This note discusses on the concerns we had highlighted in our previous newsletters over the

exuberant rally in the Indian equity markets post-election May 2014. Further, these concerns have
been substantiated through data analysis which depicts the sluggish growth in business
fundamentals vs how the markets have performed during May 2014 to August 2015.

 Gap between Valuations and Business Fundamentals:

March 2014 Newsletter

“As happens in any rapid upward move based on general sentiment, certain pockets of the markets have run ahead of
their business fundamentals in the short to medium term. Short term perception do not always predict longer term
movement in indices.”

June 2014 Newsletter

“Market has moved from over pessimism (August 2013) to exuberant optimism, but for the current rally to sustain,
fundamental metrics needs to capture with the ‘hope’ factor.”

March 2015 Newsletter

The hope driven rally-post elections- has come to a halt as things haven’t improved on the ground yet and in any case
the expectations were too high to begin with. As a year has passed by, the reality check of actual performance of
earnings has sunk in.

June 2015 Newsletter

“India, from a macro perspective is very well placed, relatively. However, most of the positives seem to be priced in.
The biggest risk the market currently faces is the gap between valuations and fundamental reality, which hasn’t
changed as much at the ground level.“

Figure 1 – Business Fundamentals for large caps deteriorated post June 2014. Decline in commodity prices has helped
in expansion of margins in June 2015

Sensex – Quarterly y-o-y Results

25%
19%
20% 15%
15% 10%
8%
10% 14%
12%
5% 1%
-1%
0%
2%
-5%
-3% -4%
-10% -7%
Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15

Sales Growth (%) EBIT Growth (%)

Source: FactSet

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 Figure 2 – Even Mid cap companies which have rallied significantly in the current rally have failed to depict an
improvement on Revenue growth and Profitability.

BSE Midcap – Quarterly y-o-y Results

14% 13%
12% 10%
10%
8%
8% 10%
6% 8% 5%
4% 3%
2% 1%
0%
0%
Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15

Sales Growth (%) EBIT Growth (%)

Source: Ace Equity

Figure 3 – Brokers too have revised their EPS estimates which were based on the market exuberance

Declining Broker EPS estimates for Sensex

1,956 1,947
2,000
1,825
1,716
1,700

1,648 1,645

1,514 1,435
1,400
Sep-14 Nov-14 Jan-15 Mar-15 May-15 Jul-15 Sep-15

CY '15E CY '16E
Source: FactSet

Figure 4

Declining Broker EPS estimates for BSE 500

788 791
750 772
752

659 660 719

707
638 690
650 615
585
573
560
550
Sep-14 Nov-14 Jan-15 Mar-15 May-15 Jul-15 Sep-15

CY '15E CY '16E
Source: FactSet

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Figure 5 – A hope based rally is unsustainable
Benchmark vs MSSP Performance

160

150

140

130

120 Since March 2015, markets have been

stagnated and have corrected.
110

100
May-14 Jul-14 Sep-14 Nov-14 Jan-15 Mar-15 May-15 Jul-15

MSSP MSSP Benchmark (BSE 500 & BSE Midcap)

Source: FactSet & Wealth Spectrum
Note: This period has been chosen to show how the Benchmark of MSSP vs MSSP has performed post election. Please refer annexure to see the
performance returns of MSSP since inception.

 Asset Allocation Strategy

June 2014 Newsletter
“The High Quality mid & small cap stocks which were providing value until now have rallied sharply in the last 3
months and thus opportunities remain only in the average and low quality space which is not our preferred market
segment.
This has reduced our opportunity set and thus our equity weights, as we have started trimming some of the cyclical
names which have already factored a cyclical recovery, and now therefore exhibit speculative prices.”

