Wipro and TCS are the cos in the ICT sector. Infosys has a policy of depositing cash in a bank, not investing in the share market,etc. Surely if cash flows cannot be invested to yield returns over the benchmark bank rate, surely the company would be well placed to paying the cash to shareholders as dividends.
The pulls and pressures of capitalism are such that companies are prone to buying turnover rather than profits, looking at EBITDA rather than cash flows, Looking at market share rather than segment. Companies which are faced with a small market would rather expand in new areas rather than sticking to their knitting. Top level Executives flair for growing a company big is borne out through fatter pay cheques rather than making companies better in what they do. In other words an effective capital allocation in a capitalist economy is far better than a bulk of the companies running their operations like mom and pop stores with no returns. Ten million investors would be far better than a million traders dabbling in shady cos with no prospects of growth.
A question put out is are companies better off sticking to their knitting or diversifying? A difficult question posed has no easy answer. In their quest for diversification, companies incur losses at the learning curve which can be expensive.GE’s under performance amplifies that companies would be better off growing organically.
Whether it is Tata Steels’ acquisition of Corus at 12 billion or Hindalco’s acquisition of Novelis at 6 billion or Tata Motor’s JLR for 2.3 billion these have been not so great. A survey placed 70% of the M&A’s fail to create shareholder value.
In the steel sector one has to go with JSW Steel or a part power play one has to go with Jindal Steel and Power. Reliance Power is another good investment on 2015 valuations. SAIL has been forced to sell steel in rural areas at cost and has maintained the same absolute profit over the last five years. NTPC could be a 2 bagger at these levels.
Infra and Capital goods companies are abundant in this area. LNT and Bhel have order books which are 3X of their revenues and are good bets. With irrigation projects in the South Lucrative contracts are being handed down to Lanco Infra and Gmr Infra.Gmr looks pricey.
Hero Honda with a 70% market share of the two wheeler market of 9 million vehicles can expand by 2 1/2 times. Tata Motors with a million Nanos being sold can see wafer thin margins being a rule in this segment. Maruti is a better bet.
RIL which straddles sectors like petrochem, oil refining, oil and gas exploration, retail and solar photovaltics is a good bet. Sterlite and Hindustan Zinc with MarketCaps being 3X and 4X of revenues is the height of absurdity in valuation being witnessed nowadays.
Edited by venkat - 29/Oct/2009 at 5:41pm
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. How to overcome Draupadi's curse that India will be ruled by malecchas or Rakshasas and is doomed to poverty?
. While the other companies will merely cater to a segment or a niche where growth is not possible. Another survey said 20% of the workforce is employed in companies with less than 20 workers.
