A new year has begun. A lot of things have changed in my world since I last posted. My portfolio is more focussed and I’ve re-balanced it a bit(not done completely yet) in the last 3 months to reflect current valuations/business performance. I’m reasonably happy with my returns over the last 6 months, having more than recovered from the big crash in May and June. Smaller companies that comprise the bulk of my investments have somewhat lagged the market indices during this period. But luckily for me financial services and IT suddenly became mkt leading sectors again, helping offset the smallcap underperformance.

However it must be said that now @13650+ our mkt wide valuations are getting stretched again. People are getting too optimistic about the sustainability of current growth rates and not factoring in the effects of a cyclical downside in the global economy. Also interest rates have gone up 0.5% in the last 4 months and might trend up another 0.5% in the next 12 months. Present interest rates are now in fact within touching distance of 6 year highs(11.5% now vs peak of 12% in 2000). Since credit growth @25% is still probably higher than what RBI wants(15-20%) rates might stay up there for a while now to rein in growth.

Well all these macro worries notwithstanding the structural part of the Indian economic growth story seems intact for now. Manufacturing sector continues it’s amazing revival(now into it’s 4th consecutive year of robust growth) rebounding after a 7-8 yr slump since the mid 1990’s. So far the big players haven’t rushed in to announce extravagant plans yet. Hopefully they have learnt their lessons from the crazy post liberalization capex binge & subsequent bust.

Result season started in earnest today with two of my top overweights(& favourite companies) Infosys and HDFC Bank reporting q3 results. Not much change as far as business performance goes for these two jewels of our corporate sector. Infy reported results inline with guidance despite the Rs appreciating 3.8% during the quarter. They improved productivity and managed to negotiate better billing rates. Their dependence on US also reduced to an extent with European business growing more strongly. HDFC Bank clocked a 19 sucessive quarter of 30%+ growth in bottomline. It did this despite RBI curbing branch expansion for last 12 months ! This quarter they made up for lost time – adding 48 branches and 120 odd ATM’s. NII was up 38% and NIM’s steady at 4%. With the 1.5% increase in PLR in December the next few quarters should see these margins maintained. Both these co’s are expensive I guess by most normal valuation parameters and they have been that way for most of the current 4 yr bull run. Luckily I figured out early enough that adjusted for growth(and it’s sustainence) they were absolute steals for a LT investor.