The Indian equity market took a bit of a hammering this month with, with the Nifty falling 8.8% for the month. For the current financial year, the Nifty is down 14.3%. Our portfolios were also affected this month, but we did significantly better than the market. More importantly, we are still positive for the year in a market which is down quite a lot. The recent down move seems linked to global events such as the US credit downgrade, the European debt crisis as well as due to the Anna fever gripping the nation which practically brought the government and Parliament to a standstill.

In the context of the sharp fall in markets, we think it is a good time to review the overall economic environment and corporate performance. Broadly, the Indian economy is doing fine with the real GDP growth likely to be a little below 8%. We expect that over the medium to long term, growth rates of close to 8% should be sustainable, despite some intermediate hiccups. In such an environment, we expect that the group of high quality, stable companies that we track should be able to deliver 13-15% topline growth over the coming years. It is our expectation that the global events may cause some intermediate term issues, but the long term trajectories of most of these businesses should remain intact.

Due to the 11 interest rate increases over the past 2 years by the RBI, several pockets of the economy are beginning to see some slowdown in demand. For instance, a home loan which was available at about 8.5% pa about 2 years back, now costs close to 11%. There have been similar increases in interest rates for cars and for businesses. These rate increases are likely to continue to exert downward pressure on demand for products which are financed by borrowings, be it homes, cars or capital equipment. To some extent a cool down in demand is necessary to curb inflation in a supply constrained economy. At the same time, should there be a severe slowdown in demand due to global and local factors, the RBI would have enough buffer to bring down interest rates and stimulate the economy like it did in 2009.

Finally, though markets have corrected sharply, they are trading well within the historic range of valuation. The Sensex has traded in a PE range of 14 – 22 on trailing earnings very consistently over the past 20 years. Even after the current fall, the Sensex is currently trading at close to 16x PE, which is well within the historical multiples.

The current market conditions are being severe on companies with large borrowings and unpredictable businesses. On the other hand, there are several great companies out there whose balance sheets are strong and are growing at satisfactory rates. We have been buying into some of these companies, and expect to buy into more of these companies as opportunities arise. The next few weeks should be an interesting opportunity to buy into these companies at great prices.

The Indian equity market continues to face headwinds – the Nifty is down 6% in the current financial year on the back of global economic concerns and the RBI’s strong anti-inflationary policy. Our portfolios continued to do well through this period, and despite the continuing market weakness, we closed the month on a positive note. For the current financial year, we continue to be significantly ahead of the market and satisfactorily positive.

The weakness in Indian equities is partly driven by the souring global macro-economic scenario. While Europe continues to struggle due to the high debt problems in the PIIGS countries, the focus has now shifted to the US where the government debt to GDP has hit 100% and thus the debt ceiling of $14.3 trillion is sparking a big debate in that country. The US government runs a serious risk of a credit down grade, a situation the world has not seen since World War I. The bond yields in Spain and Italy are also foretelling some serious debt issues in these countries. All these are partly reflective of expenses of these governments having gotten far ahead of actual tax revenues. In the final analysis, it is all about revenues versus expenses, be it individuals, businesses or the government.

The real issue facing the Indian markets for more than a year is the high rate of inflation. The RBI took baby steps in raising interest rates in the early part of the rate hike cycle in order to support growth. The result has been that inflationary expectations have set in firmly. Meanwhile, core inflation which was weak in the early part of last year, has climbed significantly in recent months. For a significant part of the last 18 months, a typical home loan has been available at about 2% below the prevailing inflation rate. Such a policy has led to a significant boom in demand, whereas supply has failed to catch up. You may have seen more cars being bought, but correspondingly roads are not being built. Significantly more air-conditioners and high end televisions are being bought, but not sufficient power plants are being set up. There is more demand than the ability of the infrastructure to accommodate the increased usage. A good part of the current inflationary situation is due to capacity lagging demand.

The RBI has started to take a serious view on this and has been taking steps to reign in the run-away demand environment. More importantly, the policy makers want capacity to catch up with demand, which takes time. We are likely to see a period of softening demand and a slowdown for a few pockets of the economy. This outlook has been affecting the equity market.

