Windmill Capital selects Pure Plays for its thematic smallcases. Before starting off, let’s understand what does pure play mean, in the context of building a smallcase? Pure play is essentially the foundation or base of the smallcase, upon which the entire structure is built.

Pure play determines the kind of sectors and stocks that will be considered for inclusion in the smallcase.

To set the context straight, pure plays are relevant for non-model and tracker smallcases. Since model smallcases are a systematic combination of fundamental and technical filters, there is no concept of pure plays for them. They remain sector & stock agnostic and follow a simple rule-based selection and rebalance process.

You see, pure play is majorly divided into 2 steps – 

a) Assigning of sectors which are relevant to the theme of the smallcase

b) Selecting the final list of stocks from these sectors which shall be considered for inclusion.

Let’s deep dive into specific examples of a non-model smallcases to better understand the concept.

Brand Value

This is one of the most broad based smallcase in our offerings, having 15 stocks from as many as 13 different sectors. The reason behind this is that since the rationale of the smallcase is to get India’s biggest brands under one roof, we turn sector agnostic to some extent unless there is a structural issue with the sector.

Here are the steps that our analysts follow to determine the constituents of a smallcase:

• The analyst goes through the entire sector list and assigns those sectors which are congruent with the theme. We use the GICS Sector/Industry classification to shortlist the sectors. However, GICS classification can be restrictive in nature.
• We go a step further, break down the GICS classification and call them – smallcase prop sectors that do a significantly better job of mapping companies to sectors.
• Well, the next step is to study all the companies that are coming in as part of the sectors marked green for the smallcase and to determine the relevance of the company to the theme. 
• Example: FMCG companies are a pure play for Brand Value. And we get companies ranging from HUL, Dabur, Britannia Industries, to Zydus Wellness. 
  The key is to gauge brand aspiration for these companies’ products. Almost goes without saying that HUL has a brand aspiration worthy product portfolio, which is not exactly the case with Zydus Wellness. Hence, we’ll leave the latter out from the run.
• Similarly, this is done on the back of geographical revenue contribution numbers as well. Tata Motors is a classic example. Tata Motors is an exceptionally strong brand amongst Indian consumers, however, the company derives ~80% revenue from outside India. Therefore, even though it has a strong brand in the country, revenue dependence outside the country makes it a theme unfit. 

Brand Value smallcase by Windmill Capital

Speciality Chemicals

Speciality chemicals are specific items that are used in low quantities for the production of high-value goods

Indian middle class is leading a dramatic change in demand for items like food, clothing and transportation, which is primarily driving demand for speciality chemicals For example, caramel manufactured from sugar is a commercially produced speciality chemical. Caramel colouring is extensively used to manufacture soft drinks and confectionery items.

Sectors like speciality chemicals usually have a whole host of sub-industries like color and dye manufacturers, chemical suppliers etc. which need to be accounted for while managing the smallcase.  

This smallcase comprises companies manufacturing speciality chemicals that are used in a wide range of industries like automobiles, pharma, textiles, food processing, agrochemicals, etc.

The objective here is to include all such companies which are a part of the speciality chemicals ecosystem. 

Speciality Chemicals smallcase by Windmill Capital

Timely Updates

At Windmill Capital, besides just setting up processes, we keep updating them, in order to maintain relevance. So is the case with pure plays. Once in every six months, we pick the pure play list of our smallcases and individually refresh the list for each one of them, so that we don’t miss out on any new company or sector that might be a good consideration for the smallcase.