December 2014 Newsletter

“But in the current market where a rational investor would like to increase the quality of the portfolio, we are finding
it increasingly difficult to find ideas in the high quality space, where valuations are close to astronomical levels if not
already there.
Most importantly these valuations are not being supported by an actual uptick in business. Thus, at this juncture we
would prefer to sit on cash and increase the same rather than bring down the quality of the portfolio to chase value
and risk the investor’s capital.”
Figure 6 – As the hope base rally continued, we reduced our equity allocation in the portfolio to avoid undue risks

MSSP Portfolio - Equity Allocation V/s Nifty

9,500 72% 75%
8952
9,000 70% 70% 69%
70%
8,500 8240
65% 8588 65%
65% 8422
8,000 62%
7954 62% 7971
60%
7,500

7,000 7236 55%

May-14 Aug-14 Nov-14 Feb-15 May-15 Aug-15

Nifty Equity Allocation

Source: PMS Team & FactSet

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 March 2013 Newsletter

“Mid-Caps and Small Caps though have been disproportionately affected by the slowdown in the economy and an
almost “stag-flationary” environment”.
“As per our estimates, we feel current valuations seem to be factoring in most of the negative news and the
downside, and prospective returns available to investors in the Mid & Small Cap indices are far higher than those
being afforded by the Large Cap stocks.”

Figure 7 – We identified high quality Mid & Small caps in 2013 with an attractive risk reward ratio, thereby increasing
our exposure to ~67%. Post elections, the prices of Mid & Small Caps reflected a full recovery in the business cycle
whereas there was no improvement on the ground level. However, this momentum created a few value pockets in
high quality large cap space.

Large Cap to Mid & Small Cap Ratio

75%
67% 65%
65%

55%

45%
35%
35%
33%
25%
Nov-13 Feb-14 May-14 Aug-14 Nov-14 Feb-15 May-15 Aug-15

Large Cap Mid and Small Cap

Source: Wealth Spectrum

Figure 8 – Downside risks in mid & small caps still prevails. Our portfolio is no w inclined towards la rge caps and we
believe there are a few value pockets in the high quality large caps space.

Performance of BSE Mid Cap vs Sensex

200
CAGR - 23.0%
180
160
140
120 CAGR - 13.7%
100
80
Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15

BSE Midcap Sensex

Source: BSE

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 Global risks

March 2014 Newsletter

Technically the market seems to have broken out from an important zone and there is a possibility that the move
higher could continue, given the high degree of pessimism that we witnessed in India just as recently as in August
2013. Global markets have had even sharper increases in 2013. We however, continue to remain cautious ( as
highlighted in the previous newsletter ) about the global macro-economic conditions and the durability of the factors
(primarily faith in Central Banks and a belief in QE) that have driven overseas markets.

June 2014 Newsletter

We are however concerned of a far more serious global correction that could affect FII flows into India and the
resulting impact on the Indian market. We continue to be worried of the repercussions of the QE unwinding that
would occur because sooner or later the major mental prop (QE) that investors have used to invest in equities will
perforce dissipate and investors will begin to discount that event six to nine months in advance.

• We believe due to ample liquidity infusion by Central Banks and highly leveraged economies, global risks continue
to hover over Indian markets and we will not remain isolated when the outcome of these risks come to the fore.
E.g. Global uncertainties did play out recently in the form of Greece Crisis and China stock meltdown.

• The outcome of these risks can emerge in a surprise, but we at Multi -Act believe believe as long as an investor is
placed in high quality businesses, they will face less brunt from the outcome of such risks.

 Focus on Capital Preservation and evading undue risks in the portfolio

Figure 9
Drawdown Comparison Peak of the Market to Current Market (3 rd March
2015 to31st August 2015)
Moat & Special Situation Portfolio 2.0%

Benchmark (Average BSE 500 & BSE Midcap) -5.4%

Sensex -11.2%

Nifty -11.4%
Source: FactSet & Wealth Spectrum
Note: This period has been chosen to show how MSSP has performed since peak of current bull market vs various indices. Please refer annexure to
see the performance of MSSP since inception.

 Way ahead

• Though India is well positioned compared to other emerging economies, unless business fundamentals improve
and earning improvement starts kicking in, the scope of the market to rally could be limited .

