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 traveller 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.
The developments in global
financial markets in the past couple of years highlight that presently very few
persons are interested in taking the straight road.
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.
Infrastructure has made money only for few
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 been a 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.
As per a recent government
admission almost one third of the population cannot afford to buy basic cereals
at market price and therefore need to be subsidized. Only about 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 has 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.
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.
The investors and traders, who jumped on this
trampoline after listening to the enthusiastic budget speech in February 2022
promising trillions of rupees in infrastructure spending, would understand the
best, what I am trying to suggest here.