A stroll through the social media timelines of several self-claimed extremely successful investors and traders (popularly known as finfluencers) would indicate that there are thousands of people who have made extraordinary returns from stock markets in India. Everyone seems to have identified several successful businesses at a very early stage and earned exponential returns by holding it for decades. Everyone seems to have unlimited money to buy more stocks at every market correction, while they would hold on along with their existing positions till eternity.
The narrative presented by these so-called finfluencers is clearly oblivious of the fact that there are not more than a hundred companies in India that have operationally performed consistently for more than a decade. Number of companies that become redundant in each business and market cycle is very high.
There are numerous research reports and messages which rely on “low per capita consumption in India” and “moat” in India. Based on this many “new businesses” (and some established businesses) are given astronomical valuations. In this context, it would be pertinent to note the following:
In the early 1990s, the number of Indian citizens using air transport for travelling purposes was extremely low. There was only one public sector civil airline, viz., Indian Airlines. Then the civil aviation business was opened to private competition. Within a span of 2yr several private airlines started business, e.g., Sahara, NEPC, Damania, East West, Modiluft etc. All these ended as bankrupt in less than a decade. In the second tranche, some more private airlines started business, e.g., Jet Airways, Kingfisher, Deccan Airlines etc. Soon they became very popular with Jet Airways acquiring more than 50% market share (“moat”). These also ended bankrupt, along with Indian Airlines (later Air India).
Similar has been the story with private banks and telecom operators. Many first-generation private banks (Global Trust Bank, Time Bank, Bank of Punjab, Centurion Bank etc.) ended up merging with larger banks. Numerous telecom operators and ISPs ended shutting the shop in less than a decade. This all happened in spite of very low telecom density and poor financial inclusion.
Steel and power sectors have been another anti-thesis for this “moat” and “low per capita consumption”. India still ranks amongst the lowest per capita consumers of steel and power. If we carefully analyze the banking sector crises during the 1990s and 2010s, these two sectors have been largely responsible for huge credit costs to the banks. There have been numerous bankruptcies and debt restructuring in these sectors in the past four decades. Even the sector leaders like SAIL and Tata Steel have been responsible for massive investors’ wealth destruction multiple times in these four decades. Power producers like JP Power, Reliance Power, Lanco, ended bankrupt, while the leaders like NTPC and Tata Power have not yielded any noteworthy return over the past two decades.
I would not be surprised if many of the new age digital businesses also wind up in the next one decade, despite huge scope for growth in businesses like ecommerce, fintech, food delivery, etc.
The point is that arguments like “per capita consumption” and “moat” may not necessarily work in a country where about 60% of the population is dependent on government support for necessities like food, cooking fuel, primary healthcare, education, and transport; and government is constitutionally mandated to keep policy framework largely socialist.
Investors accordingly need to adjust the denominator (total population) appropriately to calculate a realistic per capita number. The “moat” premium should be assigned to a business only after applying appropriate policy risk discount. On the positive side, per capita income for the total addressable market will also be much higher than the official number.
In particular, notwithstanding the finfluencers claims, the investors must consider the following while evaluating a company for investment:
1. It is not sufficient to only evaluate the debt servicing capabilities of the company. The ability to pay the cost of other factors of production (e.g., wages, rent, dividend, plant and technology upgrade etc.) must also be evaluated.
2. It is important to assess the dependence of the company on the global economy, especially the stressed developed economy consumers and over regulated Chinese businesses.
3. Policy risk, especially related to “sin consumption”; competition; business with the government; and economic offences, etc.
4. Risk of obsolescence of products, technology and IPRs.
