Prosperity Discovery Fund - Quarterly Update Q4FY23
Greetings from Prosperity Wealth Management.
As we look back on the final quarter and the subsequent months of the current quarter, let us take a moment to summarise our progress and share some key insights.
As highlighted in our Q1FY23 letter, our strategy has remained to focus on insulating PDF from global headwinds while capitalising on the benefits of a buoyant & growing domestic economy. This strategy has played out well with our portfolio displaying good resilience during the market downturn in Q4FY23 and a stellar rebound, substantially outperforming the broader market’s recovery in Q1FY24.
[During the period from January 2023 to June 2023, the Prosperity Discovery Fund generated a return of 14.06%. In comparison, the benchmark BSE 500 TRI* recorded a return of 5.53%]
Our strategy going forward remains to focus on investing in companies that will benefit from the underlying themes,
(i) Rise in disposable incomes of a large section of the demographic resulting from a strong growth in GDP.
(ii) Global adoption of a China +1 manufacturing strategy to build more reliable supply chain networks.
(iii) Make in India, production linked incentive schemes and subsequently import substitution ( becoming ‘aatma nirbhar’).
(iv) Sectors embracing rapid technological advancements resulting in nonlinear improvement of efficiencies and growth.
(v) Formalisation of the economy and consolidation of the unorganized sector.
While the global economy continues to recover, structural issues with over leveraging, asset liability mismatches and the re-emergence of shadow banking continue to act as impediments to the global banking system, whose performance represents a good proxy for economic recovery.
The recent turmoil with Silicon Valley bank which had unrealised losses in excess of $15 billion or the poor asset - liability management causing the collapse of the second largest Swiss bank - Credit Suisse help us learn from and appreciate the stringent regulations put in place by the RBI to ensure large banks are well capitalised. Adding to this, the 3 lakh crore capital infusion by the Government of India over the last 5 years, has also aided the Indian banking sector significantly in clearing up NPA’s and fostering credit growth.
Crude oil prices which are also viewed as an indicator of manufacturing & industrial output experienced significant volatility, initially due to the economic slowdown dampening demand followed by a sharp rise after OPEC's decision to implement production cuts to support the falling prices. The result of a volatile crude and subsequently all of its numerous derivatives resulted in an inventory correction and re-evaluation exercise resulting in exceptional gains and losses quarter on quarter for many global corporates. India continues to benefit from discounted Russian oil helping it stabilise domestic energy prices amidst highly volatile international prices.
While Central banks across the world continue to tussle with inflation, the RBI has finally eased its hawkish stance keeping the rates unchanged in its recent monetary policy meeting. As the rates eventually begin to taper followed by a drop in new bond yields, the run up in the equity markets is likely to continue well into the forthcoming financials. The RBI has also revised its economic growth outlook upwards for FY24, projecting a 6.5% GDP growth rate and a projected inflation of 5.2%.
It is also encouraging to note that various economic indicators, such as GST collections, auto sales, corporate tax collections etc. paint a picture of a growing domestic economy.
FY23 concluded with a record GST collection of ₹18 trillion – highest since the inception of the new indirect tax regime. This was also a significant year in terms of the average monthly collections that crossed ₹1.51 trillion for the fourth time in March 2023. The data shows collections in the pandemic year FY21 declined, but bounced back in the years subsequent, indicating increasing compliance and formalisation of the Indian economy.
On a year-on-year basis, FY23 saw the first full year without any pandemic-related impact, resulting in a significant growth of 21% in automotive vehicle sales, as shown in the graph below.
On the portfolio front we made two key additions,
One in the Indian forging industry, globally recognised for its technical capabilities, is the world's second-largest with an installed capacity of around 40 lakh metric tonnes p.a. We have added one of the largest forging players in India to our portfolio. The company’s strategy includes expanding into international markets and increasing the range of products manufactured towards non-automotive and EV customers. The company has acquired multiple smaller players in its domain and has planned a capital expenditure of 400 crores to increase its total capacity from the current 1.87 lakh tons to 2.4 lakh tons. The management expects to double its top-line by FY2026 through both organic and inorganic growth. Additionally, the company has received a Letter of Award for the manufacturing of forged wheels from the Ministry of Railways under the aatma nirbhar Bharat initiative, with an order size of INR 12,226 Crores which is significantly higher than the company's market capitalisation. These initiatives align with our long-term investment philosophy, and we are confident in the company's ability to create value for our clients.
The impact of the war in Ukraine and energy crisis in Europe caused crude and natural gas prices to soar in early 2022, leading to an inflationary environment that benefited certain chemical companies. However, oil and gas prices peaked out in September and have since eased back to their long-term averages. This resulted in a correction of inventory which led to an overcompensatory correction of stock prices, creating an opportunity for us to invest in the chemicals space once again. Our recent addition to our portfolio entails a prominent manufacturer of Chlor Alkali and its Derivatives, including Chloromethanes, hydrogen peroxide, Epichlorohydrin, Cholorinated Poly Vinyl Chloride, and Chlorotoluene. These products not only serve as key import substitutes but also possess the potential to cater to the European markets under the China+1 strategy. The company's strategic focus lies in further moving down its value chain thereby focusing on high margin products. In pursuit of this objective, significant investments have been made in capacity expansion, amounting to 900 Crores in FY22 and FY23, respectively.
Over the last 18 months Equities have undergone a significant correction in terms of both time and price with the nifty delivering a mere 0.5% return from October 2021 till March 2023. It is however encouraging to note that Q1FY24 has begun on a highly optimistic note for both PDF and broader markets at large. The market tends to adopt a forward-looking perspective, focusing on the 10 - 12 months ahead. It is anticipated that the market will start factoring in the estimated interest rate cuts during the years 2024 and 2025 from the second half of CY2023. For investors holding cash, it may be beneficial to purchase high-quality businesses while they are still available at attractive valuations.
As always, our top priority is to maximise returns for our investors while maintaining a margin of safety on our investments. We would like to leave our investors with the following guiding principle that underpins our idea of long term investing,
“In the short run, the market is a voting machine but in the long run, it is a weighing machine”
-Benjamin Graham, paraphrased by Warren Buffett in his letter to shareholders of Berkshire in 1987.
(Our interpretation, While it is hard to discern the signal from noise in the short run, in the long run only companies that focus on growing their intrinsic worth are sustainably rewarded in the markets.)
MD, Prosperity Wealth Management.
*All portfolio managers from April 2023 have been mandated to choose one of the three benchmarks given by the securities and exchange board of India to compare their performances against. We have chosen BSE 500 total return index, from the choice of Nifty 50 and the MSEI SX 40, as it is a closer representation of the market capitalisations of the company's we hold.
* The returns displayed above are portfolio level returns. Individual returns may vary depending upon the timing of investments of each of the investors. Returns are not independently verified by SEBI.