Jan 2013 : Strong Corporate growth, weak stock market

The Indian equity market performed fairly well during the month, up 2.2%. This was on the back of several positive announcements by the government on reforms and the RBI starting to respond with lower interest rates. Our portfolios trailed the market during the month, as during January, the market was led by the large PSU oil majors and other reform sensitive stocks. Companies which have been growing consistently, and have seen strong stock price performance over the past few months, saw some consolidation during the month. The movement of individual stock prices during the month indicates a market that is consolidating around the current Nifty levels.

One of the questions investors have today is whether the strong market over the past few months is sustainable, or whether there is a risk of any severe market correction from current levels. We did an analysis of the Nifty performance over the past 5 years, and also the performance of the underlying companies over the same period. Since Jan 2008, the Nifty is nearly flat. During the same period, the median revenue growth of the Nifty companies has been 19.4% annually. Essentially, if the median company had a revenue of Rs 100 in Mar 2008, its revenue would be Rs 242 as on Mar 2013. This is a reasonably good growth rate. Even if we were to include the 16 companies that were eliminated from the Nifty, their revenues would have been Rs 215. On the other hand, the median profit growth of the Nifty 50 companies increased at 12.1% per annum. Rs 100 of profit in March 2008 is Rs 177 now. The 16 companies that were rejected from the Nifty saw a fall in profit in the same period.

On the average, both the revenues and profits of the Nifty 50 companies have grown fairly well over the past 5 years, whereas the Nifty is trading at nearly the same levels. There are clear signs of margin pressure. We believe margins should expand in the coming years, as the economy comes out of the recessionary environment and capacity utilization improves.

The companies in the portfolio continue to do fairly well, and with the recent minor correction, these stocks are trading at prices levels where the reward far outweighs the risks. Valuations are reasonable and we feel very comfortable holding these stocks over the coming years. With the current financial year coming to an end, the market should also start to discount FY2014 earnings. We believe stock prices in the coming months will be led by increased reform announcements, economic growth triggered by lower interest rates and a valuation rerating.