Q1FY21 – Portfolio Performance

The Nifty 50 TRI posted a 23.6% gain in Q1FY21 while the midcap 100 TRI posted a 28.7% gain and the smallcap 100 TRI posted a 31% gain in the same period. The Alphamultiple portfolio was up 20% in Q1FY21.

Alphamultiple Performance

Q1FY21 Performance

Portfolio Performance

While you read this and stare at the numbers on the screen, a +20% and -20% look just normal market movements. But that very moment when your portfolio had melted 30% in just few weeks would have been scary, right? The numbers capture performance but don’t even come close to capturing the volatility.

Alphamultiple Advisors performance review

Performance for the last 4 quarters

Our portfolio fell lesser than the markets fell in Q4FY20 and also rose lesser than the markets rose in Q1FY21. The Q1FY21 surprised most investors as the markets recovered sharply after the crash of March-April 2020. Investors are still wondering what drove the markets up despite the economy being at it’s worst in decades. Countries which had survived the 2008 global financial crash have also contracted because of the lockdowns.

Portfolio Changes

We used the lower prices in March and April to add some bluechip names to the portfolio. We did not make any transactions between 20 April and 20 June, except for taking exposure in the pharma sector. There were a lot of factors which made us stay away from taking up fresh positions in those two months, but the visibility is better now. We foresee a lot of churn in the portfolio coming up in Q2FY20 as we look to book losses in stocks that we have held for the last 2 years. One reason we could add stocks in March and April was CASH.

We had almost 35% of our portfolio in cash before the markets crashed as we believed the market valuations were stretched. In the coming quarters, we are looking to add quality small and midcap names to the portfolio. We believe that over the next 3 years, the small and midcaps would deliver higher returns. The small and midcaps are at cheap to fair valuations. Many largecaps look expensive now.

Note on the economy

We have been getting a lot of queries about the economic outlook, sector performance, impact of Aatmanirbhar Bharat and other geo-political factors. As much as we wish to predict outcomes, these topics are outside our scope of understanding. We will stick to what we believe in – Buy quality stocks at cheap to fair valuations.

Q4FY20 – Portfolio Performance

The Nifty Total Returns Index (TRI) has posted a 25% return for FY20 basis while the midcap and smallcap TRI are down by 35% and -46% respectively. Our portfolio is down -20% on a YTD basis.

Alphamultiple Performance Review

FY20 Returns

Portfolio Performance

Our portfolio has not escaped the market carnage. From the portfolio peak in January 2018, our portfolio is down by -30%. Ours is a predominantly small-midcap portfolio and it has fallen less than the TRI of the largecap, midcap and smallcap.

Alphamultiple portfolio review

5 quarter performance

For Q4FY20, the Alphamultiple portfolio fell by -20.59% which is much less than the Nifty, Midcap and Smallcap. We had a high cash allocation in our portfolio and we have utilized some portion of it in the recent market correction. While this is a great time to increase allocation to equities, one has to be careful because the stocks that did well in the previous bull market may not do well in the next one.

Our focus will be on high ROCE generating businesses that are generating cash flows from their business and have the opportunity to grow. The sweet spot would be the Rs 1,000 Crore to Rs 10,000 Crore market cap companies here.

Markets at fair vaulations

While the earnings growth is depressed and the FY21 EPS set to get a huge dent, the PE ratio will appear distorted. We have discussed this earlier on our blog (Read: April 2020 Market Valuations). This is a very good opportunity to invest in equities and we are confident that over the next 3 years the Indian markets will deliver 12%+ CAGR.

If you are doing your SIPs for the last 3-5 years and are sitting on negative to NIL returns, it would make sense to continue them for another 2-3 years. You will most probably see very good returns. We have back tested data January 1995 onwards and have observed that 17% of the instances have negative returns on SIPs for 5+ years. However, if these are continued for 2+ years, then the returns move up significantly.

Don’t try to time the markets

Historically, during depressed markets the PE ratio of the Nifty has fallen as low as 10-12. In the current scenario a PE of 12 would mean levels of ~ 5,500 on the Nifty. Everything is possible in the markets but getting the bottom right is not possible. So focus on reading reports, analyzing fundamentals instead of worrying about the market bottom. Also, invest in a phased manner. Don’t rush to deploy your cash at once.

We will come out of this bear market and look back at this period as a golden opportunity to have made investments in equities.

