Dear Investors,
Greetings from Prosperity Wealth Management. As we embark upon a new year of investing, we are optimistic as ever of spotting new trends and emerging opportunities that ensure sustained alpha generation.
Over the last 12 months January to December 2024, Prosperity Discovery Fund (PDF) delivered 23.35% returns versus BSE 500’s 15.81% and Nifty 50’s 8.80% out-performing both indices by a healthy margin. (The returns mentioned are at a fund level, Individual investor returns may vary depending upon their timing of investment into the fund.)
A full summary of PDF’s performance since inception (net of fees & charges) relative to its benchmark, is provided in the table below for reference.

The markets peaked in September last year with the Nifty crossing 26,000 points and the sensex touching 86,000 points respectively. Both indices have since corrected close to 12% from their all time highs, and are valued at their long term average price earning multiple, below 22. The correction in the broader markets was a lot more pronounced with non-index stocks correcting more than 20% on average. At PWM we actively mitigated concentration risk by booking or trimming positions which had grown more on the basis of a ‘multiple’ expansion rather than a growth in earnings.
Concentrated portfolio strategies that had worked well for several funds and investors in the prior years had to recalibrate their position sizes to avoid bearing the brunt of the market correction.
While market corrections and volatility can feel unsettling, they are an inherent part of equity investing. For instance the present correction marks the third time where the market indices have declined more than 10% since the inception of our fund. At these times it is important to remember that a company’s fundamentals and inherent strengths do not wax and wane with market sentiments. We are confident that our holdings are fundamentally strong and our portfolio will surpass its previous highs upon market recovery.
While there are myriad reasons attributable to market corrections, a simple, and perhaps the most relevant explanation for the recent correction was the slowing down of our Indian economy. Our real GDP growth in Q1 was 6.7% (a decrease of 1.1% from the previous quarter) and 5.4% in Q2, yet another decrease of 1.3% from Q1. To add to this, a marked depreciation in the value of the rupee versus the US dollar, made oil imports dearer, further increasing our current account deficit. FIIs also found other avenues in the emerging markets and their own countries as the rupee depreciated and bond yields remained high.
The slowdown in GDP was primarily attributed to the manufacturing, mining, agri, utilities and construction sectors, which typically witness a dip during the election season. (Table source: Ministry of statistics & program implementation)


From the above table it is also evident that exports and government spending on fixed capital formation slowed down significantly in Q2.
While India's GDP growth has moderated, dampening market sentiments, the good news is that the finance ministry has several effective levers at its disposal to restore growth to its previous trajectory of 7 to 9%. Our monetary policy, which has remained a status quo for over two years to control inflation, can now be leveraged to stimulate growth. By cutting interest rates the finance ministry can encourage capital expenditure and boost consumption. A shift in fiscal policy could also enhance the spending power of both corporations and individuals, driving higher consumption. Additionally, government spending, which has been subdued due to the election cycle, can be ramped up to stimulate manufacturing output and create jobs. Historically, a temporary slowdown in GDP over a few quarters is not unusual, and in the absence of any substantial adverse events, the economy typically recovers within a few quarters by adjusting monetary and fiscal policies.
At the portfolio level, we’ve been actively engaging with the management teams and CFOs of public companies across sectors such as manufacturing, NBFCs, metals, capital goods, automotive, and more. Our goal was to gain deeper insights into on-the-ground activities and assess the overall sentiment within the top management. Based on these discussions, we expect demand to pick up over the coming months, leading to a stronger Q4 and a much improved Q1 FY26 across various industries.
We have identified a few key India-focused themes through which we aim to achieve superior risk-adjusted returns for our investors. One such theme is tapping into the overhaul of India's power distribution sector.
India's power distribution sector is grappling with significant challenges, including high aggregate technical & commercial (AT&C) losses to the tune of ₹6.46 lakh crore for distribution companies (discoms). These inefficiencies are exacerbated by the outdated power metering system, which relies on manual intervention, lacks real-time consumption tracking, and hampers accurate billing.
To tackle these issues, the government has launched the revamped distribution sector scheme (RDSS), aimed at reducing AT&C losses by deploying smart electronic meters across 250 million households. This initiative presents a ₹1.5 lakh crore market opportunity.
In light of this, we’ve identified a promising electrical equipment manufacturer based in Tamil Nadu, who has ventured into smart meter manufacturing. The company builds on its four decade long expertise in switchgear and wire harness manufacturing, with a proven track record of supplying to industry leaders such as L&T and Schneider. Located in Tamil Nadu—an important market yet to adopt smart meters—it is well-positioned to become a preferred supplier for EPC players in the region.
