Yesterday we suggested
that investors may follow a rather simple investment style to achieve their
investment goals. It is highly likely that most find this path boringly long
and apparently less rewarding, but in our view this is the only way sustainable
returns could be obtained over a longer period of time.
In our view, taking contrarian view (infrastructure), speculating
policy changes (e.g., QE tapering, gas pricing, FDI rules relaxation etc.)
anticipating short term performance (e.g., monthly sales, quarterly profits
etc.) or arbitrage on information/rumor of a corporate action are some examples
of circuitous roads or short cuts that usually lead us nowhere.
Taking straight road means investing in businesses that are
likely to do well (sustainable revenue growth and profitability), generating
strong cash flows; have sustainable gearing; timely adapt to the emerging
technology and market trends, and most important have consistently enhanced
shareholder value.
These businesses need necessarily not be in the “hot sectors”
like commodities in early 1990’s, ITeS in late 1999s, or infrastructure and
financials in 2004-07.
In next few days we shall discuss why contrarianism or lottery
seeking attitude to investing might not be the right one and may expose
investors to greater losses.
We begin by an argument against investing in infrastructure
sector in India. Admittedly, the argument may be little too late in the day and
benefits from hindsight. Nonetheless, it is still valid and deserves
consideration.
In our view, the “need” for infrastructure, both social and
physical, in India is tremendous. However, despite 8%+ growth of five year and
manifold rise in government support for society especially poor and farmers who
happen to constitute over 2/3rd of India’s population, the “demand”
for infrastructure has not grown substantially. The affordability and
accessibility to basic amenities like roads, power, sanitation, education,
health, transportation, housing etc, is still low.
As per recent government admission almost 2/3rd
population cannot afford to buy basic cereals at market price and therefore
need to be subsidized. Only 10% of adult population has access to some formal
source of financing. Ever rising losses of state electricity boards highlight
incapacity or unwillingness of people to pay power bills. The loss incurred by
much acclaimed Bandra - Worli sea link in the heart of Mumbai highlights low
affordability to pay toll tax for using roads.
The optimism on the sector was consequence of overconfidence and
indulgence of administration and corporates who sought to advance the demand
for civic amenities to make abnormal profits. This was not only a classic case
of capital misallocation, but also misgovernance by allowing a select few take
advantage of policy arbitrage.
The collective wisdom of market has understood that the business
model of most of so called infrastructure firms is unsustainable. Those taking
a contrarian stand may realize it the hard way. We suggest revisiting the
sector after 3years or 5year if you like so.
Thought for the day
“A person should not be too honest. Straight trees are cut first and honest people are cheated first.”
- Kautilya (350-275BC)
Word of the day
Scabrous (Adj):
Full of difficulties.
(Source: Dictionary.com)
Shri Nārada Uvāca
The concessions being offered by the beleaguered government are signs of desperation not reforms.
Someone would need to answer, if FDI in defense and telecom etc could have been relaxed so effortlessly, why the government kept waiting for 9 long years.
Anyway, given the policy mess, the government may not find many takers this morning. Rather Mittal and POSCO have exited projects.
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