management indicating a near 5x jump in one vertical.

• New high-margin products go live this year.

• The company is building capabilities that have almost no listed peers in India, implying a scarcity premium once scale is visible.

• Our estimates point to a potential 2x+ revenue jump over the expected high base of FY26, with substantial operating leverage.

• The company transitions to the main board next year, which could open institutional participation.

2. Two Jewellery Businesses: Exceptional Execution, Attractive Value

Business 1:

• Despite a 50 percent rise in gold prices, the company delivered strong double-digit volume growth during peak festive periods — a rare feat in this sector.

• New stores will open over FY26–27, adding to revenue visibility.

• Trading at a single-digit FY27 PE, despite consistent execution and clean reporting.

Business 2:

• Healthy revenue growth led by new stores reducing the share of single store even further (one common concern among investors)

• Profitability grew faster than sales, indicating newer stores are maturing.

• One store still contributes a disproportionate share of revenues, but this concentration will reduce meaningfully as the new stores scale.

• Valuations remain extremely attractive, with inventory backed by gold and strong on-ground feedback on management integrity.

In an environment where organised retail names trade at 30–40x earnings, these two sit at 10–12x on existing earnings with healthy growth prospects.

3. The IT Products Company: Clean Execution, Big Pipeline, Marquee Clients

• Revenue visibility of ₹200 crore at stable profitability for FY26.

• Dividend policy + quarterly disclosures = credibility building.

• Major capex in product development ends this year; cash flows should meaningfully improve from FY27.

• Strong domestic and international pipeline; management extremely transparent in calls.

At current valuations, this continues to offer a compelling risk-reward as it trades at 8x on FY26 expected earnings.

4. Precision Engineering, Pharma R&D and Specialty Chemicals

These remain small allocation high-optionality bets.

• Strong customer feedback, marquee client base (GE, Rolls Royce etc) with new capex going live.

• Promoters extremely high-energy and execution-focused.

• One pharma idea is delivering its best numbers ever, with potential triggers in pipeline.

In all these, the sizing reflects our risk discipline 2 to 4 percent allocations until long-term patterns emerge and we develop more comfort.

5. The Outlier: the disappointing one

One company in our portfolio underperformed sharply due to a government-driven delay in a key business segment.

However:

• The product that anchors our long-term thesis, in a high-growth surveillance/AI category, is fully ready.

• Factory is operational, STQC licensing expected soon.

We are tracking the same closely and at some point, we would be interested in scaling this position further.

Small, Micro and SME Market Environment

At the index level, the current pain in the market is almost invisible. The microcap and smallcap indices are down only 10–12 percent, while the largecap and midcap indices continue to make new highs, as shown below. For anyone looking only at headline numbers, it would appear that the broader market is stable.

However, the microcap index reflects only the top 250 companies beyond the Nifty 500, that is, roughly the 500th to the 750th largest companies by market cap. The 750th ranked company today is still around ₹5,000 crore in size. Beyond this universe lie almost 3,000 companies that are not captured in any index-level performance and form the true small/micro/SME landscape where most individual investors operate.

To understand the real state of this segment, we segregated these 3,000-plus companies by market cap, looked at their individual drawdowns from the peaks of the last 2–3 years, and then calculated the median drawdown for each bucket. The results are shown below:

We also compared this with the previous smallcap downcycle from January 2018 to February 2020. We intentionally avoided March 2020 to exclude the COVID-related panic that was a once-in-a-century shock. Here is the same analysis for that cycle:

As shown, companies below ₹3,000 crore market cap are currently down around 55 percent on a median basis. In the previous cycle, the equivalent median drawdown was 68 percent. The purpose of this comparison is not to suggest that there is “only 30 percent” more downside left or to predict market bottoms. The small and microcap universe does not provide downside protection in weak markets. A stock at 10x earnings can easily become 5x earnings, and stay there for an extended period.

What this analysis does offer is context: beneath the calm at the index level lies a deep and broad correction in the parts of the market where most investors participate.

