Sunday, October 27, 2019

Diwali Dhamaka 2019

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Here’s wishing everyone a great Diwali and a prosperous new year ahead. After the carnage witnessed in mid-cap and small cap stocks over the last year (which worsened over the last 6 months), the market appears to be stabilising. Though the rise in indices has largely been due to their large cap nature, where this category has done reasonably well, there are some mid-caps which have either been news driven or were beaten down way too much along with the market churn, much more than was warranted, which have regained some of the lost ground in the last few weeks.While it is true that this category of stocks has always traded at a premium to the market at most times, everybody was taken aback by the severity and impact of the fall ranging anywhere from 10% to 90% in some cases.

There were some major market-shaking events since last Diwali – the cascade effect of IL&FS default on the entire NBFC space, the govt’s quirky budget announcements of taxing the super rich (of which foreign investors form a significant part) and the US-China trade wars which had a global impact which cascaded to Indian markets. The IL&FS fiasco cascaded into an overall liquidity crunch so much so that the source of funding for NBFC practically dried up and some like DHFL have gone belly-up and others like Piramal Enterprises have halved from their year-ago levels. The sell-off in mid-caps and small-caps also happened in no small measure due to SEBI which launched the re-categorisation exercise based on market capitalisation. This led to a number of mutual funds selling off their disproportionate holdings of mid-cap and small-cap stocks across schemes to bring them in line with the SEBI mandate and their schemes’ categorisation as per the new classification. This couldn’t happen overnight and their effect was felt over the next few months.

While the govt. has rolled back the tax on super rich and has tried to reverse the tide by announcing corporate tax cuts, which will boost the bottom lines of quite a few companies significantly in these trying times, the key question of when the demand will again come to its pre-churn levels or even increase from those levels is a moot question.

And this has provided a window of opportunity, and a quite wide one at that, to grab some of the quality mid-caps at attractive prices, which will lay the foundation for compounded growth in times to come. After all, equity is considered, and has proven in no uncertain terms, to be a long-term game meant only for the patient ones. The current times are certainly testing this theory to the full.

The mid and small caps which have crashed over the last year are the very stocks which will bounce back with a vengeance once the environment becomes benign, or at least there are no negative signs. This will not be a broad-based rally like the bull run of the 2003-08 and will only reward the ones which are in sectors with positive outlook and/or have cleaned up their acts either on the management side or the business side.

As always, the focus should continue to be on companies with quality management and good corporate governance practices. Also, some of the companies have been beaten down for reasons other than their performance and this can only change once the non-technical parameters are sorted out. Following are some of the companies either in nascent sectors which are poised for growth in the coming years, or have suffered collateral damage in the market meltdown.

Nippon Life AMC (NLAMC)

I had recommended this earlier as well, and now post management change (Nippon Life buying out Reliance stake), there is all the more reason to go for it.

In the MF industry, the penetration has certainly been significant. Even in times of a weak market when the indices fell by a few thousand points, the SIP book has remained stable. For NLAMC, the retail AUM has now reached 55% of its total. The ADAG group issues which haunted this stock earlier are now behind it with Nippon Life taking full control of it. Now the focus will be on improving business fundamentals. After being on top for some time few years back, due to management and group issues, this company had to let go of its top ranking and had slipped from its former #2-3 rank in the MF industry. It is now in a position to regain its lost stature in the next 1-2 years.

There are only 2 listed AMC in the market and HDFC AMC commands a premium over reasonable valuations, So NLAMC is in the right position to reduce this gap and provide great returns. This is a structural story and hence will continue a compounded growth over the years to come. It should be considered as a portfolio stock to be held for years to come to see the real benefits of growth for a sunrise industry. A similar thing happened in the Paint industry where only Asian Paints, a pedigreed stock, ruled the roost not too many years back. In the last 5 years, Berger Paints and Kansai Nerolac have given eye-popping compounded returns, way ahead of Asian Paints, just because people only looked at the leader and not the next few below it who were snapping at the leader’s heels. And the market expanded favourably to give the next in lines an opportunity which they grabbed with both hands. The same could well turn out to be true for NLAMC.


Aditya Birla Fashion & Retail (ABF&R)

Another pedigreed stock from the AB stable, this too has had a hammering over the last year or so from the levels it enjoyed earlier.

