January 2019: Nifty performance hides pain in broader market

The last 12 months have been a bit atypical in the Indian stock market. At a high level, the Nifty is down 1.8% over the last 12 months, which suggests a difficult year but not out of the ordinary – over long periods of time, the Nifty has been down on an annual basis, 30% of the time. However the internals of the market tell a very different story. In the same period, the Nifty Midcap Index is down 18.7% and the Nifty Small Cap Index is down 30.4%. The median stock in the Nifty 500 is down 33% from its peak and the mood among investors is somber, to say the least. As such, most mutual fund managers and portfolio managers have struggled to even keep pace with the Nifty in this environment.

If we look at the Top 1000 companies by market capitalization, which covers all companies with market capitalization greater than about Rs 400 cr; of these, 25 companies have a market cap of over Rs 100,000 cr, 210 companies have a market cap of over Rs 10,000 cr and 702 companies have a market cap of over Rs 1,000 cr. The remaining companies have a market cap between Rs 400 and Rs1000 cr. The exact numbers will change on a daily basis, as stock prices changes, but this is a good approximation of how the market capitalizations are distributed across the top 1000 companies. For the purpose of simplicity, we can categorize these companies into giants, large, medium and small cap companies.

From a performance perspective, over the last 12 months, the Giants have performed the best, with the median company stock up 3%. The Large caps are down 11%, the Medium sized companies are down 23% and the Small ones are down 38% on the average. What stands out even more is that 82% of the companies closed negative during this period. Though many investors had a great run in the 2013 – 2017 period, it has been a struggle to protect capital since then.

This period has also been characterized by a fairly large number of companies seeing large erosions in stock prices in as short a period as a day. Over the last 12 months, we saw 47 companies (almost 10% of the Nifty 500 constituents) falling more than 15% over their previous day’s price on a closing basis. Further, we saw 23 companies (almost 5% of total) falling more than 20% in a day. When we scan the names of the companies in the above list, it is a familiar story of poor corporate governance and broken balance sheets. In fact, when we look at the performance of different stocks, besides size, which we talked of earlier, the other distinguishing factors are quality of the business and corporate governance. The stocks that have been hit hardest have been those where there is either a question about their corporate governance or an issue with too much debt on the balance sheet.

In an environment like this, our course which is steadfastly focused on high quality companies and regular free cash flows, has been rewarding to the extent that we have managed to protect capital in this difficult environment and even eke out some gains. We intend to continue our existing focus on this area for investment.