As Q3FY23 has come to an end, the market participants can be divided into 3 groups.
Boys grapple with their portfolio of stocks.
Men write eloquent threads on “what they told you last quarter/year”
Legends discuss the Air India-Boeing Aircraft Deal
This one is for the boys. And girls too. 🙂
They are still scratching their heads as to what just happened this quarter (Q3FY23).
And yours truly is no different.
SUBSCRIBE to our mailing list
While our team at SSS will soon come out with detailed notes on the Q3FY23 results and conference calls of 70+ businesses that we are tracking, it is a good time to make an attempt at figuring out what is ailing most businesses (especially manufacturing) in this quarter.
The consensus is still high on Make in India & Make for the World. And rightfully so. In the Union Budget 2023, the government has provided further impetus to this initiative.
Source: Financial Express
However, if you invest based only on these high-level govt initiatives, you are in for a big shock in the stock market. The market has its own mysterious ways to surprise, shock, and eventually reward us. Investing is far more nuanced than what a lay investor often thinks.
So let’s look at what has happened in this quarter for manufacturing companies with a sizeable export component in the revenue. It started in Q2FY23 and may have its effects in Q4 as well, but Q3 was probably the peak impact quarter.
With my limited understanding, I believe these 5 broad things are playing out:
- Export demand slowing down
- Destocking from dealers, distributors & others in the system
- Most businesses are high on Capex
- Doubly whammy of lower revenues & higher costs hitting the PnL
- Raw Material prices easing out but high-cost inventory is still on the books
I am not going to expand on these 5 points further. You can simply use Google search to know more about them in detail, or maybe even ChatGpt. And you will also find ample evidence in the concall notes of these businesses this quarter. We have already updated the Q3FY23 notes for 20 of them here.
If you go back and replay all the episodes since Covid-19 hit us in March 2020, you will realize that the economic, business and investing world are becoming extremely uncertain in the short term. Things were uncertain pre-pandemic as well. In the post-pandemic era, however, uncertainty has increased manyfold.
Rather than becoming sure of your predictive ability, a far better way out today would be to just accept that you are in for a surprise every six months.
This is what ChatGPT tells me when I ask about destocking.
Source: Chat GPT | Open AI
ChatGPT had not heard of any “destocking” in Sep 2021. Neither did we, the investors. But here we are seeing just a year later that destocking is a common theme all around.
In fact, with the benefit of hindsight, it is fair to say that Q4FY22 and Q1FY23 saw peak sales for many businesses just because dealers in the supply chain were keeping a much higher inventory due to the recent memory of supply chain issues around the world. As the supply chain issues started receding, the inventory levels at the dealer end are coming down. And that is impacting the demand and eventually the revenues.
However, if you bought businesses for this very reason in Q4FY22 and Q1FY23, you will be tempted to sell them now because of destocking.
And unfortunately, you were grossly mistaken both times.
So you might be thinking how can one be a long-term investor in such a scenario?
It’s not compulsory.
Being a fundamental investor need not mean you should just buy and hold businesses for the long term. A friend of mine who is not on any social media and doesn’t want to be named has generated a CAGR of 40%+ in the last 10 years. And his style appears fairly simple at the outset.
- Buy growth at a very reasonable valuation.
- Hold unless you get a better opportunity or the valuation turns expensive.
- Be a ruthless seller and don’t shy away from churning the portfolio for better opportunities.
Fairly simple. Right?
Wrong.
He invests predominantly in microcaps, small-caps & midcap space. Plus, he keeps track of 100s of such fairly small-unknown companies all the time to act quickly as and when the stars align for any of those businesses. He carries no baggage. A stock that he had bought at 40 and sold at 100, he can easily buy it again at 250 when he thinks the risk-reward is in his favour. I hope he one day permits me to take his interview and show the world how he invests. Someday 🙂
Btw, I forgot to mention that he has a day job, and investing is his side-kick 🙂
But that’s the story of an outlier.
For you and I, the mango people, this strategy can be very challenging.
Don’t worry, we have another option.
Of course, not as exciting as my friend’s. But it works fine albeit with a much lower CAGR.
Go back to the 5 ailing points for the export-facing manufacturing businesses I told you about before. And analyze the businesses in your portfolio and watchlist. And just try to figure out if these are the only problems that are ailing them or if there are some more company-specific problems.
The answer to this simple question will give you a lot of clarity as to how to approach that business from the perspective of building your investment portfolio.
The future is becoming far more uncertain than we believe them to be.
The economic trends are shortlived and there is a lot of macro overlap that creates confusion in our minds as investors.
For a long-term investor, a good way out is to find out if the businesses you are looking at are dealing with a transitory problem or a chronic disease.
Of course, it’s easy to say and write about them. Much harder to figure them out.
But we do not have a choice.
One thing that can probably help us in this journey is to know more about the businesses in which we are interested.
And that brings me to the 2 mantras of investing at SSS:
Know Few Things, Know Them Well.
Don’t Predict, Prepare!
Being prepared also means being aware of the uncertainty around us.
Embrace it
Thank you for reading.
Happy Investing 😊
P.S.: Stay tuned for our Q3FY23 concall notes on 70+ businesses. Will be out soon. 20 of them are already uploaded here. If you like what you read above, you may like to know more about MissioN SMILE. You may download our MissioN SMILE app on your Android phone. (iOS App coming soon ). Lots of free & premium sessions on investing for you to explore and learn. 🙂