Investing in India’s road infrastructure growth.
India’s road network is critically underserviced, with highways making up only 2-3% of the total road infrastructure but carrying 40% of the traffic. Recognizing this gap, the government has ramped up highway construction, increasing the pace from 6,500 km per year to 13,000 km per year over the past eight years, with expectations for further acceleration. While road EPC companies stand to benefit, the tender-based nature of contracts makes it difficult to pinpoint clear winners.
To capitalize on this opportunity, we've identified a proxy play in the road capex theme. Bitumen, a key material for road paving, represents a significant cost, and India continues to be a net importer of it. We’ve focused on a leading integrated player in the bitumen supply chain, who manages everything from sourcing bitumen from oil-producing nations and transporting it via its own fleet of vessels, to storing and delivering it through inland terminals and transport networks. This vertical integration positions the company to capture value across the entire bitumen supply chain as road infrastructure spending accelerates.
Unlocking value through spin-offs and de-mergers.
Spin-offs and de-mergers are strategic tools that companies utilise to unlock value and create shareholder wealth. By separating distinct business units or divisions, these actions allow each entity to focus on its core strengths, improve operational efficiency, and attract targeted investors. This approach can lead to enhanced growth prospects, better market valuation, and greater shareholder returns.
One such company is a diversified financial conglomerate with operations spanning across broking, insurance, housing finance, asset reconstruction, wealth management, and alternative investments. Financial services companies often encounter valuation challenges when multiple businesses are housed under a single holding entity.
Unlocking this hidden value depends on the separation and listing of individual businesses—a process that demands strong execution. This company has already demonstrated this capability through the successful de-merger and listing of its pure-play wealth management arm, which is now one of India’s largest wealth management firms. Post-listing, its valuation doubled under a year, underscoring the management's ability to unlock value. The management's commitment to further value creation is clear, with two additional verticals currently in advanced stages of separation.
While we continue to identify new opportunities and add promising stocks to our portfolio, we have also made strategic decisions to exit certain positions. These exits are the result of a reassessment of our initial investment thesis or changing market dynamics that no longer support our long-term objectives.
Our exits include a bromine and industrial salt manufacturer that had a dominant export presence but began facing significant headwinds. The challenges stemmed from the Red Sea crisis, which caused supply-side disruptions, including soaring freight costs, container shortages, extended delivery periods for consignments, and port congestion. Compounding these issues was weak global demand, leading to a decline in realizations and shrinking margins. The combination of these factors made it necessary to reassess our position and led to our strategic exit.
We also exited a Coimbatore-based auto components manufacturer with presence in the production of automotive chains, sprockets, gears, belts, and other industrial products. The company was generating strong cash flows and had substantial cash reserves. Our investment thesis was built around the company’s planned expansion into industrial chains with a focus on the export market. However, the company indicated potential headwinds in this vertical and signaled the likelihood of deferring or postponing the expansion. The lack of a clear time horizon for this growth initiative, combined with an absence of foreseeable triggers for valuation appreciation, raised concerns about the opportunity cost of staying invested.
Following these portfolio adjustments amongst others, we remain focused on aligning our investments with themes that offer sustainable growth and superior risk-adjusted returns to our investors. Our approach continues to be guided by a combination of thorough fundamental analysis, value investing principles, understanding evolving market conditions, and a commitment to maximising value for our investors.
India’s long-term growth story remains strong, driven by rising per capita income, a stable government, and reforms across various sectors. The recent market correction stems from a slower GDP growth, and global uncertainties, particularly around U.S. policy. However, global developments such as efforts to lower inflation, increased crude production, a Middle East ceasefire, and progress in the Ukraine conflict provide a positive backdrop. Domestically, potential interest rate cuts in the upcoming February budget, increased government capex, and a revival in private capex are set to drive economic activity in the upcoming quarters. These factors, both global and domestic, present as strong near-term catalysts for growth, and reinforce optimism in India’s future.
As we conclude this newsletter, we remain cautious amid market volatility, yet confident in the strong potential of the companies we have invested in, and their ability to compound earnings. We continue to monitor market developments closely, and with a long-term perspective, we are confident that broader market indices will regain their growth trajectory, with our fund continuing to deliver returns that outperform the benchmark. For investors holding cash, now may present an ideal opportunity to acquire high-quality businesses at compelling valuations.
We would like to express our sincere gratitude to our investors for their continued trust in Prosperity, as we continue to scale new heights together.
Kind Regards,
Vasudev Gupta,
MD, Prosperity Wealth Management.
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