• Irrespective of cause for correction in the markets, we at Multi -Act will always be at fore to invest in “Wonderful
businesses at Fair Price”.

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  Annexures
Performance Comparison Pre-Election as on 15.05.2014 Post Election 16.05.2014 till
31.08.2015
Moat & Special Situation Portfolio 13.48% 31.19%

Benchmark (Average BSE 500 & BSE Midcap) 3.68% 22.30%

Sensex 7.24% 7.57%

Nifty 7.04% 9.05%

Source: FactSet & Wealth Spectrum
Note: This period has been chosen to show how MSSP has performed during per and post election period. Please refer the table below to see the
performance of MSSP since inception.

Since
Financial Financial Financial Financial Financial
Inception Current Year
year ended year ended year ended year ended year ended
(Annualized)
Products
27.01.2011 to 01.04.2015 to
31.03.2015 31.03.2014 31.03.2013 31.03.2012 31.03.2011
31.08.2015 31.08.2015

Moat and Special Situations Portfolio

(MSSP)* Portfolio Performance (%), Net of
18.2% 1.6% 47.5% 22.0% 0.5% 14.8% 2.3%
all fees and charges levied by the Portfolio
Manager
Average Equity Weight 64.8% 67.9% 66.0% 76.0% 76.0% 47.0% 14.0%
Returns on Equities only 27.7% 1.5% 74.7% 28.9% -0.7% 24.3% 8.8%

Benchmark Performance (%) (Average of

8.5% -1.7% 41.4% 16.2% 0.8% -8.4% -2.2%
BSE 500 And BSE Midcap

Notes:
1. *Date of inception of MSSP is January 27, 2011.
2. MSSP is a 39month strategy
3. Past performance of MAECL does not indicate its future performance.
4. Returns are cash flow adjusted and time (Daily) weighted returns after expenses.
5. The actual returns of clients may differ from client to client due to different timing of investment.
6. Average Equity Weight is calculated as Monthly average of equity weight at end of the month.

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Statutory Details:- Multi-Act Equity Consultancy Private Limited
SEBI Registered Portfolio Manager - Registration No. INP000002965

Disclaimer
The views expressed in this article are for educational and reading purpose only. Multi -Act Equity Consultancy Private
Limited (MAECL) does not solicit any course of action based on these views and the reader is advised to exercise
independent judgment and act upon the same based on its/his/her sole discretion, their own investigations and risk -
reward preferences. The article is prepared on the basis of publicly available information, internally developed data
and from sources believed to be reliable. Due care has been taken to ensure that the facts are accurate and the views
are fair. MAECL, its associates or any of their respective directors, employees, affiliates or representatives do not
assume any responsibility for, or warrant the accuracy, completeness, adequacy and reliability of such views and
consequently are not liable for any direct, indirect, special, incidental, consequential, punitive or exemplary damages,
including lost profits arising in any way for decisions taken based on the said article.
It is stated that, as permitted by SEBI Regulations and the internal Dealing Policy, the associates, employees, affiliates
of MAECL may have interests in securities referred (if any).
The contents herein – information or views – do not amount to distribution, guidelines, an offer or solicitation of any
offer to buy or sell any securities or financial instruments, directly or indirectly, in the United States of America (US),
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definition of the term “US person” under Regulation S promulgated under the US Securities Act of 1933, as amended)
and persons of Canada.

Risk factors
General risk factors
a. Securities investments are subject to market risks and there is no assurance or guarantee that the objective of the
investments will be achieved.
b. Past performance of MAECL does not indicate its future performance.
c. As with any investment in securities, the value of investments can go up or down depending on the factors and
forces affecting the capital market. MAECL is not responsible / liable for any losses resulting from such factors.
d. Securities investments are subject to external risks such as war, natural calamities, and policy changes of local /
international markets which affect stock markets.
e. MAECL has commenced its portfolio management activities with effect from January 2011. However MAECL has
more than 10 years of experience in managing its own funds invested in the domestic market.