Equity

The shocking resilience of India’s stock markets

Commentators are wondering why the Indian stock market is “shockingly resilient” amidst the devastation caused by the Covid second wave.    Their premise is that Covid’s second wave is causing significant devastation and death.  2021 GDP growth has been downgraded.  Rising raw material prices will erode margins. The virus has spread across the country and will cause massive unemployment.  Analysts have started downgrading estimates.   Stock price valuations are 2X of China.  So why has the market fallen only 5% since February?

Is Value Investing dead ?

Over the last few years, traditionally defined “Value” stocks have continued to get cheaper while “Growth” oriented cos have done very well.  The divergence is stark and is now prompting questions whether Value Investing is dead. 

The categorization of stocks between “Growth” and “Value” is erroneous.   Anything that is low PE multiple and out of favour with markets is typically labelled “Value” and anything with high multiples and fast growth is labelled “Growth”. 

Implications of SEBI new guidelines on Multi-Cap Funds

SEBI came out with new guidelines last evening where Equity Multi-Cap Funds now compulsorily need to invest at least 25% of their corpus in “Mid Caps” (firms ranked between 101-250 in pecking order of Market Cap) and another 25% in “Small Caps (firms ranked 251 or higher in pecking order of Market Cap).   This needs to be achieved by 31 Jan 2021.

In this note we want to address the following issues

a)      How did SEBI get here?

b)      Our view on this order

c)       What this order means for Small and Mid-Caps in the short term?

Update from the front

We are in the midst of an economic shock.  India has not been able to flatten the curve and the number of infections continues to rise. There is no visibility of a vaccine or a cure.  SMEs are in distress. Neighbourhood shops are doing very little business, if any at all.    Yet stock prices seem to ignore market conditions and have reached the levels of February 2020.   

What is going on? Are markets ahead of themselves? Should Solidarity be taking a cash call at present to preserve some of the gains?

Strategic implications of SBI- Yes Bank Bailout for Banking sector

We had shared an earlier blog, ‘Why Mid-Sized Banks are strategically disadvantaged’ as they are forced to take on more risk in a business where success needs to be rooted in conservatism.

The collapse of Yes Bank will further widen the competitive gap between the leaders (SBI/HDFC/ICICI/Axis/Kotak) and the others.

Why do we not own any Mid Sized Banks

A question that remained unaddressed in the last Q letter to Partners was “Why do we not own any Mid-sized Banks?”

Banks can be attractive businesses to own as they enjoy natural growth tail winds of growth while delivering 15-18% ROE.  However, over the last decade, only 3 Banks (representing < 15% of Industry Assets) have delivered over 15% PAT growth or above 15% ROE consistently.  

Implications of re-pricing of credit risk in India

India has implemented two significant regulations in the recent past.   GST and the Bankruptcy Code.  We argue that a third one is on the way which will lead to Re-pricing of Credit risk

A perspective on FMCG valuations

The best businesses are those that can grow predictably while generating cash and can grow without any or very little reinvestment of this cash.

High Noon for wholesale funded NBFCs

In our Q2FY18 letter dated 4 July 2017, we had made the following observations

Should one add to equity exposure at present?

Markets have done well over the last 12 months with the NIFTY up ~ 25%.   A common question we encounter at present is whether one should add to their Equity exposure at present.