After integrating Pantaloons with itself, ABF&R is planning an aggressive store expansion of Pantaloons’s Lifestyle stores. It has plans to expand to 400+ such Lifestyle stores and 60+ Pantaloon stores. From its earlier avatar of a premium apparel maker (post Madura Garments merger), ABF&R is now in a position to straddle multiple price points in the apparel chain from low-cost to premium branded clothes, and these stores will reflect that. Pantaloons is expected to improve store productivity and margins with a higher focus on private labels and a higher mix (above 80%) of margin-accretive fashion products.

Another emerging segment which this company is tapping is that of innerwear. Page Industries is the only listed branded premium innerwear maker currently and enjoys premium valuations due to this. This segment gives ABF&R a good way to improve its margins due to the premium products in this segment that it can market. This segment has been growing well for it in the last few quarters and giving some competition to Page Industries, though there is still some distance between the 2. It is aiming to expand in the women’s inner wear segment (with already significant presence in men’s inner wear – growing at 50-60% annually). This, coupled with cost efficiency drives in the brands business, is expected to improve the EBITDA margin in the coming years.

This company enjoys a high RoE, strong FCF generation and should continue to show strong growth in the coming years.

Currently quoting at about 204, it can easily provide a 20-25% upside from here.

Zee Learn

The education sector has seen great interest from investors post the much-hyped acquisition of Euro Kids, Euro Schools, Kangaroo Kids and Billa Bong High chain by the marquee global PE fund KKR. Market sources believe that the deal was inked at around 2000 Cr Enterprise Value which translates to an EV / EBITDA multiple of 20 given the estimated Euro chain EBITDA of around 100 Cr p.a. Using the same methodology, Zee Learn is likely to be valued at an Enterprise Value of 4000 Cr given that its EBITDA this year is likely to be around 200 Cr as per market estimates. If the above deal goes through then the Zee Learn share price may get re-rated around 3-4 times from the current lower levels that it has been languishing for the last few months. Also, this deal may be one of the largest ones in the recent past. Blackstone had also invested in the Test Preparation major, Aakash, recently at an Enterprise Value of around 3500 cr which may get surpassed by the Zee Learn deal if it goes through. 

Zee Learn is a diversified Education Company with its network having multiple offerings from Pre K, K12, Higher Education, Test Prep, Tutorials, Vocational, Skilling, Manpower & Training and Digital Education. 
Zee Learn has grown its turnover and EBITDA at more than 50% CAGR in the last few years. It is has more than 4 Lakh students and 50K teachers/staff in its network. Its Brands include market leaders like Kidzee (Asia’ largest Pre K chain), Mount Litera (India’s top three K12 chains), Mahesh Tutorial (leading Test Prep & Tutorial chain) and Robomate. The Zee Learn Network has a massive pan India presence with more than 3000 schools / centers present over 800 plus cities which collect revenue of around 2000 Cr p.a. 

Currently quoting 50% below its 52-wk high, in spite of rising 45% above its 52-wk low, it can still give good returns considering the situation Zee promoters find themselves in.

Finolex Cables (FC)

Finolex Cables is the third largest manufacturer of electrical and telecommunication cables and also polyvinyl chloride (PVC) sheets for roofing, signage and interiors in India. It counts among its strengths a diversified product portfolio, wide distribution reach, backward integration to manufacture key cable components like copper rods and its cash and carry business model due to higher B2C mix.

The domestic wire and cable market is growing 10-12 percent p.a. and the current market size is estimated in excess of Rs 52,000 crore. Polycab is the largest player with a double-digit market share. Havells, Finolex and KEI follow with an almost equal share of 5% each.

FC has 5 manufacturing plants across India and 28 depots to service its 800 distributors catering to 4000+ dealers. It also has JV with foreign companies such as Sumitomo of Japan for EHV cables, marketing JV with Corning of US for optic fibre technology and technical collaboration with NSW of Germany for cables for submersible pumps.

In recent years, the company has diversified to change from being a cables company into an electrical products company (a new term FEMG for Fast Moving Electrical Goods such as electric switches, LED lights, fans and such). It is banking on its wide distribution network and brand recall in this initiative. The company first entered the electrical switches and lighting segment, leveraging its widespread distribution network in the country, and then introduced switchgears, fans and water heaters. New products within FMEG sector grew by more than 10% y-o-y each in FY19, albeit on a low base. Considering the intensely competitive market in this segment, it is treading cautiously in this area.

The interesting thing is that it owns 32% in Finolex Industries, the pipe-maker, which is expected to have a good run given the demand for PVC pipes on the back of govt's drive for water schemes and housing for all. This makes it still cheaper on the valuation front. And the fact that it has consistently enjoyed double digit margins in this competitive industry speaks a lot for the management.

