Withdrawal pangs

The turmoil due to liquidity and governance issues is contributing to shrinking the basket of investible stocks

There are two ways of looking at the current turbulence in the Indian equity market. Companies with over decades of experience are facing the prospect of either disappearing or turning into shells. The situation can be wholeheartedly embraced as a much-needed detoxification to cleanse the system. Many in the center of the storm are not particularly known for their governance. More often the aggressive push to multiply earnings was through reckless borrowing for expansion and diversification, causing asset-liability mismatch and serial ratings downgrades.  Not that there was much of a choice. Financial services, aviation, media and entertainment, real estate and telecom are capital-guzzlers. A power generator recently exited from a city-specific distribution and asset management.  A stretched media conglomerate is in the cable business, makes laminate packaging and runs an amusement park. Now most of the stressed companies are exploring dilution of ownership in favor of strategic investors to remain in the game. An earlier display of maturity to let go would have prevented destruction of shareholder wealth. The downside is risk aversion. Companies might choose sluggish growth and returning of cash as dividends or through buybacks over undertaking capital expenditure based on assumption of future market size. Already investors are withdrawing from certain sectors that have not lived up to their earlier promises.

Telecom has become a graveyard due to the policy flip-flops, regulatory uncertainties and pricing wars. The space has shrunk to three players in a battle for supremacy and survival. The outcome is not fat margins but cannibalization. There is no clarity on the outlook even as India prepares to enter the 5G era. Only those with an appetite for adventure will undertake the roller-coaster ride with the two no-frills listed airlines remaining in the fray with more routes to fly after yet another player hit an air pocket. PSU and private banks are taking turns to be in and out of fashion based on trends of capital infusion and missteps on governance. Till recently the poster boys of how banks should be, NBFCs’ fall from grace has been swift and cruel on realization that these traders of funds are not even adept at balancing their books. Caught in the crossfire are real estate developers: they cannot deleverage unless their lenders extend credit for their stalled projects. The FMCG category is facing an identity crisis as it transforms to a cyclical depending on monsoon from being an evergreen defensive. Similar is the fate of pharmaceutical producers. Rather than being a balm in volatile times, they are transmitting stress of intensifying competition in generics in the developed countries and periodic inspection crackdown by overseas health agencies. Cement makers get strength only when they hunt as packs of price-manipulating hounds, dependent as they are on production and market locations.

The usually reliable two-wheeler and car makers have lost the kick to turn in heady returns as they grapple with climate-conscious warriors. How many of them will be able to travel the road to electrification is a question to which there is no easy answer. Improved road connectivity and a uniform indirect tax regime were supposed to put commercial vehicles in the fast lane. Weighing them down is too much debt taken to accumulate capacity. Power generators should ideally be fighting state distributors to pay their bills promptly.  Instead they were litigating to postpone getting auctioned for not servicing their loans. Catering to a global powerhouse in the making should be lifting valuations of oil explorers and refiners only if round-the-clock elections did not hinder their ability for a cost pass-through. Tech solutions providers were knights in shining armor for providing capital gains in a transparent manner till it became apparent as they struggled to transit to a digital economy that their gear is rusting and the troops are conveyor-belt operators. The choice is between backing high-risk ventures of first-generation promoters for rapid multi-fold appreciation and sluggish growth of established giants commanding discounting based on their brute market share. The  global footprints of those enjoying the advantage of cheap labor and operating in low-tech or polluting industries are not going to last forever. Indian investors are paying ridiculously high valuations for efficiency of capital utilization rather than for innovations. Harmonizing national ambition with regional aspirations (NaRa) is the slogan coined by the Modi 2.0 government. The investing community needs companies with global ambitions using the springboard of local aspirations (GaLa) by offering products and services that might not be essential but are indispensable in the New Economy.

-Mohan Sule