Bottoming - पुनरुत्थान
Markets are showing signs of bottoming out, offering a compelling opportunity for investors to increase their equity exposure.
Normal Market Correction and Not The Bear Market Cycle
The small-cap 250 index is rebased to 100 for various periods of correction.
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As highlighted in our Mar 2025 letter, we are experiencing a normal market correction, which occurs every few years, as previously seen in 2016 and 2022. This is not a bear market cycle driven by recessionary or weak macroeconomic conditions, like in 2018. The current correction is primarily due to a reset in expectations toward normalised long-term earnings growth following the excessive earnings growth of recent years. Macro indicators remain stable. And FIIs are likely to increase allocation to India amidst a weakening global outlook.
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As shown in the above chart, the recent correction in small caps is towards the bottom of prior ones. Investing at similar points in the past has rewarded investors well. For example, as shown in the above table, small-cap indices have gained more than 2x within approximately 2-3 years from the bottom in previous market corrections.
Domestic Markets Amid Rising Protectionism
The global macro environment is entering a volatile phase. The proposed reset in U.S. policies, marked by government spending cuts and a broader tariff regime, aim to narrow fiscal and trade deficits. The U.S. economy faces the risk of a shallow, short-lived recession—or potentially a more prolonged slowdown—depending on the scale and duration of ongoing policy disruptions. Rapidly evolving U.S. trade and fiscal policies, which are increasingly targeted by sector and geography, have added to global uncertainty. While India is relatively less dependent on exports than many peers, key sectors within the listed space—such as IT services and chemicals—are impacted. These sectors are vulnerable to slowing discretionary demand and rising friction in trade flows. Bond yields in the US remain elevated in parallel, and markets are recalibrating earnings expectations in response to upcoming data and corporate commentary. While economic data will take time to bottom out globally, we expect markets to react to policy actions bottoming out. Hence, we see Indian equities well placed to generate returns despite probable volatilities in the near term.
Risks From Tariff Policies
Tariff escalation, especially from the U.S., introduces a twofold risk: direct pressure on US export-oriented companies due to tariffs amidst weakening demand and second-order effects from potential Chinese dumping in global markets. The narrative that India may benefit as an alternative to China is valid but not absolute—gains in market share could be offset by pricing pressures and logistical disruptions. Sectors like IT, commodities and chemicals are already showing signs of stress. Discretionary tech spending decision cycles highlight the risks, as recent TCS results show.
Opportunities
At the same time, Indian companies in select sectors such as CDMO, engineering goods, and textiles may find selective opportunities as supply chains diversify away from China. Investor sentiment remains cautious. Talks of a bilateral trade agreement (BTA) between India and the U.S. offer some optimism. However, absent clarity or concrete outcomes, markets will likely remain range-bound with heightened sensitivity to global developments.
Portfolio Performance and Positioning
Portfolio Performance
Source: Fund returns are after management fees and other expenses.
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For the 1 & 3 months ending 15th Apr 2025, the fund delivered +40 & -300 bps relative to NIFTY500 and -220 & +300 bps relative to NIFTY Small Cap. Note that the fund has a higher weightage of small caps.
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The following factors have contributed positively :
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Select stocks were up on an absolute basis, such as in financials and in a special situation in the chemical sector.
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On a relative basis, cash levels helped on outperformance. Select pharma (domestic) manufacturing positions outperformed as positive changes were delivered.
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The following factors dragged down the returns :
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Select small caps in the portfolio had 20-30% drawdowns. These stocks are in the pre-discovery phase as CHANGES are in the early innings.
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Stocks exposed to the US, such as IT, manufacturing and Pharma (CDMO), underperformed.
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Portfolio Positioning
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Over the past month, we have made meaningful shifts to align the portfolio with evolving macro risks. Our core positioning has become more India-centric, with increased exposure to Financials, Healthcare/Pharma (domestic mainly) and Construction. Financials benefit from improving trends in unsecured credit and regulatory easing under the new RBI governor. At the same time, we have tactically reduced positions in IT Services and export-oriented companies.
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We are maintaining a healthy cash level to capitalise on tracked opportunities or respond swiftly to volatility within our portfolio holdings.
Valuation data represents a weighted average across the fund’s positions. Forward P/E is used, except for turnaround stocks (approximately 8% of the fund), 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.
Portfolio Snapshot
Investee Companies
Notes:
- The portfolio distribution across size and sector is as of April 15, 2025.
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Market caps are approximated as of April 15, 2025. Sources: Ace Equity and publicly available disclosures.
Risk Disclosures:
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Concentration Risk: The portfolio is diversified across multiple sectors and key economic indicators, mitigating concentration risk.
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Foreign Investment Risk: The Fund does not hold investments in foreign entities, eliminating exposure to foreign investment risks.
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Leverage Risk: The Fund operates without the use of leverage. Hence, there is no leverage risk.
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Realization Risk: Portfolio investments consist of listed or soon-to-be-listed entities, providing clarity on potential realization pathways and resulting in negligible realization risk.
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Strategy Risk: The portfolio remains fully aligned with the stated strategy of Vaikarya Change India Fund, which has been consistently maintained since inception.
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Reputation Risk: Investments are restricted to listed or soon-to-be-listed entities, ensuring adherence to high governance and transparency standards, resulting in negligible reputation risk.
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ESG Risk: The Fund adheres to established ESG practices and believes that portfolio companies also follow strong ESG principles.
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Fees: Fees are charged as per the Private Placement Memorandum (PPM) read with Fund Documents.
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.
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This Letter is made for informational purposes only and should not be regarded as an official opinion of any kind or a recommendation. 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. 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 or reproduction of any information contained in this document is strictly prohibited. The views in this document are generally those of Vaikarya and are subject to change without notice, and Vaikarya is not under any obligation to update its views or the information 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. Fund will be exposed to various risks depending on the investment objective, investment strategy, and the 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 have 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 can be expected that some or all of such assumptions will not materialize or will vary 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.
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.