APPROACHING THE TURN
Dear Partners,
-
For the September quarter, the fund, post expenses, delivered +288 bps & +538 bps relative to the NIFTY500 TRI & NIFTY Small Cap 250 TRI. The key driver has been delivery in L&T Finance and Fedbank Financials in response to change factors — precisely the kinds of management changes, strategy, and industry cycle turns that are central to Vaikarya’s investment philosophy.
PERFORMANCE ANALYSIS
-
The following factors have contributed positively:
-
Fedbank Financials delivered a classic Vaikarya change thesis – a management change a few quarters ago, and a business mix shift towards lower risk while protecting profitability during the transition. Stock has given 41% returns for us, including 7% around results.
-
L&T Finance continued its strong delivery on transformation (more below) with good outcomes on MFI book, delivering 25+% returns during the quarter.
-
Varroc benefited from 2W OEMs’ work around the rare earth shortage and expectations of GST rate cuts, stimulating demand, delivering about 5% returns for the quarter.
-
Dr Agarwal’s special situation around its holding company was announced last quarter, leading to 7+% returns during the quarter.
-
-
The following factors dragged down the returns:
-
A more pronounced seasonal slowdown, caused by early monsoons, led to reduced reported growth, which in turn impacted the stock prices of construction-linked companies such as Capacite (-16%) and Interarch (-11%).
-
August’s US tariff hikes impacted ~4.9% of portfolio positions in August. Exposure had already been reduced from 6.4% (June-end), given that tariff negotiations were getting delayed and harder.
-
Axis Bank: Technical slippages in Q1 shook sentiment, with -6% returns. We view this as a classic value play—credit costs likely peaked, margins should recover in 2H FY26, with regulators supportive of growth.
-
PORTFOLIO POSITIONING
-
Over the last quarter, most allocation was made in domestic pharma stocks. Several of our stocks experienced a mild correction following the GST rate reduction from 12% to 5%, which may lead to inventory de-stocking. Our channel checks indicate a very short cycle, with inventory normalisation likely in the December quarter itself. Other meaningful purchases were increasing the stake in Tata Communication, a moderate position in a demerger situation, and net increase in financials (increase in likes of Axis Bank and reduction in L&T finance due to regulatory ceiling at 10%). Notable sells continued the reduction in exposure (~4.9% in August) to two stocks impacted by US tariffs. With good returns over the last quarter, the financial sector has become a significant weight and is reviewed monthly. The sector continues to benefit from the Industry cycle and regulatory easing under the new governor.
Valuation data represents a weighted average across the fund’s positions. Forward P/E is used, except for turnaround stocks, where a 24-month forward P/E is applied. Returns (ROE/ROIC) are incremental or based on a 12-month forward view. Growth rates are forward-looking, steady-state, and measured at the top-line level.
Size and Sector percentages may not add up to 100% due to rounding
L&T Finance – Transformation-led re-rating in play
THEN - Original “Change Thesis”
Vaikarya identified an early pivot—management reset, wholesale exit, and Fintech @ Scale transformation—toward a Tier-1 NBFC transition, while the market remained fixated on the lost decade with the stock till 2023 and MFI noise.
NOW - Execution validated
Tech & AI Edge: From NBFC to Fintech@Scale Challenger
VAIKARYA’S CONVICTION-BUILDING DURING DISLOCATION (DEC 2024 – APR 25)
“A few of our target opportunities may provide favourable prices in the short term as they navigate cyclical factors. For example, MFI space has been under tremendous stress…
“As our stated strategy, we size our positions based on risks, price (value) and conviction (evidence of thesis).”
— CIO, Investor Letter (Dec 24)
NEXT – Compounding Phase
We believe it is transitioning from a special situation phase to a compounding phase, driven by Fintech @ Scale improving ROE via credit and cost reductions. At ~2.2x vs peers at 3.5–4.5x, valuations remain attractive, offering, in our assessment, long-term compounding potential. Vaikarya continues to hold the position as part of its Quality Compounder basket.
Source: Ace Equity. Stock prices indexed to 100 from respective turnaround years — Bajaj Finance (2011), Cholamandalam Finance (2014), L&T Finance (2023). Y-axis is in log scale.
Disclaimer: This case study is shared strictly for informational purposes only. It does not constitute, and should not be construed as, a stock recommendation, investment advice, or an offer to buy or sell any securities.
Market Cycle
Source: NSE for NIFTY500 and Investing.com for MSCI World
-
One of the concerns around the weak performance of Indian markets has been the sustained FII outflows (~$30bn over the past year). As shown in the table above, Indian markets historically undergo phases of negative returns — typically accompanied by currency depreciation — lasting 1.0–2.5 years. These are often followed by strong compounding over the next 4–5 years. The current downcycle is already ~1 year old. Longer drawdowns have usually been triggered by domestic disruptions, such as the NBFC liquidity crisis in 2018–19 (post IL&FS default) or the 2011–13 period marked by high inflation, growth slowdown, and policy paralysis. In contrast, globally driven shocks, like the 2008 GFC, have tended to result in shorter corrections. At present, domestic factors appear stable, while the headwinds are largely external — including tariffs impacting select export sectors. FIIs are reallocating to markets like China, where returns turned positive in 2025. Once India’s cycle turns, FII inflows are likely to return.
