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The smelting of Indian stocks


[This post was written the day before, let’s call it “Green-Friday”. Check out @Prashanth_Krish take on that 5% upmove]

Markets have been getting smashed over the last 12-18 months, dramatic corporate tax reform notwithstanding. But because our benchmark index views are market-cap weighted, they don’t do justice to the phenomenal destruction in value across the board.

Overall, the 1,900 companies we analysed, went from a market cap of Rs 1,46,19,230 Crores ($ 2.1 Trillion) in the middle of 2018, to currently about Rs 1,37,95,850 Crores ($ 1.97 Trillion). 

Wait. That’s a 6% decline in a little over 12 months. What’s all the hand-wringing pessimism about then?

Maybe we’ve just been spoilt by secular up moves.

But then again, maybe it’s not been as benign as the market-cap weighted NSE 500 makes it look.

Here’s what “market returns” would have looked like if we weighted equally and not by market cap.

For every stock that advanced, 6 declined.

Of the 1,900+ companies we analyzed, just over 15% (1 in 6) have increased in value over the last 18 months, adding 24% cumulatively. 84% have lost a whopping 32% together. The remaining 1% were new listings.

To put things in perspective, through all this, it’s like we lost a little more than a TCS over the last 12 or so months. (TCS market cap is 8,25,000 Crores). 

Surely we can handle that kind of correction without running for the hills?

Minor correction? Say that to mid and small-cap holders

People don’t hold indices (yet). They hold actively managed funds that supposed to pick tomorrow’s winners or  they try their luck directly.

The -6% market-cap weighted return does not reflect the absolute carnage happening with the sub-10,000 Crore segment of companies.

Table shows the percentage of stocks in each market-cap bucket and their returns over the last year.

For example, the first row shows how companies with starting market cap of Rs 1 Lakh Crore and above have done. 55% of these companies have seen their value increase. 7% have seen their values decline between 50 and 90% (Tata Motors, Vedanta).

Just three firms, TCS, Reliance Industries and Infosys added nearly 5 Lakh Crores in market cap. That’s almost a third of all added market cap. The rest of the 1 Lakh Crore+ bunch added another 6 Lakh Crore.

The situation is almost completely the reverse for the mid and small caps. Only 7% of companies in the 500 to 1,000 Cr  (last but one row) market cap range have gained over the same time, and 41% have seen declines between 50 and 90%. Another 5% lost more than 90%.

There just has been nowhere to hide for mid and small-cap investors.

All sectors are not created equal

2-and-3 wheeler manufacturers made up the 10th largest sector by market cap in 2018 (excluding other auto-makers). The sector has lost 26% of its value. 9 out of the 9 companies in this space show negative returns. Not surprising. How about the other sectors?

Chart below shows aggregate sector return versus % of companies in the sector with +ve returns.

Each dot is a sector. The sectors in the upper right are had +ve returns (even in the market we’ve had) and most companies in the sector added value. The bottom left sectors are the opposite. Look at all the sectors on the zero line i.e. every single company in those sectors lost money.

Without clicking on it, which sector do you think is that dot on the far right? Then click to see if you guessed right.

We find 30 sectors where one or two companies have bucked the overall trend and delivered positive returns.

We’ll come back to why those outliers are are a good place to look.

What Banking-NBFC Crisis?

DHFL was worth about 18,000 Crores last year. It’s now closer to 1,500 Crores (down 91%). 

Yes Bank was 76,000 Crores. Now 17,000 Crores. Down 80%. 

RBL Bank has lost a third of its value. 

You’d think any sector remotely associated with lending money would have been decimated.

Table shows segments within the financial services sector and how they have fared. 

Turns out the business of usury pays. No prizes for guessing that one positive mover on the Housing Finance line.


Smelting is the process of extracting metal from its ore. The process involves various treatments to remove the impurities, or non-essential elements from the ore followed by heating the ore to temperatures exceeding 1,200 degrees Celsius. What is left is the pure elemental metal.

Think of what’s been happening over the last 18 months as just that. The poor quality has already been punished with impunity by the markets. Too much debt, shady corporate governance, poor moves into unrelated sectors, pure commodity players masquerading as value-adding brands. They’ve all their a**es handed to them.

Sure, so have a lot of the good quality companies. Just not as badly. And those that haven’t been hammered as much or those that have prospered call for closer scrutiny.

For example, Commercial Vehicle makers lost 51%, more than half their value. 8 out of 9 companies lost value, and a lot of it.

But one company, Commercial Engineers and Body Builders (CEBBCO Ltd) has gained 47%. Go figure. This might just be another case of a stock propped up with the usual shenanigans companies get up to that we’ve written extensively about. Or it might be a quality stock of a quality company that might be a future winner.

Those are the kind of stand outs we’d like to spend more time looking deeper into. More about them in a separate post.

Overall, this is a good time to take stock, and consider what goes into your multi-cap portfolio. Because a lot of the impurities have been burnt away, leaving behind some gleaming nuggets. We just have to sift through it, carefully through, and find them.

You can see what’s in the CapitalMind Multi-cap portfolio by signing up for CapitalMind Premium.

Want to debate / clarify / ask about anything in this post? Tweet @CalmInvestor  and @Capitalmind_in.


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