Invesco India Caterpillar Portfolio
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As on March 31, 2020 Invesco India Caterpillar Portfolio Equity Market Commentary Amid the rapid spread of Covid-19 cases across the world, the Indian equity markets too posted sharp declines in the month with both Sensex and Nifty indices falling 23% each. BSE Midcap and BSE Smallcap indices also declined 28% and 30% respectively. Given the potentially large impact on the US economy and confidence, due to ongoing Covid-19 impact, the US government announced a US$2 tn stimulus package and the US Federal Reserve cut interest rates twice in a month. At the time of writing this piece, the number of Covid cases globally is approaching 1.3mn but the trend of new case addition has declined from ~100k cases/day to about 70k cases/day during the past few days. In India, however, where the curve is delayed relative to the rest of the world, daily case additions have risen materially from ~250/day to 700/day in the last few days. As a bold proactive measure and one of the biggest containment actions in the world, India ordered a nationwide lockdown for 21 days (from 25th March) to contain the virus spread. In parallel, the Finance Ministry unveiled ~$22bn / INR 1.7trn (~0.75% of GDP) package to support weaker sections of the society that are most affected by the lockdown. On the monetary front, RBI too announced a slew of measures to fight economic stress after the Covid-19 outbreak, like reducing repo rate by 75 bps, CRR (Cash Reserve Ratio) by 100 bps, and a new targeted LTRO (Long Term Repo operation) and increase in MSF (Marginal Standing Facility) liquidity facility, which would improve the system liquidity. In terms of India’s domestic economic activity indicators, barring consumer credit growth, most other indicators like auto sales (wholesale), consumer durable production continues to remain weak. Global risk-off fears and liquidity demands led to panic FII (Financial Institutional Investors) selling to the tune of -$8.3bn in March which was absorbed by DII (Domestic Institutional Investors) buying worth +$7.5bn. Capital market deal activity remained muted (M&A, IPO Market). In terms of sectoral indices; during the month, all sectors were sharply down, with IT, Pharma FMCG and Telecom relatively outperforming whereas Financials, Realty, Metals and Autos being the worst hit sectors. In view of the still developing impact of the pandemic both globally and in India, growth and earning's outlook for the economy and corporate sector has turned highly unpredictable in recent weeks and sets our expectation of a modest cyclical economic recovery back by at least two quarters now, For now, we would like to run with the assumption that while global and local economic activity will stay significantly disrupted, it would settle down in the next 2-3 months. A lot will, however, depend on the path of the virus at a global level, particularly in hotspots like US, Spain and other parts of Europe and further fiscal and monetary policy actions undertaken by authorities across the globe. We think further market and economic stabilisation measures will be necessitated to instil economic and market normalcy. From an India standpoint too, the course of the virus in the coming two weeks and the related progress on the severity of the lockdown will be critical in assessing the economic damage in the near term and the time to recovery. Besides, further policy measures to support leveraged sectors of the economy such as NBFCs, real estate, telecom etc. will also be keenly awaited. Higher than usual market movements in the interim cannot be ruled out. Many earnings-based valuation determinants can likely throw up incorrect conclusions in the near term due to dislocation in earnings. Today, investment decisions that discount near term earnings profile but are justifiable based on long-term intrinsic or franchise value of enterprises attracts our attention. Medium term we do take a more constructive stance on the economy and markets as a whole, but we remain measured in our conduct with regard to portfolio choices. We keep our growth expectations low while simultaneously increasing the bar on quality of businesses and balance sheets as our guide to our choice of investments. Source: Internal (https://www.worldometers.info/coronavirus/) Disclaimer: Past performance may or may not be sustained in future. The estimates expressed herein are based on internal analysis of publicly available information and other sources believed to be reliable. Any such calculations made are approximations, meant as guidelines only. The recipient(s) before acting on any information herein should make his/their own investigation and seek appropriate professional advice. Page 1 of 4 As on March 31, 2020 Invesco India Caterpillar Portfolio Portfolio Commentary Indian economy has continued to deliver strong real GDP growth over the last many years as the country has decisively migrated from being an agrarian driven to consumption and manufacturing driven. The consumerism within Indians has started manifesting