Changing complexion

Three transformations that investors will have to prepare for as the market undergoes another evolution

By Mohan Sule
The way of doing business has gone a dramatic change since last May. Transparency and rule-based governance are the buzz words. Natural resources are being auctioned. There are no phone calls or chits from the PMO or extra-constitutional authorities to bank CEOs to grant loans to cronies. Company bosses and lobbyists no longer have to make frequent trips to New Delhi with suitcases to tweak policies to suit them. The transformation is welcome and is another pointer that India is slowly graduating to a demand-based market from a supply-controlled economy. Investors have to prepare for the next phase in the evolution, where a company’s value will be determined by cost-efficiency and competitive policies rather than due to the monopoly status acquired by bagging licences based on proximity to the policy makers. The rise and fall of Naveen Jindal’s JSP should be an apt illustration and so also the wealth creation by the Adanis through acquisitions. Instead of SBI, the group is scouting finance from Russian and Chinese banks for its Australian mining project. The earlier stages saw the scrapping of the Controller of Capital Issues, which was vested with powers to decide not only the entry but also the size and price of the offering. The opening up resulted in a flood of fixed-price issues from the established to the shady. To solve the problem of hefty premium, the power of deciding pricing has been transferred to the market through book building. Another difference is the motive of the IPOs. Initially, they were to raise funds for expansion. Now shares are listed to allow early stage incubators to exit. The issue of expensive offerings, thus, continues.

The next stage is crucial. It can either propel the stock market’s wealth or discharge the third shock. The first was the period when fishery and aqua culture growers and timeshare promoters ripped investors, followed by the bursting of the dot-com bubble blown by eyeballs. Two types of issues will dominate. The first, of course, will be from the infrastructure sectors as stalled projects spurt to life. The not-so-pleasant past experience with these companies in the frontline of benefiting or losing due to government’s wise or whimsical policies might prompt caution. The second lot will be emerging companies, predominantly from the services sector. This is natural. The share of the services sector in a developed economy overwhelms manufacturing and agriculture. Pinning down valuations will be difficult due to their unique business models. Investors grappled with a similar dilemma when fast-food chains and telephony- and web-based aggregators of information ranging from general to wannabe brides and grooms and jobs entered the market. Is the valuation expensive based on trailing 12 months or cheap discounting the enormous forward earning potential? Lately, theme parks have sought funds and going forward there could be those setting up digital platforms to exchange used goods, sell furniture or find suitable houses not to exclude e-supermarkets. Should the market compare them with tech companies? Many of them may not even have comparable brick-and-mortar peers. More than these wonders, perhaps below-the-radar back-office and last-mile services providers are likely to be the winners, just as our tech companies remained immune from the crash of Internet companies.

The second challenge for investors will be to spot when a generational change takes place. Usually, the recast of indices is a good guide to notice the shift. Despite the first-mover advantage, Nokia and Blackberry have lost market share to the disruptive Apple. Traditional business houses have been shaken to the core by the net revolution, which has flattened the globe. Not surprisingly, they are in the forefront of the campaign to discourage zero rate arrangements between Internet service providers and e-commerce companies. The worry is that an agile upstart can neutralize the high-entry barrier in the real world by diverting traffic to its site by tying up with an ISP. Investors are already in the midst of the third wave of change. As the government pulls out from the business of running businesses, monetary rather than fiscal policies are having a far greater impact on the market. The US Federal Reserve’s moves are closely monitored. China’s softening of interest rates created ripples and so also liquidity injection by the European Central Bank to pull the euro zone out of recession. The policies to control the flow and the cost of money will affect the health of the market more than the budget as tax rates become stable and the government runs a system without many shocks to attract investors. Just as the Fed chairman is the most powerful person in the world, the Reserve Bank of India governor will be the man to watch out for.