Prosperity Discovery Fund – Update H1 FY26

Dear Investors,

Hope you are doing well. We are pleased to share with you the half-yearly update of the Prosperity Discovery Fund (PDF). We would also like to extend a warm welcome to the new investors who have joined us over the past few months.

To reiterate our objective, PDF is designed to create long-term wealth by investing across the Indian capital markets. Our philosophy is rooted in identifying high-quality businesses led by capable management teams and allocating capital in a disciplined manner, with a margin of safety. Since our inception in early 2021, PDF has delivered a CAGR return of 21.04% to date, net of all fees and charges. (Please note: individual investor returns may vary based on the date of entry; the above is a time-weighted rate of return across all investors, calculated per SEBI guidelines.)

The Indian capital markets, over the last twelve months have remained subdued, with the broader indices delivering neutral to negative single digit returns. The months of January and February this year were particularly challenging for all equity investors, as relentless FII sell-offs drove steep corrections in the mid and small-cap segments. The large-cap indices (Nifty and Sensex) which are generally resilient to sell-offs, corrected over 15% from the highs of September 2024 to April this year.

While PDF was no exception to the correction, we remained steadfast in focusing on the business fundamentals of our holdings. [While market price fluctuations are an indicator of economic sentiments in the short-run, price is eventually governed by the underlying value of a business / asset in the long run. As mr.Buffet once famously quoted “In the short run the markets are a voting machine, and in the long run the markets are a weighing machine”] This discipline enabled us to recover swiftly, delivering a 22.21% recovery between March and September 2025 versus the Benchmark’s 16.87%. 

We are optimistic that the best is yet to come and the time one stays invested in the Indian markets would be a hallmark indicator of success in their equity investing journey.

While the Nifty remains 1,000 points below its all-time high of ~26,100 at the time of writing the letter, several encouraging indicators point to a resumption of the upward momentum, likely culminating in a new peak within the next six months. We believe this backdrop augurs well for equity investors and for PDF.

GDP growth has accelerated from 5.36% in September 2024 to 7.80% in Q1 FY26, a sharp 45.5% improvement. At the same time, consumer price inflation has eased from 5.49% to 1.55%. With the repo rate at 5.50%, monetary policy retains room for cuts that could further stimulate economic growth.

Valuations also appear reasonable, with the Nifty trading at a P/E of 21.9 vs. 24.2 a year ago, offering a better entry point compared to global peers such as the S&P 500 / Nasdaq. On the policy front, reforms such as GST rationalisation, rising government capex on infrastructure (rail, power, roads, defence procurement), and progress on free trade agreements with the UK and other nations continue to support growth.

While the above are noteworthy positives, headwinds still persist impeding the market’s upward momentum. Notably, the 50% tariff imposed by India’s largest western trading partner poses risks, potentially shaving 0.5–0.6% of GDP growth, if sustained. While recent statements from both heads of state hint at possible resolution, we prefer to wait for clarity before taking any positioning on this front.

Our portfolio strategy reflects this environment: a bias towards domestic growth stories and minimal exposure to U.S.-dependent exporters. We have raised allocations to infrastructure, mainly electricity Transmission and Distribution (T&D)  and Engineering Procurement & Construction (EPC) companies with strong business fundamentals, further strengthened exposure to healthcare providers, and selectively entered consumer sectors such as automobiles, travel & tourism, and jewellery – areas supported by rising disposable incomes post-GST rationalisation and tax revisions. Manufacturing, especially in import substitution also remains a key focus.

We are underweight in the IT sector, given risks from the proposed U.S. HIRE Act, which could indirectly tax US companies outsourcing software development to India. We are also gradually reducing exposure by booking profits in the financial services sector,  where regulatory uncertainty around F&O activity continues to dampen sentiments. Our stand on the other sectors remains neutral. 

With valuations across large, mid, and small caps near their long-term medians, we believe this is an opportune time to identify select high-growth businesses and sectors with potential for significant capital appreciation. A few of these opportunities have been outlined below.

