Hard lessons from the equity markets in Samvat 2074

At the close of Samvat 2074, the domestic equity market has lost about Rs 17 lakh crore of market cap from the peak value of close to Rs 160 lakh crore. Though the overall market cap erosion is just around 11%, nearly 250 stocks have lost more than 60% from their 52-week peak prices. Many individual stocks have lost as much as 95% of market caps from their respective 52-week highs in Samvat 2074.

Average annual return from the stock market in the long-term is reportedly around 15%. Based on the average returns, those, who lost their hard-earned money to the extent of 60% need to wait for minimum six-and-half-years to get back their original principle. However, still it is only an arithmetic expectation – in reality, the individual stocks or the whole market fail to give 15% annual returns consistently even for a block of the five-year period.

Roughly 80% of these stocks were small cap stocks at the peak of their prices before the meltdown started. A few of the companies in this list posted impressive quarterly results on a standalone basis but shifted the burden of high debt and low margin businesses to their subsidiaries and joint ventures. Some "technology companies" had "a huge proportion of expenses on purchase of goods and services" and also had "very low (as low as 2%) expenses on employee benefits" in total expenses despite being "engaged" in 'people-driven technology' business.

Some of them had weak balance sheets – they had debt/receivable and inventories exceeding annual sales. A few of them had allocated "intangible" assets (fixed assets which cannot be seen visibly) as much half to three-fourths of the total capital of the company. If intangible asset acquired is really worth its acquisition cost, such an asset should ultimately generate enough return on capital employed (ROCE). Unfortunately, for some of the companies, which invested heavily into the intangible assets, had a poor 5% ROCE.

Some companies were making substantial losses for several years, still, the boom in the mid-cap stocks took their stock prices to record highs only to see solid meltdown later. A few stocks had a consistent history of multiplying prices and then losing 70-80% quite frequently in the last one decade. Still, some gullible investors ignored such perennial losses and painful historical facts.

Lessons of Samvat 2074: investors need to dig out suppressed facts between consolidated and standalone accounts, learn the reality of the "actual business model" and nature of reported fixed assets, limit concentration on exposure to small-cap stocks, understand management quality, balance sheet strength and valuation comfort.

The writer is founder and managing director, Equinomics Research and Advisory