Sensex India: The Month That Was - February 2014

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 |  Includes: CPLFY, HDB, IBN, INDY, LTORY, MAHDY, RDY, TTM, VEDL
by: Shiv Kapoor

The Sensex closed February at 21,120, up 606 points or 2.96% for the month, underperforming the NIFTY, BSE Midcap & NSE Midcap indices which closed up 3.08%, 3.05% and 3.52% respectively.

An equal weight portfolio of Sensex stocks would have returned 1.51%, compared with 2.96% for the Index. And so it is clear that there were large divergences in individual stock performance: not all stocks participated equally in the rally.

This month the winners with month gains of over 5% were ICICI Bank (NYSE:IBN) (5.68%), Oil & Natural Gas Corp (5.73%), HDFC Bank (NYSE:HDB) (6.54%), Tata Power (6.56%), Mahindra & Mahindra (OTC:MAHDY) (9.47%), Sun Pharmaceutical Industries (9.51%), Dr. Reddy's Laboratories (NYSE:RDY) (10.96%), Larsen & Toubro (OTC:LTORY) (12.55%) and Tata Motors (NYSE:TTM) (19.28%). The losers with a month loss of over 5% were NTPC (-11.11%), Bharti Airtel (-8.7%), Cipla (OTC:CPLFY) (-6.41%), and Sesa Sterlite (SSLT) (-5.71%).

Of the stock selection and capital allocation strategies I track, Midcap Investable India Equal Weight Adjusted for Value performed the best returning 4.4% for the month. At the end of January, this portfolio came with a forward year PE of 13, a beta of 1.02 and a value score of 81.50. Given a portfolio beta of 1.02, the return of 4.4% versus 2.96% of the Sensex indicates alpha creation. Details of the performance for the month of February are displayed in the table below.

Click to enlarge

Source: MaxKapital Archives

Note: The midcap investment portfolio excludes the value of Welspun Enterprises Limited (WEL). WEL was demerged from Welspun Corporation and it is to be listed separately. The spin-off is complete however we cannot determine the value of WEL as the shares are not yet listed. We will consider that a little bonus, not accounted for in the strategy performance.

The top large cap strategy was Frontline Investable India Equal Weight Adjusted for Value, which closed the month up 4.12%. At the end of January, this portfolio came with a forward year PE of 15.02, a beta of 0.88 and a value score of 82.40. Given a portfolio beta of 0.88, the return of 4.12% versus 2.96% of the Sensex indicates alpha creation. In fact on a beta risk adjusted basis, this portfolio outperformed the Midcap Investable India Equal Weight Adjusted for Value strategy. Details of the performance for the month of March are displayed in the table below.

Click to enlarge

Source: MaxKapital Archives

The equal weight adjusted for value capital allocation strategy is a methodology which allocates capital amongst a portfolio of stocks, equal weighted in the first instance, and then adjusted upwards or downwards depending on the value of each stock.

The Frontline Investable India is a stock selection strategy, which selects a portfolio from amongst Sensex and NIFTY stocks, after eliminating stocks which are considered poorly governed, or over leveraged, or those where promoters of the company have pledged a substantial portion of shares which they own.

The Midcap Investable India is a stock selection strategy, which seeks to avoid poorly governed stocks, stocks with an over leveraged capital structure, and stocks where promoters of the company have pledged a significant portion of shares that they own. The stocks are selected from those listed on the National Stock Exchange, but exclude stocks listed on Sensex and NIFTY. There are at least two stocks included in the portfolio which fail the selection criteria, but are included nonetheless.

With the equal weight adjusted for value capital allocation strategy providing the best strategies for the month, it seems that stock pickers, not passive allocators are in control at present. This suggests that market participants are willing to embrace risk. The Midcap Investable India stock selection strategy provided the top over-all strategy: this win to the midcap space also suggests that market participants are willing to embrace risk. Since this strategy outperformed BSE/NSE Midcap indices, it is evident that stock pickers and alpha generators are in action over passive allocators - more evidence of a healthy risk appetite. The Frontline Investable India stock selection strategy provided the top over-all large-cap strategy. This suggests that stock pickers and alpha generators are in action over passive allocators. The note of caution is there too. The outperformance of Midcap Investable India and Frontline Investable India stock selection strategies, suggests that stock pickers and alpha generators are retaining a focus on quality and not chasing risk by driving up prices of the many poorly governed and over-leveraged entities listed in India.

Here is how the Rs 11.8 million in value on Midcap Investable India Equal Weight Adjusted for Value would be allocated for March.

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Source: MaxKapital Archives

Here is how the Rs 10.9 million in value on Frontline Investable India Equal Weight Adjusted for Value would be allocated for March.

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Source: MaxKapital Archives

Bear in mind, that these two strategies need not be the top performing strategies during March.

Midcap Investable India Equal Weight Adjusted for Value now comes with a forward PE of 13.62, a beta of 1.01 and a value score of 78.83, while Frontline Investable India Equal Weight Adjusted for Value comes with a forward PE of 15.89, a beta of 0.88 and a value score of 77.96. I suspect that in March, we could see the Free Float Market Capitalization capital allocation strategies taking the lead. As long as risk aversion does not escalate, I expect Midcap Investable India to lead in March on its cheap value. But while I expect Frontline Investable India to outperform over the long term, in a rising market, we can expect a risk rally driving up prices of beaten down stocks with poor capital structures and weak governance.

Disclosure: I am long INDY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. I am not long INDY, but I have long positions in most of the stocks listed in India mentioned in this post. Several of the stocks included in this post are INDY constituents.