Currently it is quoting at 380 close to its low of 335 and has seen a 52-wk high of 540. Considering govt’s focus on affordable housing, chances for growth are high and it should get back its growth trajectory pretty soon.

Spencer Retail (SR)

This is a new kid on the block in the listed retail space after KB’s Future Retail and Tata’s Trent.

Though this got listed only in Jan ’19, it has been around for 10 years now. It had stores in tier-2 metros such as Pune and in less expensive ones like Chennai.

The Indian organised retail market appears set for a stellar run, with its size likely to triple by FY25 as per a recent research report by Motilal Oswal. While the industry is undergoing constant disruption, one thing has remained steady – consumers’ affordability is on the rise and aspirations are growing more than ever. This trend particularly bodes well for food & grocery (F&G) and apparel categories.

Though the demand exists, all is not rosy yet in terms of financials for the retailers and it has taken quite a while for them to get their maths right. Consider this - Trent Hypermarket, which has been around for around 16 years, saw losses widen to Rs 90.50 crore in FY18 from Rs 52.49 crore in FY17 partly on store rationalisation costs. Again, not able to sustain prolonged losses which accumulated to 712 crore at the end of FY17, Shoppers Stop sold Hypercity to Future Retail for 655 crore in October 2017. Godrej’s Nature’s Basket, a premium supermarket chain, with outlets across 2000-6000 sq ft, has been around since 2005 but is still floundering.

Spencer’s managed to break even at the EBITDA level for the first time in FY18 after the parent company took over its debt of Rs 280 crore. The smaller debt helped the company to narrow its net loss to Rs 30 crore compared with a net loss of Rs 108 crore in FY17. And in the first half of ’19, it has shown a positive PBT of 5.2 cr. SR added 19 stores this year, most of which are doing well.

Management plans to accelerate the pace of store additions, increase the share of private labels and apparel with the recently launched value apparel brand 2Bme and ramp up omni-channel presence.

Similar to insurance and AMC business, though Retail has been around for close to a decade or slightly more, this is still a sunrise industry. It has taken 10-15 years for the established biggies such as Tent and Future to get their act right, but the advantage that SR has is that it has seen all the mistakes the others have done over the years and also some of its own. It therefore is in a position to grow judiciously within its means.

Post its demerger from CESC, SR listed in Jan ’19 at a price greater than 200, and is currently quoting at 78. Given time, this will surely provide great returns, albeit at a measured pace, at least initially. One thing which should be remembered but almost 90% of the people forget, is that your returns in the market are determined at the levels you buy the stock. If you had bought Reliance in the first week of January 2008, you still have not made any money in Reliance Industries. For 9.5 years, you have been just preserving your capital but if you had bought Reliance in the third week of October 2008 or the first week of March 2009, you would have made great returns.

Before concluding, let’s look at how last year stocks have performed:
  

Market Cap class
Price last Diwali (Rs.)
Price this Diwali (Rs.)
Gain/Loss (%)
Yes Bank
Mid-cap
216.00
52.15
-75.86%
Maruti Suzuki
Large-cap
7135.45
7457.50
4.51%
Max Financial Services
Mid-cap
392.85
404.65
3.00%
GNA Axles
Small-cap
392.40
251.45
-35.92%
Godrej Agrovet
Mid-cap
530.05
506.45
-4.45%
Total

8666.75
8672.20
0.06%

So from last Diwali, the portfolio is practically flat. Considering the carnage in mid-caps and small-caps over the last 6 months and the performance of the indices of both these categories, mid-cap indices fell 3-7% and small-cap 10-11%, the performance of this mid-cap heavy portfolio should count as a reasonable one, though that may not be something to be proud of. Maruti Suzuki and Max FS were the only 2 stocks which kept their heads above water. Yes Bank (asset quality and promoter issues) and GNA Axles (M&HCV auto sector slow down) were the ones hammered badly. However, in the light of recent developments, I am still positive on both of these and given some time, a year or two, they should get back their mojo, barring unforeseen circumstances beyond their control.

The current set of stocks is also from mid-cap and small-cap categories and considering that they have already been hammered to rock-bottom, the only way for them could be up.

HAPPY MUHURAT INVESTING.


Monday, December 31, 2018

Themes for 2019

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Here’s wishing everyone a very happy 2019 ahead. 

Calendar 2018 provided a reality check to all who weren’t aware of Newton and gravity. And even more, it busted the myth of mid-cap and small cap stocks always giving huge returns year after year. While it is true that such stocks gave huge returns in the last 2 years, they also were hammered anywhere between 20-90% this year.

