As market conditions worsen, we can see the volatility caused by the twin forces of inflation and tightening interest rates. The policy repo rate has been increased to 5.9% and the RBI expects inflation to hover slightly below 6%, by the end of FY23. On their part, the long-term value investor must hunker down and be laser-focused on company level metrics.
Some important questions that should be asked at the individual portfolio company level are:
● Is the company able to maintain its revenue levels?
● Is it able to maintain its margins at current revenue levels?
● Is the balance sheet strong enough to withstand these adverse economic conditions?
● Do the capital allocation decisions indicate good discipline, including perhaps considering buybacks, if the share price is depressed?
● Is the working capital being maintained at appropriate levels?
If a company’s condition, in the current scenario, indicates strength with respect to these questions, then it is only a matter of time that portfolios will recover from these depressed valuations.
Looking forward, we are optimistic about the future of Indian businesses and markets. Already this year, the Indian markets have done better than the US markets. A comparison of 2022 data shows that the Indian index has not fallen nearly as much as the S&P500, even after adjusting for the rupee’s decline versus the US dollar. India also seems to be in a geopolitical sweet spot.
Fortunately, or unfortunately, conflicts and tensions in various other parts of the world may indirectly benefit Indian businesses, especially those that are able to provide goods and services to export customers looking for alternative sources.