itself across products and services – fueled by aspirations. Further supporting it, is the fact that per capita GDP income has moved above US$ 2,000 p.a., a level where daily needs are taken care of and discretionary consumption takes off. Ensuring availability of products and services across all pin codes of the country has differentiated winners from losers within corporate India. This has led to opportunities for companies not only selling such products & services but also for those involved in aspects of logistics, infrastructure, software solutions etc. The government has been increasing spend on infrastructure to keep pace with rising needs of roads & ports etc. Over the next few years, we expect some companies to benefit from this growth and transform into bigger companies. We have witnessed that the companies which have traversed this journey – if identified at early stage – have created a lot of wealth for long term investors. In our experience smaller companies, which have operated in industries that have potential to become large, for e.g. in the banking industry, few players have conducted business in a financially-sound manner (based on healthy return ratios), over years, transformed into bigger companies. This portfolio endeavors to capture this transformational growth. India had been navigating economic challenges over the previous 2 years and only recently, towards the end of CY19 and early part of CY20, had started to witness certain green shoots of recovery in economic activity. However, the global outbreak of COVID 19 virus has created a health issue which is transcending into an economic challenge. This pandemic has brought this process to a halt and as a result the reaction of stock markets has been a vicious one. Globally, we have seen a coordinated move by various agencies announce economic packages – right from QE (quantitative easing by central banks) to governments paying out cash into the hands of people. The level of monetary aid announced is several folds as that announced during the global financial crisis of 2008-09. These steps give us confidence, that once the pace of spread of this disease stabilizes/ cure is found we would see liquidity chase risk assets and equity could be one of those. We believe, as we have identified companies that have continued to maintain their leadership through cycles and gained market shares – profitably; these could be the wealth creators of future as well. The steep market fall has resulted in a lot of such companies emerge as relative value plays and we have made certain changes in portfolio to reflect that. As of December 2019, YTD (year to date) over the previous financial year, the companies in this portfolio have delivered, on portfolio weighted basis, revenue growth of 3% YoY, EBITDA growth of 2% YoY and PAT growth of 8% YoY. This subdued growth in EBITDA and PAT is explained by few companies that have recently been added to our portfolio, subsequent to fall in their market capitalizations, – which factor the fall in earnings. Our understanding of the companies in this portfolio suggests that they have a potential to grow the earnings at 14% CAGR over the period FY20-22E. The portfolio is available at an average P/E 12.6 on FY21 earnings estimates, which we consider attractive from long term investment purpose. Portfolio Data Source: Factset, Internal. EBITDA: Earnings before interest, tax, depreciation and amortization, PAT: Profit after Tax. P/E: Price to Earnings. CAGR: Compound Annual Growth Rate. Disclaimer: Past performance may or may not be sustained in future. The estimates expressed herein are based on internal analysis of publicly available information and other sources believed to be reliable. Any such calculations made are approximations, meant as guidelines only. The recipient(s) before acting on any information herein should make his/their own investigation and seek appropriate professional advice. Page 2 of 4 As on March 31, 2020 Invesco India Caterpillar Portfolio Investment Objective Investment Strategy To achieve capital appreciation over a long ▪ Investments in fundamentally strong and high growth midcap and smallcap companies term by investing in a diversified portfolio. ▪ Participate in companies with structural growth trends ▪ Participate in niche or emerging business areas ▪ Exploit overlooked investment opportunities, Benefit from both earning growth and P/E multiple expansion, ▪ Bottom-up stock picking, High conviction portfolio Key Facts Indexed Performance (In ₹ Lacs) Portfolio Benchmark 250 Portfolio Manager & Experience Mr. Amit Nigam Total Experience: 17 yrs. 200 Managing this portfolio since May 16, 2018 150 Benchmark Index 137.69 NIFTY MIDCAP 100 100 Inception Date 73.05 June 26, 2006 50 Performance Attributes 0 Standard Deviation: 6.45% Jun-06 Nov-07 Mar-09 Aug-10 Dec-11 May-13 Sep-14 Feb-16 Jun-17 Nov-18 Mar-20 Beta: 0.85 Values rebased to ₹ 25 Lacs, Since June 26, 2006 Sharpe Ratio: -0.15 Cumulative Performance Based on 3 yrs., monthly data points (Risk-free rate of 4.18% based on Overnight MIBOR) In % 1 mth 3 mths 6 mths 1 year 2 yrs.