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.