-
Key FII concerns currently include weak corporate earnings (~9–10% in Q1-FY26), elevated valuations, and tariff uncertainty. However, these are likely transient. Earnings growth is expected to accelerate in H2-FY26 into FY27, and tariff issues may normalize over the next 2–6 months.
INDIAN MARKET ACROSS STYLES
-
We continue to view earnings growth as the primary driver of stock returns, while multiple expansion is likely to be more measured going forward. Despite seemingly high headline valuations, we see significant opportunities within our target universe of 430+ stocks in the Value and Growth at Reasonable Price (GARP) style.
Source: Ace Equity. The percentage inside the bubbles represents the number of stocks in that particular style. Style classification is based on Vaikarva’s proprietary method, which combines several factors in addition to valuation.
Disclaimer
This document (the “Letter”) is being furnished to you by Vaikarya Change LLP (“Vaikarya”) and its authorized agents on a confidential basis solely for the purpose of providing information regarding Vaikarya and an investment in Vaikarya Change India Fund (“Fund”), which is a scheme of Vaikarya Change India Trust (“AIF”). Vaikarya Change India Trust is registered with SEBI as a Category III Alternative Investment Fund having registration number IN/AIF3/24-25/1536.
The information contained in this Letter is confidential to the person, company, partnership, or other entity to whom it is given (the “Recipient”) and, without the prior written consent of Vaikarya, should neither be disclosed to any other person, company, partnership, or other entity (except to the Recipient’s legal counsel and/or other professional advisers), nor copied nor reproduced in whole or in part. This Letter and any supplemental information provided to the Recipient must be returned, and all copies destroyed immediately upon the request of Vaikarya.
By accepting delivery of this Letter, each Recipient agrees to the foregoing and the terms and conditions below. This Letter is prepared by Vaikarya strictly for a specified audience and is not intended for distribution to the public and is not to be disseminated or circulated to any other party beyond its intended purpose. This Letter is not directed to, nor intended for distribution or use by, any person or entity in any jurisdiction or country where the publication or availability of this Letter or such distribution or use would be contrary to applicable law or regulation.
This Letter is made for informational purposes only and should not be regarded as an official opinion of any kind or a recommendation. Under no circumstances should this Letter be considered as investment advice; any views expressed herein are incidental to fund management activities. This Letter is not, and under no circumstances is it to be construed as, an offering document or an advertisement, and the furnishing of this Letter to the Recipient is not, and under no circumstances is it to be construed as, an offering (public or otherwise) of interests in the Fund. The contents of this document should not be treated as advice relating to investment, legal, or taxation matters. It is recommended that the Recipient consult their stockbroker, banker, legal adviser, and other professional advisers to understand the contents of this Letter. Recipients are advised to consult their own stockbroker, banker, legal adviser, tax adviser, and other professional advisors before relying on the contents of this Letter. Vaikarya does not provide legal or tax advice, and if necessary, you should approach independent professional tax or legal advisors to obtain the same.
This document is confidential, and any unauthorized use, disclosure or reproduction of any information contained in this document is strictly prohibited. The views expressed in this document are those of Vaikarya and are subject to change without notice. Vaikarya is under no obligation to update its views or the information contained in this document. Neither Vaikarya, nor its promoters, directors, officers, employees, or representatives shall accept any responsibility for any direct, indirect, or consequential loss suffered by you or any other person as a result of you acting, or deciding not to act, in reliance upon such information, opinions, and analysis. The contents of this document have not been reviewed by any regulatory authority in India or in any other jurisdiction. If you have any doubt about any of the contents of this document, you should obtain independent professional advice.
The portfolio of the Fund is subject to changes within the provisions of the Private Placement Memorandum of the Fund. Investments are subject to market risks. Past performance is not an indicator of future performance, and there can be no assurance or guarantee that any investment will achieve any particular return. The performance of the Fund may be adversely affected by the performance of individual companies, changes in the market conditions, micro and macro factors, and forces affecting capital markets, including interest rate risk, credit risk, liquidity risk, and reinvestment risk.
The Fund will be exposed to various risks depending on the investment objectives, investment strategies, and asset allocation. The sector(s)/stock(s)/issuer(s) mentioned in this document do not constitute any research report/recommendation of the same, and the Fund may or may not hold any future position in these sector(s)/stock(s)/issuer(s). Any projections, forecasts, and estimates contained in this Letter are necessarily speculative in nature and are based upon certain assumptions. It should be noted that some or all of these assumptions may not materialize or may differ significantly from actual results. All projections, forecasts, or “forward-looking statements” relating to expectations regarding future events or the possible future performance of the Fund contained in this Letter are those of Vaikarya only and represent Vaikarya’s own assessment and interpretation of information available to it as at the date of this Letter and are subject to change without notice as a result of known and unknown risks, uncertainties, and other factors which may cause actual results or eventualities to be materially different from those contemplated in such statements.
Any views expressed herein are incidental to the fund management activity of the Vaikarya Change India Fund, and are not intended to constitute comprehensive investment advice to any person.
The Recipient should not treat the contents of this Letter or any prior, or subsequent, communications from Vaikarya, any of its affiliates or any of their respective directors, officers, employees, partners, members, agents, professional advisers, representatives, and/or consultants as advice relating to legal, taxation, or investment matters and are advised to consult their own professional advisers concerning the acquisition, holding, or disposal of interests in the Fund
Investments in securities market are subject to market risks. Please read all fund documents carefully. Past performance does not guarantee future results.