With a bit of cash in hand, we hope to take advantage of any further weakness in markets. Many of the stocks that we would like to buy have run ahead of themselves in terms of valuations, but are doing wonderfully well as businesses. We hope the current weakness will give us an opportunity to buy into some of these businesses at better prices than where they are trading now.

The Indian equity market was weak for most of the month, but due to a strong rally in the last five days of the month, closed in positive territory. Our portfolios continued to outperform and finished up strongly for the month as well. As a result, while the Nifty is down 3.2% in the June quarter, our portfolios are up quite strongly.

The weakness in global markets of late is partly triggered by the financial crisis in Europe, wherein some of the governments are struggling to finance their debt and the cost of borrowing for countries like Greece, Ireland and Portugal has shot up significantly in recent months. After being handed a 110 billion Euro bailout package last year, Greece says it needs a further bailout package of similar proportions. While efforts are on to prevent a default by Greece, an impasse could have far reaching implications for the global financial system.

Fortunately, India does not have problems of the scale that are faced by the Western countries. The larger issue in India continues to be high inflation and the RBI wanting to take on inflation at the cost of growth. The RBI is focused on controlling inflation and more importantly inflationary expectations and has become more aggressive in its stance lately. Due to the increased transmission effect of RBI’s moves, this has led to a significant increase in the borrowing costs for industry and consumers. The increase in interest rates and the high rate of inflation seem to have begun to have an impact on consumer purchasing behavior, and can potentially affect growth for some companies. The next few months could potentially see growth slowing down for several pockets of the economy. Companies which have borrowed heavily to fund growth are likely to see stiff headwinds in this scenario.

In this sort of an economic environment, we are quite often asked whether there are good opportunities to invest in the market. The truth is that if one invests in high quality companies, whose long term trajectory is unlikely to be affected by these events, uncertainty in the stock market often presents a good opportunity to get invested. As a wise man said, “In the stock market, one pays a heavy price for a cheery consensus”. The converse is also true. The fact is that there are some fantastic companies out there, which have withstood the test of time. One of the companies we bought recently has been in existence for well over 100 years, and continues to operate in its market with sufficient agility. The longer term growth and profitability of these companies are not likely to get affected by these negative macroeconomic events. The negative market sentiment allows us an opportunity to buy into these companies at good prices. To that extent, such periods are actually welcome for a long term investor.

Equity markets were weak for most of the month, and despite a rally towards the end of the month, still ended down 3.3% for the month. For the current financial year starting April 1, 2011 the Nifty is down 4.7%. Our portfolios have held up well through this correction and continue to deliver positive returns for the year.

The equity market as a whole, as measured by the performance of the Nifty or the Sensex, has remained broadly flat over the past 3 years, delivering annualized returns in the 5% per annum range – less than the rate of return on fixed income instruments. On a closer look, one finds that the market seems to have a bit of a split personality – there is a large number of stocks out there which are down 70-90% from their peaks hit 3 years ago and there is another set of stocks which are reasonably higher than the highs they made in 2007. The companies with very poor stock market performance have not only seen their business performance deteriorate significantly, but are also loaded with significant debt on their balance sheets. Despite the steep fall in these stocks, they do not look attractive on valuation terms. On the other hand, there is a category of companies where the stock prices are reasonably higher than their 2007-08 peak levels, but their businesses have continued to perform quite well over the last three years. Our preference continues to be companies which have delivered well over time – some of these companies are starting to trade at valuations that are fairly attractive.

Over the past few years, we have been sticking with a simple investment process of identifying reasonable growth companies with high levels of profitability, having had a track record of stable performance through good and difficult economic conditions. We focus our efforts on buying into these companies at sensible prices. The last 3 years has been a period of test for the corporate world and some of these companies have delivered exceptional performance through this period. As and when the economic environment turn favorable, we believe these companies should perform even better.

The weakness in stock markets since Jan 2011 (the Nifty is down 9.4% since Jan 2011) has started to throw up some good investing opportunities among these exceptionally performing companies. We have started to significantly increase our overall equity exposure over the past few months and expect to continue doing so. Equity markets may remain weak in the coming days, but the opportunity to put together a portfolio of great companies at sensible prices is probably the strongest that we have seen in recent months.