July 2019 Newsletter – Negative Sentiments

Market Outlook

As we write the July 2019 Newsletter, the sentiment on the street is negative. Investors do not want to put their money in small-caps or even mid-caps. Whoever is still sticking to equities is now talking about investing in Bajaj Finance or other large caps that are at 52-week highs. Just a simple trend analysis of the term Multibagger on Google will show you this graph:

Multibagger Search Trends

Even multibaggers have fallen out of trend now. Look at the peak of 2017 and compare it to the scenario now. Investors want to invest in Index funds, large caps and want to stay away from small & mid-caps. The mid-cap forward PE tracked by institutional analysts usually trades at a discount of 5% to 10% to the Nifty’s forward PE. This discount is now above 20%, a level seen when the market sentiments are depressed. The valuation gap between the indices will eventually reduce. Another indicator of the depressed sentiments is the dull IPO market:

Dull IPO Markets

Ground Sentiment

We have been speaking to businesses on the ground. Bearing traders are saying that business is down by up to 70% this year, car dealers are saying that unsold inventory has been inching up. However, restaurants have been rejoicing the newfound business through delivery apps like Swiggy & Zomato. Soft drink companies have seen a spurt in the demand for diet / sugar free variants of their beverages and the more people are enrolling for wellness programs of startups like We feel that traditional businesses, especially those that took place in cash to evade taxes have taken a hit from which they will not be able to recover.

When we look the numbers being posted by listed companies, we see shrinking margins, slower growth and higher inventory days. This is reflected in the stock prices which are sinking day in, day out. What is encouraging is that the SIP book of the mutual fund industry now stands at ~ Rs 8,000 Crores per month which is an all-time high. Usually, the retail investor runs away from the market after a year like 2018. However, considering that the large cap funds and indices haven’t really seen a bloodbath yet, the regular mutual fund investor must have shifted from small & mid-caps to large caps.

The above table shows the trend in growth of Midcap earnings (ex-financials).

We will stick to companies that meet most of the below criteria:

  • Growing their revenues at 15% p.a. and higher
  • Maintaining / Improving margins
  • Have a history of earning a ROCE higher than Cost of Capital
  • Debt-free or low debt levels
  • Have low reliance on external debt to expand
  • Cash generating companies
  • At cheap/fair valuations
  • Regular dividend paying companies
  • Offer high margin of safety

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April 2019 Newsletter – High PE Ratio

The markets made an all-time high in April 2019. The markets are consolidating close to these highs. The General Election of 2019 is going on and as we write this newsletter, most of the constituencies have already voted. By the time we write to you the next month’s newsletter, the election results would have been out. While the Bharatiya Janata Party is most likely to be the single largest party, the markets will be having a keen eye on the number of seats the BJP wins on its own. Anything above 220 will keep the sentiment positive on Dalal Street. However, if the single largest party fails to win 200+ seats, then the markets could react adversely. In 2009, the markets were locked in upper circuit after the Congress won 200+ seats on its own and the UPA retained power with an even more powerful majority.

Talking about the elections might be fancy, but the real issue is the missing earnings growth. The Q4FY19 earnings have been disappointing. The Nifty’s EPS has shrunk to ~ 400 per share and the PE Ratio is at a bubble territory of ~29+. These valuations are not sustainable, and we need to be very selective of the stocks that we buy now.

HIGH PE Ratios – The new normal?

In the late 90s, the dot-com boom created bubble valuations, in 2007 the economy grew at such fast pace and the markets rose up to bubble valuations. People justified those valuations citing some or the other factor behind a sustainable long-term growth in earnings. However, the valuations cooled off as the markets crashed. This time, the investor community is citing the low interest rates that are keeping the valuation levels elevated. Interest rates globally are near zero and this has created immense liquidity, a lot of which has flowed into emerging markets. Rs 67,122.07 Crores has been pumped into the Indian equity markets in 2019 by the FIIs. In 2018, FIIs had withdrawn Rs 53,020.87 Crores.

Analysts are expecting the Nifty EPS to increase by nearly 60% in FY20 because of positive earnings from banks. The NPA crisis has eroded the profitability of banks and this depressed earnings. If indeed the Nifty EPS grew by 60%, the PE ratio would cool down to ~ 20. Such expectations of a bump in earnings growth have been there for the last 3 years, but in vain.

Low interest rates mean low returns from safe assets like Government bonds, term deposits, etc. When the returns from risk free assets go down, the expected returns from equities also go down.

Risk free Equities Remarks
10% 18% When the risk-free return is 10%, I expect atleast 18% from equities
6% 12% The risk-free return is down to 6%, I am happy with 12% from equities


When an investor expects 18% returns from equities, he will want to pay lower valuations (Maybe a PE of 15). But if his expected returns from equities go down to 12%, then he will be ready to pay higher valuations (Maybe a PE of 22-25). This is a very generalized example. The financial theory behind this is an entire subject.

What makes up the returns?

Particulars 1-Jan-2018 31-Dec-2019
EPS 10 20
PE Ratio 15 20
Share Price 150 400

In the above scenario, the earnings have grown by 100% while the share price has grown by 266%. This is because of the expansion in valuation multiple that the investors were paying for the shares.

