March 2019: A difficult financial year

As we look back on the financial year gone by, we get the sense that the 14.9% increase in the Nifty for the financial year belies what truly happened in the year. We began the year with the hangover of the long term capital gains tax which was introduced in Feb 2018 and markets had sold off over the prior 2 months. The Nifty shrugged off the capital gains tax and made a peak in August, 2018 when the ILFS crisis surfaced. That caused some tremors in the equity market and the ensuing troubles of the NBFC sector have put the economy on a bit of a back foot, largely because NBFCs were a key source of funding in the absence of PSU banks, because of their NPA problems. After a shake-out in the market during the year, the Nifty rallied 7.7% in March to end the year with a healthy return.

While the Nifty 50 growth at 14.9% looks quite robust, the internals are nowhere near as cheerful. The Nifty 500, which is a broader index comprising the 500 largest companies, grew a more subdued 8.4%. The Nifty Mid Cap 100 Index was down 2.7% and the Nifty Small Cap 100 Index was down 14.4%. Within the Nifty 500 which is one of the broadest Indian indices, the median stock is down 9.6% for the financial year. Further, while the Nifty is off only 1.2% from its 52 week high for the year, the median stock in the Nifty 500 is down 24.4% from its 52 week high. This suggests that the headline Nifty is not reflecting the pain in the broader market.

This is also reflected in the performance of mutual funds. We studied the performance of the Top 25 equity mutual funds in India by size, over the last 12 months, and found that the median performance of these mutual funds, which include funds in different categories, like large cap, mid cap, small cap and multi cap funds, was 6.6% for the year. The top 3 mutual funds have performed in line with the Nifty while the worst performing mutual funds are reporting negative performance for the year. As such, it has been a tough financial year for most equity participants.

On a 5 year basis, the Nifty has delivered 11.6% per annum which is close to its long term averages. However, it has been a 2 tier market – there is one section of the market which during the year was trading at historically high valuations (in some cases, even now) and there is another section of the market trading at between 5 and 10 year lows. The former are the regular growers, and many of them form part of our investible universe, while the latter are the indebted balance sheets and companies with poor corporate governance. In the recent upheaval in the market where the median stock has lost almost a quarter of its value, there are instances of heavy damage to the extent of 50% and more. Some of these could be opportunities to consider and we have seen some new additions to our portfolios over the last 12 months. The volatile nature of the market during the last 12 months, has also presented us some opportunities to trim some holdings where valuations were getting to the expensive side. All in all, we feel comfortable with the companies we hold in our portfolio and look forward to higher growth as India gets through its banking troubles.