Market Overview – March 2020 Quarter


The year 2020 has been more than what we bargained for. From a pandemic called COVID-19 hitting almost the entire world, to the hardships caused by the lockdown to several businesses, to border tensions, and fears of a slump in corporate profitability, to cancellation and/or postponement of major sporting and social events, this has been quite a year so far.

The stock market in India has seen quite a roller-coaster ride. The S&P BSE Sensitive Index had fallen from a high of 42,273.9 in January 2020 to 25,638.9 in March 2020 (a fall of over 39%). This has been one of the sharpest falls in India’s stock market ever. However, the Index has staged a decent recovery, and at the end of June 2020, has risen to 34,915.8, which is a rise of 36% from the bottom of the year.

As we hear about the concerns, please see some of the positives for Indian markets

  • The current account deficit (CAD) has reduced to ~1% of GDP in 9M’20 vs 2.1% of GDP in FY19 due to fall in imports on account of poor domestic demand and sharp correction in energy prices (crude oil and natural gas). This has provided RBI additional levers for managing monetary policy to support growth.
  • The global central banks have embarked upon a massive monetary policy easing program with interest rates in the US close to zero. This along with massive fiscal easing by US and many European countries shall inundate the global market with cheap money. Once the fear of COVID-19 subsides, a part of this cheap liquidity will certainly flow to emerging markets like India in search of yield.
  • The corporate tax cut announced last summer is finally beginning to show impact with companies like HUL, Bosch etc. have announced fresh capex by forming 100% subsidiaries to take advantage of lower tax rate of 15% for new businesses. If government plays its card right, tax cut along with shifting of global supply chains from China to other countries may result in the elusive capex cycle starting much earlier in India than anticipated.
  • Limited impact of COVID-19 (so far) and indications of good monsoon along with MSP price hike has resulted in more money in the hands of people in rural areas thereby leading to faster recovery in demand as can be seen from June month data.

With this positive developments, we can’t ignore concerns post the pandemic:

  • India is under lock-down from the end of March till June. Even today, Lock down is continued in several parts of the country. Due to this, economic activities are badly impacted and hence there are questions how markets will sustain with this challenges?
  • How Small and medium enterprises (SMEs) which are badly hit due to COVID-19 will revive?
  • Thousands of migrants have left large cities and moved back to their home towns. Will this not spark a labour shortage?

Have we not faced “uncertain” times before? In the last 30 years, this country has seen assassinations, wars, numerous terrorist attacks, severe natural disasters, spread of communicable diseases, scandals, recessions, political upheavals and several other difficulties which certainly qualifies as “uncertain times”. Despite all these uncertainties, the Indian stock market represented by the BSE Sensitive Index has risen by 13.21% per annum during past 30 years. Out of these 30 years, there have been 13 years when the market has risen by more than 25% in a year, and 4 occasions when the market has fallen by more than 20% in a year. The 13% stock market return is in sync with the nominal GDP growth of the country during the same period.

Stock market is nothing but a product of cycles. Every now and then some idea catches the fancy of many investors and this idea is flogged until it goes over the top. With reference of this, a few month back, there was a frenzy which had captivated stock markets with comments being made that ‘value investing does not work’ and ‘Quality and Growth are the only thing that matter, and the entry price is irrelevant’.

With the recent out-performance in the month of June, Small and Mid-cap stocks seem to be back in the favor (which will keep on changing). What should not change is the belief in one’s individual strategy. Based on the same, we remain firm on our conviction which are:-

  • Stick to strong fundamental companies having visibility of earnings growth/recovery.
  • Value investing does not mean merely buying cheap stocks. It means buying into competitive businesses for less than what they are worth.
  • We have strong reasons to believe that quality of companies in our portfolio is in no way inferior to any other in the marketplace.

However, we remain open to make any changes wherever we believe fundamentals have changed or better opportunities are available.

Corporate Performance:

COVID-19 infects corporate India’s performance in Q4’20. The financial performance of Indian corporate sector was primarily hurt by consumer and commodity linked sectors, both of which were significantly impacted as the pandemic spread rapidly. At aggregate level (excluding financial sector), revenues contracted by 2.9% Y-o-Y in Q4’20 which resulted in contraction in EBIDTA margins by 30 bps Y-o-Y and 120 bps Q-o-Q to 16.8%, whereas PBT margins fell to multi-year lows of 7.1%. Further, the impact will be even more pronounced in Q1’21, given the stringent 2-month long nation wide lockdown during the quarter.

Banks, Auto OEMS as well as Ancillaries, Metals, Oil & Gas, Consumer Durables, Steel, Construction, Textiles and Infrastructure did poorly whereas IT, Pharma, Chemicals, Fertilizers, Cement and FMCG did fairly well.

Our view

We would like to say that, there is no guarantee that the stock market would not fall again. But the best way to handle that is to own companies with strong fundamentals which will navigate this situation and will emerge as winner post uncertain period and reward investors. We will continue to do this, as we are confident that we, and indeed our country, will emerge stronger from this ordeal, hopefully soon.

We would like to end the update with the following quote:-

“Investing is the age old, never ending emotional battle between FEAR of future and FAITH in future” – Nick Murray

Happy Investing!!