Equity markets opened strongly towards the beginning of the month, we saw some weakness kick in towards the end of the month and the Nifty closed down 1.4% for the month. For calendar year 2011 the Nifty is down 6.2%. Over the last 3 years the Nifty is up an annualized 7.2%, which is in line with what bonds have been earning – the market is still settling down after the euphoric rise in the years leading upto 2007. Our portfolios finished the month positive as some of the larger holdings did fairly well.

We believe that one of the key reasons for the continuing weakness in the equity market is the high rate of inflation and the possibility of interest rate increases. The current inflation needs to be viewed in the context that fuel prices have still not been revised for the sharp rise in crude prices. When the government decided to liberalize petrol prices about a year back, the objective was to reset the prices of petrol monthly in line with global oil prices. Due to the elections in four states in April and the sharp rise in international prices (about 20%), there has been no reset in fuel prices over the past 3 months. It is likely that there will be a sharp increase in fuel prices towards the middle of May, which is likely to add to the already precarious inflationary situation. Over the last two years, the regulators have been trying to balance the twin objectives of containing inflation and spurring growth and they have tilted towards growth because the economy was coming out of the crisis of 2008. With inflation beginning to get a bit out of control and growth continuing to be robust, the time may have come to shift the stance towards inflation control.

Several of the companies in our portfolio have come out with their results and the performance of these companies continues to be fairly good, though in some cases there is a distinct margin pressure. The good thing about the highly profitable companies is that, even if they do face margin pressure, they continue to generate fantastic free cash. More importantly, their ability to grow is never really affected, as these companies require very little capital to grow. Many of these companies need so little capital to grow that at times they make a mockery of traditional finance theory, where companies are expected to require X amount of capital for a certain Y growth. These Companies stand out when cost of capital rises because they actually benefit from the higher interest they receive on the excess cash lying in their balance sheet. The cost of capital has started to rise and we have started to see growth slowing down in pockets.

In the context of a tight equity market over the past 3 years, we are starting to find several high quality companies at prices that are sensible, where investors can commit to investments without getting unduly worried and with an expectation of a reasonably satisfactory return. Though the coming few months may continue to be tight for equity markets, we are increasingly getting comfortable in committing capital and look forward to collecting a portfolio of high quality companies at sensible prices. In fact, some ideas are beginning to look exciting.

Equity markets rallied towards the end of March, ending the month up 9.4% and have now reasonably recovered from the steep fall in January and February. The market seems to be digesting most of the bad news with respect to the Japanese earthquake as also the continuing upheaval in the Middle East and North Africa. The Nifty eventually finished up 11% for the financial year ending 31 March 2011. Over the last 3 years, the Indian equity market has provided returns of about 7.2% per annum compounded, lagging the growth in broad company earnings over the same period. As a result, the market which was fairly richly priced in March 2008 is now looking a lot more reasonably priced in March 2011.

Equity markets reached a high in Jan 2008, at which point in time valuations across the board were generally very high. Since then, companies in some of the ‘in fashion’ sectors, like infrastructure, real estate, etc, have seen a sharp deterioration in fundamentals. In light of the relatively more somber mood on Dalal Street, the weakness of these companies’ balance sheets has been exposed. As a result, a large number of companies have seen their stock prices fall over 70% from their peaks posted 3 years ago. A common theme running across these very poor performing stocks is the high level of debt that these companies have on their balance sheet.

On the other hand, there is another set of companies which have continued to report consistent profit growth through the last three years. Importantly, these companies have continued to grow without requiring any additional capital from their shareholders. It appears to us that these companies will continue their stellar performance in the coming years as well. While some of these stocks had become expensive in January 2008, the good growth in underlying earnings and relatively less stock price growth has meant that these stocks are now available at prices which can be called reasonable. We are seeing some very interesting investment opportunities among these companies.

We have been using the opportunity provided by the market over the last few months to get into some of these high quality companies. The recent spate of negative news, both globally and within India, has started to throw up some good opportunities. Our intent is to allocate a significant amount of capital to equities in the coming days.