Particulars 1-Jan-2020 31-Dec-2021
EPS 20 30
PE Ratio 20 18
Share Price 400 540

In the above scenario, the earnings have grown by 50% but the price has risen by only 35%. This is because of the contraction in the PE multiple that investors were paying. In the dull market phase of 2011-2013, many good companies were available for a PE ratio of < 10. Today, very few good companies are available for a PE ratio of < 25. If we pay such valuations today and the earnings do not grow over the next 3-5 years, then the valuations will cool off and we wouldn’t be able to make such returns.

We are not saying that one should only buy stocks that are trading at cheap PE rations. Infact that is one way to load up cheap quality companies. We should pay high valuations only when we are sure that the earnings growth will continue long enough. Now, in the stock markets the ‘sure’ term doesn’t exist. So, our research is focused on determining the longevity of earnings growth, high ROCE, etc.

Very few companies can sustain such valuations for a long period of time. Most companies see sharp cool down in valuations eventually and leave behind a lot of retail investors stuck at higher prices. When the valuations are elevated, we prefer to maintain a decent cash allocation in the portfolio.

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March 2019 Newsletter

<This is an extract from our March 2019 newsletter to clients>

Return on capital employed – The Promoter angle

Recently, Naresh Goyal stepped down from this leadership role at Jet Airways. The media was buzzing with the story of a travel agent turned airliner who was at the forefront of the air travel boom in India. If you think of it, the air travel industry has grown multi-folds over the last couple of decades. However, Jet Airways has failed to create wealth for its shareholders. This should serve as an example for those who believe that just because an industry will grow, shareholder returns will follow. But, the focus of this letter is on another aspect.

Imagine – You started a business and ran it for many years during which the business made big losses, you would have ended up under a lot of debt and would have to eventually sell off your assets to pay these liabilities. However, businessmen like Naresh Goyal, Venugopal Dhoot, Ruia, etc. are examples where your business goes bankrupt in couple of decades and yet the promoter amasses huge wealth over this period. I am not saying that you think of this phenomenon as a scam or siphoning away of funds. But, think of this as a way to evaluate businesses and stay away from a particular type of company that we will discuss later in this note. I am trying to think from a promoter’s perpective and not from that of a retail shareholder.

So what is Return on capital employed?

The academic formula is Earnings before interest and taxes divided by the average capital employed. The capital employed includes own funds (shareholder) and borrowed funds (lender).

Particulars Company A Company B
EBIT (Rs. Crores) 100 300
Avg. Capital Employed (Rs. Crores) 500 2,000
Return on capital employed 20% 15%


Company A is earning as much as Company B but the capital it is using is much lower than the capital Company B is using. This shows that Company A is a better business. Now let us add a twist to this example.

Particulars Company A Company B
EBIT (Rs. Crores) 100 300
Avg. Capital Employed (Rs. Crores) 500 2,000
Shareholder’s Funds 500 100
Borrowed Funds 0 1,900
Interest Cost 0 228
Profit After Tax 70 50
Return on capital employed 20% 15%
Return on equity 14% 50%


Company A has borrowed nothing while Company B has taken a big loan at 12% p.a. and invested it in the business. Both of them have paid tax at 30%. Because of this leverage, the return on equity for Company B has shot up to 50% against 14% of Company A.

Return on equity

Return on equity is the Profit After Tax divided by Shareholder’s Funds. Thus, the loan has boosted returns for the shareholders. Now, assume that you were the promoter of Company B. You started the company with Rs. 1 Crore of your own investment, kept re-investing the profits and came with an IPO, selling 25% of your stake to the public for Rs. 50 Crores. The you took a Rs. 1,900 Crores loan and pushed the business into the big league. Now, 75% of the profit belongs to you. Everything that you are earning is on the Rs 1 Crore that you had invested.

While the ROE for the investors is 50%, for you it is astronomical! And you have already made a fortune by selling 25% to the public. That amount is being invested into real estate, restaurant businesses, etc. You have created multiple sources of income for yourself. And on top of that, your family and you are withdrawing handsome salaries from the business. Many promoters also indulge in related party transaction and pay family members rentals, leases, etc.

A bad phase strikes


Particulars Company A Company B
EBIT (Rs. Crores) 30 100
Avg. Capital Employed (Rs. Crores) 500 2,000
Shareholder’s Funds 500 100
Borrowed Funds 0 1,900
Interest Cost 0 228
Profit After Tax 21 (128)
Return on capital employed 6%
Return on equity 14%


Soon, the industry faces headwinds and the company goes into losses for 3-4 years in a row. To keep the cashflows running, you keep taking more and more debt hoping things will turn around. But things don’t turn around and the company declares bankruptcy. You and the company are separate legal entities, so nothing happens to your wealth. Yeah, you have lost the business but then you are affluent enough and have many other sources of income now. Your lifestyle doesn’t change, but the shareholders of your company see their investments go down to zero.

