Expert Analysis of the Global Macro Events & News affecting the Indian Markets

What’s Happening with our Portfolios? 

3 weeks ago, I had written about how attractive valuations were in the small and mid-cap space with a nice chart. Here is what that chart looked like.  

• When I compiled this chart based on the data from BSE, I was stunned to realise that the small and mid-cap space were trading at COVID levels in terms of PE (Price-to-Earnings) multiples. We love the small cap space. 
• People say small and mid-caps are very risky, and I’d rather have exposure into the Large and Mega caps, but when I speak to these investors, they often underestimate the fact that the FAANG stocks (the biggest companies in the world) fell 45% from their all-time-highs in 2021 to the nadir of 2022. Interestingly, this is almost double the fall these FAANG stocks witnessed during the COVID crash – 22.8% fall.
• We believe real risk is not based on the volatility in share price but volatility in the business. If the business is facing threats, working on thin margins, and doesn’t have a solid position in its industry, it’s a risky stock irrespective of whether it’s a small cap or a mega cap. 
• Anyways, even after this sharp rally we have seen across our smallcases, especially Smallcap Compounders, we believe there is a huge value opportunity in this space. 
• The same S&P BSE Smallcap 250 index is trading at 18.23x PE, which is still very cheap.

Hype about US’s CDS (Credit Default Swaps) hitting a multiperiod high

• I am not going to mention the full form of CDS because its more frightening than the acronym itself. Just think of it as the cost of insurance – higher the chances of default or higher the risk, higher is the cost of insurance, right? That’s all. 
• The US has been struggling financially – believe it or not. Yes, it’s been concealed thanks to the printing of the dollar. They were printing 1 million dollars per second on average (source). No, it’s not a typo. 
• Tax collection have dropped, expenditure has increased, and US is facing fiscal strain; and interest rates have increased. To top it all, they are nearing their debt ceiling of $31.4 trillion. Debt ceiling sets an upper limit to the amount the US government is allowed to borrow. As disciplined as it may sound, they have raised the debt limit 78 times since 1960.

• In simple words, representatives of both parties (Republicans and Democrats) have to agree to increase this limit in order to avoid a default, but as things stand, Republicans are rooting for a spending cut, which Democrats aren’t aligned with. More profound this friction between parties, the higher the probability of default!
• If they do not reach a consensus, and the debt limit isn’t raised, the rating agency Moody’s is predicting a 4% fall in GDP, the US stock market correcting by 30% odd and the slashing of 6 million jobs. As stark and unrealistic as it may sound, the credit markets are pricing in a higher probability of such an event. 

UPCOMING ECONOMIC EVENTS

STOCK COVERAGE OF THE WEEK

• We have recently added this stock in our Green Ethical smallcase, following the recent rebalance that took place on Monday. 
• The company has gained significant traction recently, with its stock surging by 25% in the last one month. Let’s get a closer look at Aarti Pharmalabs Limited and understand what is happening with the company.
• Aarti Pharmalabs Limited is a demerged entity of Aarti Industries Limited, created to achieve operational efficiencies. The company is an internationally recognized manufacturer of Active Pharmaceutical Ingredients (API), pharmaceutical intermediates, New Chemical Entities (NCE), and xanthine derivatives
• Despite the tough operating environment, Aarti Pharmalabs Limited has managed to record good performance in the last nine months. This can be attributed to the company’s ability to pass on inflation in input costs to its customers, along with a high demand trajectory for key products from generic pharma companies and Xanthine businesses, leading to higher realization of PAT margins. 
• Performance is even more remarkable when compared to its peers who have been bleeding during the same period.
• Future prospects are quite strong, thanks to its growth drivers:
  
  – The company plans to add 50+ new products in the Pharma division with a Capex of Rs.350-500 Crores in the next three years. This move is expected to boost the company’s revenue streams significantly.
  
  – Aarti Pharmalabs Limited is well-positioned to benefit from China plus one since it is an established player in the industry with a reputation for quality products.

• Despite all these factors, the company has a healthy balance sheet with absolutely no long-term debt and has one of the lowest valuation ratios among its peers.