Equity markets in India were weak through the month and finished February down 3.1%. Including the 10.2% fall in January, the Indian market is now down 13% in the calendar year 2011. Partly due to the high cash component and partly because the portfolio stocks did better than the overall market, our portfolios continue to do much better than the market.

Though the fall during the earlier part of the year was led by the telecom scams and related uncertainty, Feb 2011 weakness was largely due to uncertainty in Libya and the continuing concerns about stability in the Middle East and North Africa and the resultant impact on oil prices. Oil prices have spiked over the last few months and this can have a very negative impact for India’s current account deficit and on inflation. If the price hike is not passed on to consumers, there will be an adverse impact on the fiscal deficit. The next few weeks need to be watched closely for any dramatic worsening of the situation from current levels.

The other big event for the month was the Union budget – the day of the presentation of the budget was marked with a lot of volatility as the market digested the event. While on the face of it, the fiscal deficit projection of 4.6% of GDP looks remarkable, the details suggest that the numbers are a bit optimistic. Given that as per the Finance Minister, the net impact of his tax proposals is net neutral, it is difficult to understand how revenues are expected to grow 24% on a 9% real GDP growth expectation. This probably assumes either a very high rate of inflation (thus increasing the nominal GDP significantly) or much higher tax compliance. Expense growth at only 13% also seems on the optimistic side. Particularly baffling is the oil subsidy of only Rs 23,000 cr. All in all, whether the fiscal deficit of 4.6% would actually get achieved is a big question mark.

The weakness over the past few weeks has started to throw up some interesting opportunities. A few of the companies with exceptionally good business fundamentals are available at attractive prices, though the same can not be said for the market as a whole. Statistical evidence suggests that some of these stocks are nearing prices where one can start to commit capital with a reasonably high probability of more than satisfactory returns over the next 12-24 months. These stocks, though not trading at the perfect entry price, are trading within about 5-15% from their buy points. We are fairly excited about the probable summer sale in the stock markets.

After being the best performing among major world markets in 2009 and 2010, the Indian market is now showing a lot of weakness. The Nifty fell 10.3% in January, largely on account of FII selling. FIIs have been large buyers in India over the last many months and this is the first month of outflow from FIIs since May 2010. We have been taking a cautious view on the market, reflected in our high cash position, due to our previously stated position that the valuations in India were at a high level. As a result, our portfolios did much better than the overall market. It is in such market conditions that the importance of capital protection gains importance. At this stage, it is difficult to say whether the current negative momentum will continue, but there are reasonable indications that negative sentiment may persist.

Despite the correction in equity markets, the Indian economic growth story broadly seems intact. Opportunity for companies to grow significantly in the coming years seems good. We follow several companies, which have a proven track record of good performance through both good and bad economic conditions, and these companies continue to deliver exceptional performance. There are some companies that have seen some margin pressure due to raw material price inflation, but the issues should be temporary in nature. Underlying strength of these businesses continues to be strong.  The recent correction in stock markets is more to do with moderation in valuations of these companies, rather than dramatic worries over their performance in the coming years.

The high inflation in recent times and a dramatic rise in interest rates over the past few months have led to some concerns over the economic growth momentum. The sharp increase in interest rates will definitely affect some pockets of the economy in the immediate term. The government has also changed its stand and made inflation control a higher priority over economic growth. This change in stance may be prompted by the upcoming elections in several states – it is certainly welcome because once the inflationary expectations set in, they are very difficult to fight. Whether this changed focus will actually impact inflation in the short term is difficult to say because a lot of the inflation is due to structural issues with respect to food grains and higher international commodity prices.

The other issue which is receiving a lot of attention of late is what some people have called the governance deficit. This has been an issue dogging India for a fair period of time but it seems to have come to the fore because of the large number of scams which have been unearthed recently. Apart from inflation, this is the other issue which seems to be impacting the Indian stock market in the short term.

With the correction in stock prices, several of the companies that we follow closely are now closer to our ideal buy prices and we are beginning to take small bites there. If the current trend persists, we should start seeing some very compelling prices soon and we are beginning to get excited with the prospect of buying into good quality companies at great prices.