In this way, despite being part owners of a company the promoters and the retail shareholders get different results from their investments. Yes, the promoter had a vision and he took the risk, executed his vision and deserved to make money out of it. But then a 10% ROCE for him is good enough while for a retail shareholder he will desire at least a 15% ROCE.

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February 2019 Newsletter

<This is an extract from our February 2019 newsletter to clients>

Investor Behavior – Returns will come

While 2018 was a tough year for most investors, the optimism is still there. Many investors remember the 2017 performance of their stocks and believe that returns will come back in 2019-2020. While investors have enough maturity of thought to understand that returns are not a given and that there could be periods of negative returns, they tend to forget that the market has a 3rd dimension as well – Flat / range bound.

Many investors are assuming that the Small / Mid-Caps will bounce back and deliver stellar returns over the next 2-3 years. The expectations of 15% CAGR from their equity investments are still alive.

Nifty 10 year chart (1992 to 2002)

The above chart shows the movement of the Nifty index from 1993 to 2003. As you can observe, the index remained in a range and delivered no returns. Typically, such a range bound movement happens after a strong rally (something like a 2x-5x move).

In the hindsight, we know that the Nifty / Sensex delivered 12% to 15% CAGR and the “power of compounding” is engraved in our mind. But imagine if you were an investor who had invested in equities in 1993 and was witnessing no returns for many, many years. Wouldn’t you eventually lose interest in equity investing? The point is that many investors still have that expectation of getting multibagger returns. The blame is not on the investors but on the entire community of brokers, advisors, funds, etc. who preach the risk and return part of investing but don’t talk of patience.

In no way are we saying that the next decade will be like the decade between 1993 and 2003, infact the 2008 to 2018 period was a dull period in general for the market and most of the returns just came in the later years (2014 to 2017). Investing in equities and equity funds should have a multi-decade outlook to create wealth that can make a difference. If you start with Rs 3 Lakhs today and turn it into Rs 6 Lakhs by 2022, it would not have any drastic impact on your lifestyle.

What should investors do?

As a retail investor, split your equity investments into direct stocks, equity funds (including ELSS), PMS (if you net worth is > Rs 2 Crores) and other such avenues. Also, continue with SIPs into mutual funds of any amount that you can set aside every month. In range bound markets, you keep collecting units at low NAV values and once the market witnesses a strong period of high returns, you really see your wealth grow.

Infact, in the long run the range bound markets and bear markets are the best friends of an SIP investor. They let you purchase more units at lower NAV values. As your investment keeps increasing, the potential returns you will generate in the future keep increasing too!

Let’s assume you started with a Rs 5000 SIP at the start of a bull market, your entire returns will come on the initial investment which is hardly Rs 60,000 a year! Now, if you start investing and the market is flat for 3 years, your investment would be in Lakhs and whenever a bull market starts, your portfolio will deliver returns in Lakhs! So, if you are an SIP investor, your prayer should be for a dull market in the initial 6-7 years of investing.

I would take this opportunity to convey a social message – Please Vote. We are the lucky few people who have the right to elect / throw away our Governments. Our forefathers gave their blood & sweat to make this Democracy which is one of the most successful democracy in the world! If you don’t have a voter id card or if your name was deleted from the rolls then you can enroll online. If you are a registered voter, then just re-check your name online.

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January 2019 Newsletter

<This is an extract from our January 2019 newsletter to clients>

Investor Behavior – We won’t sell at a loss

In the current market conditions, there are times when we must exit positions at a loss. There are periods when we book profits consistently and then there are periods, when we exit many positions at a loss.

When we give exit calls, a few investors do not exit the positions. They exit some, they hold the balance for the cost price to come. This is not the best habit to have as an investor. There are reasons why we exit a position, if we knew that the cost price would eventually come back, we would not exit! We would instead add more and hold.

The problem is that investors do not take a bird eye view when it comes to looking at the portfolio returns. They look at the returns of each stock in the portfolio. We will use the example of Cricket to explain this behavior.

India has posted a strong score of 296 and the run-rate is > 6. It is like a portfolio that has delivered a 15% CAGR over a 5-year period. As a viewer, you will be satisfied with the result. However, if this was your portfolio’s performance then you would not be impressed.

Out of 10 players, just 3 players scored most of the runs. A century, two half centuries and the rest of the players did not even cross 15 runs! Imagine if your portfolio delivered a 15% CAGR and just 3 stocks of out 10 were the reason for the return. Instead of being happy with the returns, you would question why 7 stocks failed to deliver returns.

With any portfolio, like a cricket team’s score card, you will have most of the returns coming from a few stocks. The other stocks would end up in a loss or deliver sub-par returns. You cannot expect most of the stocks to deliver a strong performance. That is why we have different allocations to each stock.

When it comes to stocks, never get emotional.

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