The National Electricity Plan 2024 outlines ambitious targets of adding ~1.91 lakh circuit-km of transmission lines and ~10.6 lakh Mega Volt-Amps (MVA) of transformation capacity by FY32, requiring cumulative investments of ₹9.15 trillion. Power Grid Corporation of India (PGCIL) alone has committed ₹1.08 trillion between FY26–28, thereby setting the stage for a multi-year growth runway for companies in the T&D and EPC value chain. Skipper Ltd, a diversified T&D player with backward integration, an order book of ₹8,520 crores equalling 1.8x its trailing twelve month (TTM) revenues and 1.5x of its market capitalisation is rapidly expanding capacity while offering strong revenue visibility. Techno Electric & Engineering Ltd (TEECL), a zero debt EPC company with a ₹10,400 crore order book (4.3x TTM revenues), and a ₹10,000 crore capex plan (majorly focusing on data centre EPC), is well positioned in both power transmission and emerging digital infrastructure opportunities.

In renewables, we remain selectively bullish on wind energy manufacturers buoyed by favourable central government policies and India’s 500 GW renewable energy target by 2030 (vs. current 234 GW). Inox Wind Energy Ltd, one of India’s largest wind mill manufacturers and maintenance providers is  targeting an execution of 1.2 GW in FY26 and 2 GW in FY27 (backed by a 3.1 GW order book). We also continue to remain bullish on Acme Solar Holdings, another portfolio stock which has already delivered close to a 70% return since addition. The company is enhancing its operational capacity to 4.9 GW from the current 2.9GW. We have also entered Sanghvi Movers Ltd, India’s largest crane rental company and the fifth largest globally with >370 cranes and a 40–45% market share, expanding into Wind EPC to leverage its heavy-lifting expertise.

On the consumer side, Sky Gold and Diamonds Ltd, a Mumbai-based jewellery manufacturer with 9 lakh+ designs and presence across 2,000+ showrooms, is scaling its manufacturing from 456 kg/month of gold products to 900 kg/month by FY27, supported by new partnerships with Reliance Retail, CaratLane, and others large retailers, is well positioned to capitalise on India’s jewellery retail market which is estimated to grow from USD 84B in 2024 to USD 145B by 2028.

Healthcare investments continue to remain a key focus for PDF, Yatharth Hospital & Trauma Care Services Ltd, a fast-growing North Indian healthcare provider that recently acquired two hospitals in Delhi and Faridabad, has expanded its bed capacity to 2,300 beds in FY25 and has a target of 3,000 beds in FY28. 

As we actively seek new opportunities and add high-potential stocks into our portfolio, we have also made strategic decisions to exit certain positions based on changing market dynamics. We exited Krsnaa Diagnostics Limited at a slight profit, an integrated diagnostic services provider operating under a Public-Private-Partnership (PPP) model. It was recently awarded a large-scale PPP project in Rajasthan, though promising in terms of long-term scale, required substantial upfront capital expenditure with revenue realization only from FY27, thereby introducing near-term challenges to cash flows and return ratios; while the company remains fundamentally sound, the opportunity cost of staying invested outweighed the potential reward. Similarly, we exited J G Chemicals Ltd, India’s largest Zinc Oxide manufacturer (~30% market share) used in rubber products, pharmaceuticals and construction, after a sharp two-month rally. This was consistent with our philosophy of realizing gains when a stock significantly exceeded its fair value. We also exited Transrail Lighting, an integrated EPC company in power T&D infrastructure, including towers, conductors, and monopoles, following a strong rally over a five-month period and finding other promising opportunities in the same sector.

During our recent outreach, we visited the manufacturing sites and met with the top management of several companies across diverse sectors in various parts of the country. Some of these companies included J.G Chemicals Ltd. (specialty chemicals manufacturer), Megatherm Induction Ltd. (Industrial machinery), Thaai Casting Ltd. (automotive and industrial castings), Universal Autofoundry Ltd. (automotive components), Sahaj Solar Ltd. (solar pumps and renewable energy solutions), Salzer electronics Ltd (switch gears and smart meters) etc. While not all the companies made the cut to PDF, these interactions provided valuable insights into their operations, growth prospects, and sector dynamics, helping us better evaluate potential investment opportunities and understand emerging trends across industries.

While the past twelve months have been muted for markets, India’s macroeconomic trajectory remains firmly upward, supported by GDP acceleration, favorable demographics, structural reforms, and digital adoption. India is poised to become the world’s third-largest economy before FY30 with a nominal GDP of close to US$ 7 trillion.

We believe a multicap approach which is adopted by PDF, flexibly allocating across large, mid, and small cap segments remains the most effective strategy to capture India’s diverse growth story while managing risk. As always, our focus will remain on rigorous research, bottom-up & top down stock selection, and disciplined risk management, with the aim of compounding wealth steadily over the long term.

Kind Regards,

Vasudev Gupta (MD, PWM) & Team Prosperity.