The unprecedented rally in mid-caps that started in 2014 went on unabated for four long years, delivering a 29% CAGR return (Nifty Midcap 100 Index from Jan. ‘14 to Dec. ‘17). The lure of earning easy money attracted many investors to this category, leading to excessive valuations towards the end of 2017. Midcaps that generally traded at a discount to large-caps till 2013 started commanding huge premium over large-caps. During the first quarter of 2018, the Nifty Midcap 100 Index was trading at 40-45% premium (in PE terms) over large-caps (Nifty 50). The worsening external environment, weakness in global markets, rising oil prices, noise around the election outcome (states and central) led to significant correction in mid-caps, starting August 2018; this was more pronounced in small-caps. With this fall, some sanity has returned to the mid-cap valuations. It still continues to trade at a premium to large-caps; however, the premiums have reduced to about 15%.

Liquidity crunch for NBFC is the buzzword on D-Street these days. And there is no sign of it easing anytime soon. That has also caused the whole NBFC sector to be under the lens. Stocks like DHFL which had run up 3 times in 2 years came down to the same levels they were 2 years back, and even lower.

We are in an election year which should happen in the next 4-5 months, if not earlier. So the focus of the govt. would be more on populist schemes than economic sense. And they have only about 3-4 months to implement such schemes.
Obviously with the govt. loosening its purse strings for the general good, the sectors which can look forward to good demand would be housing/real estate/construction (led by PMAY scheme) and of course agriculture. Having bitten the dust in state elections recently and the agrarian crisis staring in the face, the govt. is faced with little choice but to cater to the farming community in whatever way it can, and fast. So expect fertilizers, tractor makers, seed companies to do well. For the other theme (housing/real estate/construction), demand would be strong for govt. financial companies (for e.g. HUDCO, NBCC), and the sectors that provide inputs to the construction sector (cement, building products – plywood, paints etc.).

It would also be prudent to temper one’s expectations of the returns from the markets. 20%+ returns would be an ambitious target; 10-12% would be more realistic, at least for 2019. There would still be opportunities at individual stock levels where good returns can still me made, as is always the case, but one has to be really choosy. Even though the mid and small caps have been beaten down, they are not yet cheap on the valuation front, mainly because their earnings are still suspect. It may therefore be a good idea to keep away from the small and micro caps, which would be the most impacted, and look at the relatively larger mid-caps and diverse large caps which could withstand the sectoral churn.However, this can't be a blind rule to be followed. There will always be opportunities in mid and small caps which show promise and are attractively valued due to the collateral damage they have suffered.

The key theme in 2019 would certainly be Infrastructure, govt’s move towards affordable Housing, and the agri sector, which again covers everything from fertilizers, seeds, and tractors to small-ticket financial companies/NBFC which have a prudent model. These sectors would certainly benefit from the govt’s thrust in this direction. So, most of my choices this time around are centred on this theme. I would also look at stocks which are consumption-based as 2019 is an election year and this category of stocks generally benefits in such years.

Everest Industries (EI)
One of the leading building-solution providers in India, Everest Industries’ range of products comprises ready-to-install building products (BP), roofing solutions (RS) and pre-engineered buildings (PEB). It offers products and solutions for the commercial, industrial and residential sectors. It has diversified from roofing to various value-added products such as cement boards and panels for ceilings, walls and floorings. It has six building-product plants and three pre-engineered building plants, with 32 sales depots and over 6,000 dealer outlets, serving more than 600 cities and 100,000 villages.

With the GST rollout, all its major products (roofing, boards, panels, PEBs, “smart” steel buildings and metal roofing) have come at the18% GST. For roofing and boards, the tax rate has come down 8-9%, resulting in rendering its retail range more affordable, aided by other expected benefits such as logistics costs and the shift of business toward the formal (or regulated) sector. The company continues to expand its geographic footprint by increasing its distribution and dealer network. Everest continues to improvise its portfolio offering through the launch of new products. Everest Super, coloured waterproof roofing sheets launched earlier this year, is gaining traction among customers.

EI is working on value-added products to improve its margins and also focusing on brand development through marketing activities. The management has guided to a topline growth of 20% on the back of a healthy order book which needs to be executed over the next 12-18 months.

