What appears
to be a winning strategy of a company can be a recipe for disaster going ahead
The
reversal in the fortunes of PSU bank stocks is at once stunning and perplexing.
Till the third quarter of the last calendar year, the only silver lining seen
for these counters accumulating bad loans and shunned by the risk-averse
investors was the increase in treasury income as bonds held in the portfolio
gained value with interest rates appearing to head south. In a matter of
months, the market has re-rated government-owned lenders post DeMo. The
optimism seems to stems from the plentiful low-cost deposits and the increase
in autonomy to recover dues. The tech sector, an anchor for the conservative
investor till the better part of 2016, too, is in a flux, with a rush to cut
exposure on pricing pressure and trade barriers. The return of stickiness for a
theme that was untouchable or distaste for a prevalent fashion appears similar
to the philosophy in politics: There are no permanent friends or enemies in the
trading ring. Not that the market is unfamiliar with the cyclical sectors,
moving in tandem with an economy in a growth orbit or in recession. The commodity
space was known to travel in a predictable pattern of heating as producers
scaled back to avoid glut and cooling as policy makers stepped in to tighten
money supply to temp buying. Of late, timelines have become uncertain as
irrational exuberance or depression in one corner gets imported into another.
The pre- and post-September 2008 days perfectly capture the transmission of
liquidity and credit crunch around the globe, upsetting the calibrated demand-supply
equation. Recent events have demonstrated that even business practices can do
cartwheels. Fads attracting higher valuations go out of vogue and outdated
models are dusted and cited for being realistic.
Take
the current obsession for small balance sheets that followed the vertical
integration solution to being self-sufficient. Establishing a value chain was
considered necessary to insulate from supply disruptions and input price
volatility. Refiners expressed interest in oil and gas exploration, while
original equipment manufacturers encouraged and sometimes even funded
ancillaries. The coal scam was the offshoot of the stampede to bag mining
licences for captive use or for supply to third parties. Developers were
assigned discounting based on land banks, assuming prices will always go up.
Yet, companies parceling out major or minor functions to outside enterprises
were simultaneously being held as examples of how to be lean. The outsourcing
boom that was first noticed in the FMCG space soon became a global contagion,
covering a host of sectors including tech, automobiles and pharmaceuticals. The
paradox of investors’ confusion is in full play in the retail sector. A pioneer
of retail chain was admired for setting up outlets on leased properties in
malls, where footfalls are high. A new entrant’s focus on owning properties in
prime residential space with captive audience is now considered a
distinguishing feature. Perhaps the changed mindset is a throwback to the
dot-com boom based on traffic. The ongoing shakeup in the world of Indian
e-commerce is a result of funds changing track to demand visibility of returns.
The outlook on consolidation now hinges on the price tag after many thriving
entities ended bankrupt after costly purchases and had to endure painfully long
restructuring.
Another
corporate strategy undergoing a rethink is of market share. Tech companies and
FMCG companies pursuing volumes are met with exasperation despite
acknowledgement that this is a desperate measure in desperate times. A
leadership slot hitherto implied a steady performer. No longer as niche players
are preferred for their ability to earn better margins. For example, a prudent
financial services provider with asset base much smaller than India’s largest
lender. Another theory that brands enjoy superior premium has been turned
topsy-turvy. FMCG buyers are going back to their roots, opting for traditional
healthcare solutions. Investors who cheered plans of organic growth are turning
cautious due to the debt overhang. Aggressive overseas acquisitions, greeted
with joy during the last bull phase, are viewed with suspicion after the
misadventure of a large commodity maker eager to break into the big league and
a telecom operator anxious to expand footprints. There is concern for any
capital-guzzling diversification. Bagging of natural resources is not a cause
of unbridled happiness as the cost-reward equation is carefully weighed.
Despite examples of once vibrant entities (a renewable energy player and a
fast-growing drug producer) slumping due to wrong moves or languishing sectors
(of late, power and construction) back in the reckoning, investors are found to
travel in herds. Perhaps a lone wolf strategy of waiting and then pouncing will
not be a bad idea.
Mohan Sule
