Q1 FY22 PDF UPDATE
For the quarter gone by, Prosperity Discovery Fund has delivered 18.27% returns outperforming Nifty 50’s 7.02% and Nifty Midcap100’s 13.83%. Many companies had limited operations in the months of May & June owing to the 2nd wave of the Covid19 Pandemic. This translated to temporarily subdued financials in line with the market’s expectations. While the market continues to scale new heights, we are cognisant of the emerging divergence between current valuations and reported earnings.
When valuations are heightened a fund manager may employ several strategies in his arsenal to combat market corrections. He may, a. Increase portfolio diversification thereby reducing fund concentration in a particular stock or sector, b. Increase fund allocation to companies with larger market capitalisations (which are better able to handle market corrections), c. Move funds to asset classes which are inherently less volatile, or d. Hedge the portfolio using derivatives such as futures and options (This is currently not viable in India as we do not have derivatives for mid and small cap indices yet!).
As you may have already noticed we have over the last couple of months employed a combination of strategies a,b,c to build a slightly more defensive portfolio.
While this enhances the resilience of our portfolio, a sustained rally in the mid and small cap companies could result in some opportunity cost in terms of performance in the short run.
With regards to Prosperity’s Discovery Fund, I'm very pleased to highlight that many of our companies have delivered outstanding returns, with the highest being our solapur based amine manufacturer which has delivered over 300% returns on investment in some of our investor’s portfolios. We have also had noteworthy performances by our Vadodara based FMEG manufacturer and our Pune based IT companies that are providing services in the Artificial Intelligence, Machine Learning and digital transformation domains. (Each investor’s portfolio returns may vary based on their date of investment into Prosperity Discovery Fund.)
We have also made a few key additions to our portfolio last quarter. We have added a Tamil Nadu-based pure-play Active Pharmaceutical Ingredient manufacturer in our portfolio, promoted by one of the most reputed pharmaceutical experts in the Industry. He has a proven track record of creating massive shareholder value through corporate spin-offs and Mergers & Acquisitions. The company has set its target of becoming one amongst the top ten largest API manufacturers in the world by 2025. They have also enlisted the Ex. Managing Director of India’s largest private bank (HDFC) as their Chairperson to help accomplish this vision.
We have also added a Fortune 500 company which happens to be the largest private sector corporation in India. The company is a significant global player in the integrated energy value chain and has established a leadership position in the retail and digital services business in India. The company plans to invest Rs. 75,000 Crore in building four giga-factories to manufacture solar panels, electric batteries, and hydrogen fuel cells over the next 3 years to benefit from India’s nascent yet growing renewable energy sector. We expect a significant upward re-rating in the company’s market valuation in the near future.
With our sharp-sighted stock screening process and timely action, we were able to participate in the demerger exercise of a Gujarat based pigment and chemical manufacturer, which has unlocked significant value for our investors. The parent company is a leading producer of agrochemicals and one of the largest producers of Phthalocyanines (blue and green pigments) in the world. The demerged company is a large producer of Caustic soda, which is a key ingredient used in the extraction of Aluminium (used abundantly in electric vehicles) through the Bayer process. Further more the company has ambitious plans to enter into the manufacturing of niche chemicals such as Epichlorohydrin and Chlorinated Polyvinyl Chloride, the former of which is entirely imported in India.
Over the next few quarters we are confident that our portfolio companies will significantly increment their earnings as a result of the commissioning of new plants and products that have been envisaged in line with their expansion strategies.
The significant amount of capital expenditure and investments that are being undertaken by the government and private corporations are truly at an unprecedented scale. The augmented earnings from these investments will bring down stock valuations continuing to render equities as an attractive asset class for investing. As India enters a golden decade of development and progress, the growth story remains intact for long-term equity investors.
MD, Prosperity Wealth Management.