The GST implementation and mounting demand due to the shift from kuccha to pucca houses, spending on infrastructure in India, e-commerce growth, increasing warehousing and govt’s focus on the rural economy would drive overall growth. On the cost front, the company continues to focus on internal business efficiencies through better working capital management and debt reduction
Currently trading at about Rs. 505, this could provide handful returns over the next few years, whichever govt. comes to power as housing is now a set theme.


Mold-Tek Packaging (MP)
A packaging company, MP is involved in the manufacturing of plastic moulded containers for lubes, paints, food and other products. It started the business in 1986 as a supplier to Asian Paints and has seen remarkable growth in the past three decades. The company diversified into other industries through an expansion of product portfolio - paint buckets, lubes & grease packs, ice-cream tubs, retail packs, q-packs and it now caters to marquee clients from the paints, lubricants, pharma and Food & FMCG space. While paints and lubricants remain MP’s largest revenue contributor, the clientele list now includes other sector heavyweights such as Unilever, ITC, Ranbaxy and Cadbury.

MP’s foray into the FMCG packaging business has been the key revenue driver for the business in recent years. Innovative packaging along with deeper penetration has helped the company scale up this segment at a rapid rate. Food & FMCG segments are likely to play a key role in improving its volumes.

The company has a total manufacturing capacity of around 33,000 metric tons spread across seven plants in India and one plant in the UAE. While the domestic business has been performing well, the UAE-based 3,000 metric ton RAK unit is operating at sub-50% capacity utilisation and continues to be a drag on the business profitability. Given the weak demand scenario in GCC, the company has decided to shift 1,200 tons of machinery capacity to India for packaging of ghee and edible oils. This will lead to better utilisation of the company’s assets in the coming time.

The company has a strong focus on R&D and was the first company to introduce IML (In-mould labelling) technology in the country, which has witnessed steady industry adoption. This now contributes more than 55% to Mold-Tek topline. The company is enhancing its capacity by setting up new units for Asian Paints in Vizag and Mysuru.

In all the right segments (Paints, FMCG, Food) at the right time (election year),  this integrated packaging manufacturer with a consistent track record of execution currently quoting at Rs. 264 , MP is surely to provide healthy returns in the coming years.


IDFC First
This is the new entity formed post the merger of Capital First with IDFC Bank. With credible CEOs at a premium in private banks (Axis Bank and Yes Bank went thru a lot of turmoil on this count), IDFC First is lucky to have someone of the calibre of Vaidyanathan to helm it.  The new entity has a head start with 200 tech savvy branches already in place( IDFC Bank’s contribution). BV of the merged entity is just 38, so share is ruling at a P/BV of just 1.15, which is dirt cheap in the current market where 2+ is the norm, even after the latest crash, especially for an entity with this pedigree.

The merged entity has a retail loan book of 32-33% of its overall portfolio. Gross NPA is 1.6% and net NPA is below 1% which reduces the default risk significantly. Capital First brings to the table a retail growth of 30% which the new entity would continue to carry forward. This coupled with a credit growth of another 20% in other sectors, the overall growth would be in the range of 23-24% which in current times should be considered excellent.

All in all, a pedigreed management, established tech savvy infrastructure and a good growth record should ensure that this is a credible NBFC in times to come.
Currently quoting at Rs. 43.4 this should easily conservatively cross 50 in the coming year and more. And this would not be impacted by a change in govt, if that were to happen.

Amber Enterprises (AE)
Amber supplies ACs and parts thereof to 8 of the top 10 AC brands in India, and enjoys client stickiness too. The number of AC units manufactured is estimated to increase from 1.9 million in FY18 to over 2.5 million by FY20-end.

AC models based on the IoT platform, which yield better realisations than regular ones, are being developed. Customs duty hikes announced by the government on some crucial AC components should help the company bag incremental orders, as import substitution initiatives by AC brands gain momentum.

Amber derives close to 75 percent of its annual revenue from original design manufacturing processes. Utilisation rates at its manufacturing facilities are slated to increase from 50 percent in FY18 to around 70 percent over the next 2 fiscal years. Debt repayments from IPO proceeds will de-leverage its balance sheet. To facilitate backward integration, manufacturing of new specialised components will gain scale.

The stock, after witnessing a sharp post-listing rally in January 2018, has corrected significantly. This makes it a good buy for those who missed the IPO bus, considering that the price of Rs. 904 is close to the upper end of its IPO price band (Rs 859).

Parag Milk Foods (PMF)
PMF is one of the leading dairy products companies in India selling the entire gamut of dairy products from milk, ghee, curd cheese, paneer and others. The company has been successful in creating strong brands like GO, Gowardhan and in introducing new products like Whey Protein. It has become the 2nd player in processed cheese (after Amul) in a short span of 10 years and commands 33% percent market share.