Why staying Invested is important and importance of disciplined investors

This environment reinforces a lesson that has repeated itself across every smallcap cycle. Nobody can forecast where the bottom lies or when momentum will return. The investors who eventually come out ahead are not the ones who perfectly time exits and entries, but the ones who stay invested without destroying capital. Survival is the real edge. If you avoid the catastrophic 50–70 percent drawdowns that many small and microcap stocks have suffered, the eventual upcycle becomes disproportionately rewarding.

When we look at the drawdown data across the 2,000–3,000 smallest listed companies and then compare it with how our recommended basket has behaved, we get a very real picture of the environment we are navigating. In a phase where large parts of the smallcap universe have gone down the drain, if a portfolio holds itself and doesn’t loose much, it is already meaningfully ahead. Because whenever the cycle turns ( whether one year from now or three) the investors who have preserved capital are the ones who participate fully in the recovery. Every past smallcap cycle has shown that once liquidity returns, everything moves, but only for those who stayed in the game.

This is also why the argument of “let me sit out and buy when the market looks better” rarely works in practice. A 50–80 percent cash call sounds logical on paper, but when do you deploy it? After markets rise 10 percent? 20 percent? 30 percent? There is no clear trigger, and most investors end up waiting far too long. Personally, we have remained close to 100% percent invested for most of our investing life. The drawdowns have been uncomfortable, but the long-term outcomes have been excellent because the goal is not to eliminate volatility, but to avoid permanent capital loss.

This is where disciplined, research-led investing becomes indispensable. Our objective has always been two-fold:

1. Protect capital during difficult phases by focusing on fundamentally improving businesses, strong balance sheets and sensible valuations with companies trading close to long-term trough multiples, not euphoric peaks.

2. Remain positioned for the turn, without trying to time the market because cycles turn quietly, liquidity returns gradually, and the winners rerate sharply before it feels “safe” to buy.

In the end, small and microcap investing is a game of survival. If you can survive the tough years without large portfolio damage, the good years take care of the returns. And when the next upcycle arrives, it rewards those who remained invested, stayed disciplined, and held on to the businesses that continued to execute despite the noise.

Our Research Pipeline

Behind the scenes, we are in the final stages of concluding our work on various ideas and we will soon release reports on a couple of these depending upon the risk-reward, valuation comfort and execution capability. Each of these ideas has been under active research for weeks in some cases, months; involving research, channel checks, plant visits, customer calls etc. These are early-stage, under-owned, high-quality businesses operating far below the radar of institutional investors, and each sits firmly in the valuation zone where we are most comfortable deploying capital.

Here is a high-level view of the themes we are working on:

• A differentiated cement business
  One of the few players in India executing a niche strategy within the broader cement space, with structural advantages. The business is quietly compounding, undiscovered, and still available at trough valuations.

• A pharma packaging opportunity
  A sticky, high-margin B2B model supplying essential components to regulated markets. Customer concentration is low, order visibility is high, and the earning trajectory is set to accelerate as new capacity comes online.

• A sub-₹150 crore recycling company with strong unit economics
  A rare combination of scale, growth visibility, and clean governance in a sector typically dominated by unorganised players. Early signs indicate a business that can multiply its profit pool meaningfully as the industry consolidates.

• A fast-scaling stationery brand
  A consumer-facing company capturing share in a growing niche, backed by brand recall, efficient distribution, and operating leverage yet to fully play out.

• An engineering capex beneficiary
  Current profitability is marred by one-off expenses, adjusting for these, it is trading at 12x normalised PAT.

Across these five ideas, the common thread is simple: high-quality businesses available at valuations that make sense, with the potential to be meaningful wealth creators as the cycle turns. Besides above, we have a very large pipeline of stocks which we want to research and conclude our work and we will keep our clients updated on the same.

Our work is centred on identifying high-quality, scalable businesses well before they appear on the broader institutional radar. Several names in our current portfolio reflect this approach, where early research, conviction and disciplined execution have helped us participate meaningfully as the businesses strengthened. If you’re a serious long-term investor who values deep, research-led insights into the small and microcap space, you can reach out at gaurav.a@nineonecapital.in or fill in the form here (link) to discover how our research services can keep you ahead of the curve.

Important Note and Disclaimer: This article is not a buy/sell recommendation. This note is shared only for the education purpose and in no way, it constitutes any buying or selling recommendation.