Eyes wide shut

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 Fads attracting higher valuations go out of vogue and outdated models are dusted and cited for being realistic.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