The dairy sector is driven by two vectors: trend in milk prices and share of value added products (VAP). Since milk prices have been subdued in recent times, plain vanilla players were impacted, even as companies with higher share of VAP were better off. PMF falls in the latter category.

In FY18, PMF registered 12.9% revenue growth. Consumer products revenues registered 15.7% growth. Value-added products comprised the maximum share with 65.6%, followed by fresh milk at 19.9%.  Better product mix, with VAP constituting nearly 66% of sales helped expand margin. In addition, benign input costs and operating leverage have been advantageous. Distribution expansion and traction from new launches (whey protein, protein powder etc) have also aided earnings growth. PMF plans to add about 9,000 retail outlets per month. As of now, its distribution stands at 2.6 lakh outlets. In the recent quarter, the management attributed 30% growth to expansion of its distribution channel. As per the Department of Animal Husbandry, co-operatives and private players procure 20-25% of the milk produced. Around 35% is still sold in the unorganised sector. The department expects milk handling by organised sector to grow from the present 20 to 50% by 2022-23.
The organised sector in the dairy business is looking ahead to increased exposure to high margin VAP in the milk value chain. This improves the margin profile and helps in reducing sensitivity to milk price volatility. Additionally, efforts are also on to enhance both distribution reach and backward integrate the procurement of milk. PMF recently forayed into the north after acquiring Danone's Haryana facility at Sonipat. While improved margin profile would be moderated by increased competitive intensity, the recent decline in stock price offers an interesting opportunity to look at the dairy consumption theme.

PMF currently quotes at 248 about 13% higher than its IPO price of Rs. 215, but that was 2 and a half years back. So it is now nearly back to square one from the time of its IPO. However, it is just about 11% higher than its 52-wk low and nearly 40% lower than its 52-wk high, thus making for a profitable risk-reward ratio.

Let’s now pause a bit to see how my last year’s picks did.

Stock
Price as on 31-Dec-17
Price as on 31-Dec-18
%
HSIL
504.45
235.15
-53.38%
Century Ply
339.70
177.25
-47.82%
MIRC Electronics
57.30
27.95
-51.22%
Dredging Corp
853.35
439.90
-48.45%
Kridhan Infra
121.00
46.45
-61.61%
Multibase
717.65
463.00
-35.48%
Total
2593.45
1389.70
-46.42%


This time the performance has been nothing short of disastrous with the portfolio nearly halving. This is also a reality check on a small-cap tilted portfolio. While this category is the fastest gainer, the fall is equally swift. Other than Multibase, which is an MNC, most of the stocks have fallen half or even more in value. That they will bounce back, I have no doubts. The best option in my view at this juncture would be to buy more of these and average out the holding cost, so that when the next bounce comes, you would have recovered all your capital (including that lost this year), and more. But this is a view most experts would strongly discourage you from pursuing. I can say for sure that this has worked for me, more often than not.

All in all, the year has indeed been a huge disaster. However, as I firmly believe, India is a stock picker’s market and the small cap ones take time to give any meaningful returns. So this portfolio should ideally be judged after at least 5 years, for a start, and not yearly. Only then the real performance will be visible.

While the BSE Mid cap index gave a return of -13.37% and Small cap index returned -23.5% this year, the mid-and-small-cap heavy portfolio of 2016 (consisting of ICICI Bank, Sterlite Tech, Bharat Electronics, Engineers (I) and NBCC), has returned a CAGR of 10.07% over the last 2 years. Yet, over this period, it has swung from one end to the other with an eye-popping return of 61.63% last year and a depressing return of -25.05% this year. This compounding is what will enable such portfolios to give a meaningful return over a longer timeframe.
Similarly, another small-cap heavy portfolio of 2015 (consisting of Axis Bank, Sun TV, Sterlite Tech, MCX, Jamna Auto, Surya Roshni and DCB Bank) which returned a great CAGR of 26.2% last year (over the 2-year period) has also returned a CAGR of 8.15% this year (over a 3-year period), while the carnage in mid-and-small-cap stocks was on this year. So it is all a matter of getting into a stock at the right valuation and holding on to it thru ups and downs as long as you have faith in it.

As I have said many times before, equity is a long term game with a holding period of at least 5 years (and much more in the case of mid and small cap stocks), if not more, to get any meaningful compounded returns. This year has only proved this theory.


Here’s wishing all investors a very profitable 2019.