Q4 FY21 PDF UPDATE
Dear Investors,
I would like to begin by saying that we have yet again witnessed a resilient performance by the Indian stock market. For the quarter gone by, Nifty 50 was up 6.30% and the Nifty Midcap index was up 11.10%.
Prosperity Discovery Fund has delivered 18.05% returns this quarter, out-performing its benchmark by a good margin while maintaining a diversified portfolio of 15-20 stocks.
Over the last few months we have reassessed the valuations of our holdings and have taken the necessary steps required to optimise the performance of our portfolio.
While the fundamentals of our stocks have largely remained intact we have trimmed stakes in companies where we felt the valuations had significantly outpaced earnings.
Additionally, in order to make the portfolio more resilient to market volatility we have enhanced our sectoral diversity by paring stakes in the specialty chemicals sector and have added exposure to the auto-ancillary, FMCG-wearables and Infra sectors.
While it may be too early to pick a clear winner in the core auto stocks, we are confident that the auto ancillary market is set to boom regardless of who the winner is, in the saga of electric vehicles.
We continue to remain optimistic on the long term growth trajectory of the economy. Low cost of funds along with a high degree of liquidity will enhance investments in infrastructure and accelerate GDP growth leading to a notable rise in the disposable income per capita, this in-turn would fuel robust demand in the FMCG sector.
We have also made entries in two holding companies holding some of the largest blue-chip stocks in India trading at price to book valuations in the range of 0.25x to 0.40x. Such low valuations give a high margin of safety to our investments while offering a significant value unlocking opportunity as the underlying assets continue to outperform in the market.
With increasing use cases of machine learning, big data, AI, cloud computing, digitisation and IOT we believe that the IT industry is set for robust growth in the years ahead. To capture this opportunity one of our key additions during this quarter has been a Pune-based IT company which has more than a decade-old partnership with tech-giant, IBM, to develop their Internet-of-things platform, IBM Watson, arguably the smartest AI on the planet. The company has had deal wins of more than US$230Mn in FY21, which gives us comfort in terms of earnings visibility in the coming quarters.
Another interesting addition to our portfolio has been a 28,000-crore Hyderabad-based Pharma company with a presence in the specialised segments of antiretrovirals and oncology. With its beginnings as a niche manufacturer of Active Pharma ingredients, which is the raw material that goes into the making of a drug, the company has grown leaps and bounds by forward-integrating into the finished drugs segment, which now contributes 30% towards the revenue. The recent acquisition of a biosciences company will help them foray into the niche but highly profitable segments of enzymes and biologics.
We have added an auto ancillary manufacturer to our portfolio who is the largest 2 & 3-wheeler component manufacturing company in India. With 27 manufacturing plants spread across 3 countries the company has embarked upon ambitious expansion plans to cater to the rising demand in the automotive sector. Interestingly, the company was one of the very few that was able to sustain its revenue and PAT in FY2021 despite the pandemic-related disruptions.
Another addition in our portfolio is the market leader in Indian wires and cables industry with around an 18-20% share of the organized market. The company is also quickly gaining market share in the fast moving electrical goods segment with significant investments in branding and technology. The company has recently launched its IoT-based (Internet of things) FMEG Product portfolio to take advantage of initiatives such as ‘Digital India’ and ‘Smart City’ projects which have raised the demand for IoT in the market. The company, being backward integrated with its own copper cathode manufacturing facility, gives it a significant cost advantage against other players, especially in the present times with copper prices trading at decadal highs.
Overall we are confident and optimistic about our portfolio’s long term performance. We have enhanced diversity across sectors and market capitalisations to make the portfolio resistant to any anticipated volatility. We have carefully chosen sectors to invest in that we believe will outperform in the future. I would like to end this quarter’s report with a quote, which though written many years ago, continues to ring true today.
“In the short run the market is a voting machine, but in the long run it is a weighing machine” ~ Benjamin Graham.
It essentially means that prices change based on sentiment in the short run, however in the long run it is the intrinsic value of a company that determines a stock’s worth.
Kind Regards,
Vasudev Gupta,
MD, Prosperity Wealth Management.