Many changes
that call for a portfolio shake-up go beyond disruption caused by innovation
If there
were any doubts of equity being a risk capital, three recent events have put
them to rest. The Telecom Regulatory Authority of India saw nothing wrong in
predatory pricing. Coal mining has been opened to the private sector. The size
of the Punjab National Bank money-siphoning fraud due to lax oversight
ballooned by another Rs 1000 crore to Rs 12000-odd crore, souring the mood that
was turning favorable after a series of reforms to clean up banks. The journey
of the telecom sector from emerging as a new investment idea to a battle for
survival is a tale of a recipe gone wrong in cooking. Due to 25% supply
deficit, genuine end users had to import coal from countries that behaved like Shylocks, squeezing the buyers by imposing export tariffs even as fly-by-night
operators cornered blocks at home out of turn. Negligence by the monetary
authority in addressing complaints and by banks of warnings to plug the scope
for misuse of systems and procedures has pushed the nationalized category to
the edge. For a time, it looked the turmoil in all the three sectors was
ebbing. Consolidation had cast aside the early gold digger and left only three
telecom services providers with deep pockets. Bharti Airtel’s African business is
showing signs of a bounce-back after being a drag on the consolidated
performance since the costly foray. Idea’s merger with Vodafone India is
progressing. The Aditya Birla group company is raising capital with end in
sight to the pricing wars. Late-entrant Reliance Jio is charging, although very
modestly, subscribers after providing free services, resulting in operating
profit in the third quarter and lifting the parent’s share price. Coal India’s
thrust on cost-efficiency translated into standalone profit in the latest three-month
period from a loss a year ago. The capital infusion in banks that agreed to
follow prudent norms and the central bank pulling the plug on the endless
rehabilitation process and nudging defaulters to declare bankruptcy had seen a rerating
of the industry.
Recent regulatory-,
industry- and company-specific developments, however, have created uncertainty
instead of resolution. The decision of Trai to not interfere with pricing is
being contested by Jio’s rivals. Those who were attracted by the cheap
valuations might balk or reduce exposure, increasing the sector’s volatility.
With its status as the sole supplier of coal under threat, the scarcity premium
of Coal India will be under scrutiny. After recording the highest output last
fiscal year, the economic slump has resulted in stockpiles and downward
revision of the production target. As it is, the counter has shed more than 30%
from its all-time high in July 2015. Despite being listed, there is lack of
accountability in PSU banks. Their difficult-to-replicate reach was once envied
and used as a justification for being invested. The digital revolution is reducing
the compulsion of physical presence to be near the customer. The market value
of a private bank with 150% lower gross advances is more than double of the largest
government-owned lender.
What these
examples of fluctuation in the fortunes of companies and industries demonstrate
is the fear of unknown that investors face. Disruptions can be gradual or
sudden. There was hardly any warning about the transformation that Internet and
wireless communication were set to usher. In contrast, the market is preparing
for the imminent arrival of electric vehicles. India is promoting alternative energy
sources so aggressively that the solar
industry is in distress as prices have crashed. China’s unexpected crack-down
on polluting industries, a source of blue-collared employment, has given a new
lease of life to manufacturers of steel and inputs in emerging countries. The
surprising finding of the 1991 liberalization is that owning automobiles and white
goods has become a necessity rather than a luxury. The dominant position
achieved through the first-mover advantage can be challenged by smart upstarts that
enhance user experience (private airlines), provide a price edge (online
retailers) or cater to niche markets (new private banks). Often it is greed (rush
into IT, telecom services and real estate) and technology innovation (online
aggregators) that result in a shake-up. Sometimes the issues are complex. The
accounting fraud by Satyam Computer Services did not affect its rivals but the
PNB scandal triggered de-rating of its peers. The adverse impact of the ban on
issue of letters of credit and undertaking for imports will be widespread and
not restricted to the gem and jewelry sector. Will streaming content kill the
movie-going habit that the advent of TV was forecast to do and the introduction
of cellular phone has done to the traditional camera is a question that still
cannot be answered with any firmness.
Mohan Sule
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