Vijay Kumar Gaba

Last time I wrote this was about 13 months ago when the Nifty was around 16000. The benchmark has gained over 17% since then. PSU Banks, FMCG, and Automobile sectors, which were not exactly favorites of market participants at that point in time, have been the top performers since then. The favorites of that time, e.g., Metals, Infrastructure, manufacturing, and digital have mostly performed in line with the benchmark or underperformed. I find it appropriate to reiterate and reemphasize it, to motivate me to stay true to my investment strategy and not get distracted by the market noise, buoyant arguments and gravity defying moves in a number of stocks.

The conventional wisdom guides that roads are meant for moving forward and trampolines are meant to get momentary high without going anywhere. Usually, the chances of reaching the planned destination are highest if the traveler takes a straight road. The chances are the least if they ride a trampoline. Walking on ropes may sometimes give you limited success.

Investors who jump up and down with every bit of news are only likely to lose their vital energy and time without moving an inch forward. Reacting instantaneously to every monthly or quarterly data, every policy proposal, corporate announcement, market rumor are some examples of circuitous roads or short cuts that usually lead us nowhere.

Interacting with numerous market participants, I discovered that presently very few people are interested in taking the straight road; which is an unfortunate situation.

Taking the straight road means investing in businesses that are likely to do well (sustainable revenue growth and profitability); generating strong cash flows; maintaining sustainable gearing; timely adapting to the emerging technology and market trends; and most important consistently enhancing the shareholders’ value. These businesses need necessarily not be fashionable or be in the “hot sectors”.

In the Indian context, finding a straight road is rather easy for investors. Of course, there are different viewpoints and strategies; having their own merits and inadequacies. It is possible that the outcome is different for various investors who adopt different strategies or take a different approach to invest in India.

For example, consider the case of investment in the infrastructure sector in India. Prima facie, it looks like a rather simple strategy. In an infrastructure deficient country like India, the case for investment in this sector should be rather simple and straightforward. But it has not been the case in the past 20 years. In fact, Infrastructure has made money only for few in the past couple of decades; excluding of course the unscrupulous politicians.

Infrastructure inadequacy of India has been one of the most common investment themes for the past few decades. However, more people may have destroyed their wealth by investing in infrastructure businesses or stocks of infrastructure companies than anything else. Especially in the past two decades, that have seen phenomenal development in infrastructure capacity building, the value destruction for investors in this sector has been equally remarkable.

There is no dearth of infrastructure builders who have become bankrupt with near total erosion of investors’ wealth who invested in their businesses. JPA Group, ADAG Group, Lanco, IL&FS, GVK, IVRCL, Gammon etc. are just a few examples. Their lenders, and the investors in their lenders, have also seen colossal collateral damage too.

The fallacy in this case lies in the fact that while everyone focused on the “need” for infrastructure, few cared about the “demand”.

Indubitably, the “need” for infrastructure, both social and physical, in India is tremendous. However, despite significant growth effort in the past two decades, and manifold rise in government support for the society, especially poor and farmers who happen to constitute over two third of India’s population, the “demand” for infrastructure may not have grown at equal pace.

The affordability and accessibility to basic amenities like roads, power, sanitation, education, health, transportation, housing etc., has improved a lot, but it still remains low. Frequent crisis in state electricity boards and other power utilities is a classic example of “need” and “demand” mismatch. As per a recent government admission almost one half of the population cannot afford to buy basic cereals at market price and therefore need to be subsidized. Less than one third of the adult population has access to some formal source of financing. Ever rising losses of state electricity boards and free electricity as one of the primary election promises, highlight incapacity or unwillingness of the people to pay for their power bills. The losses incurred by some of the most famous highway projects, e.g., Yamuna Expressway, highlights the low affordability to pay toll tax for using roads.

The optimism on the infrastructure sector in the decade of 2001-2010 might have been a 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 to take advantage of policy arbitrage. This had resulted in huge losses for investors, lenders, local bodies and eventually the central government also.

The investment in infrastructure companies’ stocks for a small investor is therefore a tight rope walk. They may achieve some success after a stressful balancing act to normalize the forces of greed and fear.

With over two third of the population struggling to meet two ends, all those statistics claiming “low per capita consumption or ownership” of metals, power, housing, personal vehicles, air travel etc. is nothing but a blind man holding the tail of the elephant. If we find per capita consumption of electricity of the population that has access to 24X7 electricity and can afford to pay full bill for this at the market rates, we may be in the top quartile of per capita electricity consumption. Similarly, if we take the income tax paying population as the denominator for air travel, India might figure in the top quartile of air travelers’ density globally.

The politics of “competitive majoritism” has also led to irrevocable government commitments towards profligate welfare spending. This has certainly provided some sustainable spending capability to the expansive bottom of the Indian population pyramid. This clearly indicates that the government finances are likely to remain under pressure for a protracted period. Therefore, in my view, capex and infrastructure themes may work sustainably in Indian markets only when necessary, corrections are carried out. Till then it is the trampoline ride that will continue to give investors momentary highs, without taking them much distance over the next decade.

The investors and traders, who jumped on this trampoline after listening to the enthusiastic budget speeches in 2022 and 2023 and read some really colorful presentations and research reports published by the government agencies and some private brokerages promising trillions of rupees in infrastructure spending, would understand the best, what I am trying to suggest here.

I am not planning any detour or adventure in my investment journey, enthused by the barrage of commentaries and reports about infrastructure spending and manufacturing boom (PLI, China+1 etc.). I shall stay put on the straight road that I took years ago.

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