“Value Creation in India Over The Last Two Decades”.

Sandip Sabharwal - Uncategorized - “Value Creation in India Over The Last Two Decades”.

Value Creation over the long term is always the facet of stock market investing. Most investors who have invested over the long run have made strong returns from their investments. The fall in markets since the stock market peak of 2007 has built a strong conviction in the minds of people that equity is a bad word and investment in equity should be avoided. However in reality in an economy like India where growth is likely to average 7% plus over the long term and demographics are so strong that the working population will keep on growing over the next three decades at least it is investing in Equity or Real Estate which will make inflation beating returns.
The decade of the 1990’s started off with the boom induced by the first round of economic reforms that were unleashed and the economy was opened up after the crisis in the early 1990’s. This lead to a huge spike in the stock markets which was largely driven by the unknown. At that stage various companies belonging to the core sectors like Cement, Steel, and Automobiles etc shot up before the boom peaked off in the year 1992. Post that the performance of the overall economy and markets was nothing to speak about till the advent of the new millennium. Economic growth remained modest and lot of companies that had over invested in capacities suffered a lot. However there was a set of companies that did create significant wealth for investors during that period. The first set of companies were the stocks that were the fancy of the 1990’s i.e. MNC stocks across the universe but specifically from the FMCG and Pharmaceutical sectors where due to the poor performance of the economy and virtually a total absence of any sort of investment cycle a large number of companies like Hindustan Lever, Colgate Palmolive, Glaxo Pharmaceuticals, Aventis etc gave very strong returns and their valuations continuously moved up.
In that time period there was another set of companies that emerged and became huge wealth creators. Both these set of companies leveraged the growth opportunities in Developed countries, specifically the US to grow rapidly. These were the Information Technology and Domestic Pharmaceutical companies. Cost cutting was the first reason which started outsourcing by companies from the US which lead to the emergence of companies like Infosys, TCS, Satyam, Wipro etc who leveraged the labour arbitrage at the initial stage before moving up the skill ladder slowly over the next several years. Investors who invested into these companies at an early stage made multibagger returns despite the huge crash in the year 2000 & 2001. Domestic Pharmaceutical companies took advantage of the low cost manufacturing and skilled manpower to start supplying generic products to the developed markets as medicines started going off patent.  This included companies like Ranbaxy, Dr Reddy’s Lab, and Sun Pharmaceuticals etc. This phenomenon has continued strongly even till date where Indian companies are now extremely strong in the global generic space, although many have tried and failed to actually come out with any new product. Both these sectors did well as they had high return ratios, high cash flow generation and no policy risks from the government. These companies continue to be wealth creators even now.
As the second round of economic reforms and investments started in 2002-03 another strong set of wealth creators emerged in the form of Public and Private sector banks. The initial rally was started by Public Sector Banks that were holding huge amount of government securities which created major capital gains for them as inflation fell and bonds rallied. New generation Private Sector Banks with their strong risk management, low political interference & focus on profitable growth have been wealth creators over the last decade. The boom of the year 2003-2007 created several winners, most of whom have not been able to create any long term return. The last decade has also seen home growth FMCG companies come up in a big way and companies like Asian Paints, Pidilite Industries, Dabur, Marico etc have been huge wealth creators with their high return ratios and strong cash generation.
Several companies from core sectors like Cement, Automobiles, and Telecom etc have also been strong wealth generators for long term investors, however due to cyclicality the returns from these sectors have come in waves and there have been periods of strong and weak returns. Wherever government interference or policies impact the growth of companies have seen periods of strong returns when policies have been supportive and extremely poor returns when policy has been a hindrance as has been the case over the last 5 years. There are companies that were the blue chips of yesteryear’s who did not have a strategy for growth or shareholder value creation and have been waylaid over a period of time. On the other hand there are companies that have taken global competition head on, innovated products, acquired capabilities by acquisitions and have created shareholder wealth. This includes companies like Mahindra & Mahindra and Tata Motors.
The key to strong wealth creation over the long run seems to lie with generating strong cash flows, investing cautiously, walking away from unprofitable ventures, innovating products & services as well as recognizing risks. Strong managements who understand their business and have been able to either leverage domestic or global opportunities have been strong wealth generators. Given the demographics of our economy and the fact that global growth opportunities might be muted for several years going forward due to the Fiscal Correction required across the developed world, it is probable that the wealth creators of the next two decades might be those which are either domestic focused or acquire strong global market access through acquisition of capabilities via Mergers & Acquisitions on the global stage. However it is also true that in a vast majority of products and services the markets share of India is still very small and market share gains can still create huge growth in the global market place.
To conclude I would say that equity investing over long periods of time in a diversified basket of stocks will always create inflation beating returns.  Patience is the key.

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