Does Size Really Matter????
Printed From: The Equity Desk
Category: Market Strategies
Forum Name: Fundamental
Forum Discription: Discuss the operations and finances of any of your companies.Make the other participants aware on the investment opportunities available in a stock on PE free cash flow etc
URL: http://www.theequitydesk.com/forum/forum_posts.asp?TID=1179
Printed Date: 04/May/2025 at 4:10am
Topic: Does Size Really Matter????
Posted By: Vivek Sukhani
Subject: Does Size Really Matter????
Date Posted: 02/Sep/2007 at 1:52pm
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There is one thing which puzzles me at times.....when we value a company how much is its size as represented by turnover, profits et. important. the question comes to mind when i look at the turnover of some cyclical companies about which we have debated earlier. These companies are making huge tonnes of money and even after covering their capex requirements, have bountiful cash surpluses with them. Thousands of crores in profits? I believe we must pay regard to the absolute numbers as number. What actually this money is doing is enabling them to make more and more acquisitions, repaying borrowings, and in case a company is free from both the counts, the company has huge cash surplus. People may write off free cash flow criteria but we cant forget that we would like our companies to not only to grow but to do that extremely profitably. Cyclicality is a factor with every thing. I was going through Mahindra Gesco's Report......although the report looked attractive but where is the profits. they have executed Chennai SEZ and many residential projec ts but man, where is the profits???? How long shall investors wait????? Faith is alright, but so us a ray to make us believe there's light......on top of it the concerns and risks they have talked about, makes them look as cyclical as the cement or a steel company. They have made private placements, issued warrants and although the company boasts of being debt free but its very easy to make out wherefrom they have come. I was also through MRPL's Annual report and can easily make out this company will easy make profits by leveraging its depreciation. Its making silent moves and will scale up very easily. I will go through SAIL's and tisco's reports thereafter and will post my views thereafter.
The reason why I am saying all this is that beyond we see India growing, there's another area which is growing may be at the same speed but most importantly, more profitably. When you grow richer, you get the freedom to allocate capital more efficiently and which in turn furthers your profits in the coming periods. the chain effect may be mind-blowing.....
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Replies:
Posted By: ndzapak
Date Posted: 02/Sep/2007 at 8:31pm
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Good point Vivek.
I think this is what precisely RIL is doing.Using the gargantum cash flow
generated from its commodity businesses of refining and petrochemicals into the new age businesses of telecom, retail and oh! the list is long which are high growth.
But as Buffett said how the management allocates capital is its acid test. Till now RIL has been doing fine by shifting its cash towards high growth and high RoE businesses. Advantage of RIL is its teremendous execution skills, quick decision making( speed ).
Question is how many business groups in India can do it as well as RIL? ------------- the Equitydesk is the best |
Posted By: ramki830
Date Posted: 03/Sep/2007 at 8:32pm
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Vivek,
I think there is another side to the story as well. When a business/corporate entity is too huge, and cash flows are massive, the management/promoters tend to diversify excessively and develop "excessive ambitions and bloated ego" and this kind of caps the growth...
I am finding early signs of this in RIL - they are no doubt a monster in terms of free cash flow and profits, but they are planning expansion in too many unrelated areas. Size, infact is a disadvantage. In the biological world, the largest mammal - elephant takes 20 months to deliver a kid elephant while a rat can breed many kid rats so fast...
Big Size - Stability with Slow growth.
Small Size - Risk with Rapid growth.
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Posted By: xbox
Date Posted: 03/Sep/2007 at 5:30am
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If RIL was listed & operated in USA, Investor would have thrashed the management for unrelated diversification. Long ago BAT opposed diversification of ITC but failed due to govt. Institutions.
Will we except Infosys foraying into energy sector ? Do we like Wipro buying FMCG companies ? A big NO.
A prudent investor never wants diversification. They want buyback & dividends. Diversification is an excuse of selecting principal business. ------------- Don't bet on pig after all bull & bear in circle. |
Posted By: Vivek Sukhani
Date Posted: 03/Sep/2007 at 9:38am
| Although, I do agree big size may be a disadvantage in some cases, however I was talking about something different. RIL is getting into something unrelated, i do agree. However, some companies will become huge without any effort. take for instance ITC....if a company generates 3500 crores of cash flow and is sitting on plum cash and handsome MF investments and has no debt, can you work out the strength of this company. I was talking more for affordability to lose. Now, ITC can take on its competitors because of its financial might....we all know FMCG was a wrong venture for ITC but then who bothers.....even though the company may lose here and there there's a big cash cow to support that.....its like kar lo duniya mutthi mein style. So long as the company is totally debt free, it doesnt matter what they do. They have also developed a progressive dividend policy at the rate of 10 p.c. I have admiration for companies which generate tonnes of cash rather than those companies which only talk of promises with little delivery like suzlon. I have never bothered for business models and stuff like that and i never dream with my stocks ....i beleive in numbers and will like my compnies to throw bundles as corporate profits and dividends....doesnt matter if its a cyclical or a non-cyclical, doesnt matter if they are into a service like GE shipping or into commodities or into FMCG, all i want is big fat numbers......no begging, no borrowing and no stealing permitted however!!!!!!! |
Posted By: prosperity
Date Posted: 03/Sep/2007 at 10:00am
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Yes Vivek, Size Matters ..... I personally think of companies who have huge cash on their portfolio as "companies having deep pockets" These companies can go through a rough period easily as compared to its competitors
These companies can come up with policies because of which - its first generation competitors cannot survive
Basantji has highlighted the advantages of first generation companies ... since they don't have huge cash - they go out to market to fund their most profitable ventures ....
This is exactly opposite of it ... If your company has huge cash inflows (like Hindustan Zinc) ... It can be positive viscous circle ... a chain effect which can be mind boggling ... ONLY if the company knows how to deploy its cash properly !!!
Hindustan Zinc pays more tax than its expenditure .... Ponder over it ... 33 percent is the tax but expenditure is less than that !!
Thats HUGEEEE PROFITS .... HUGEEE CASH FLOW .....
And you know where it deployed it ? ..... Partly expanded its own capacities ... and In order to reduce the production cost further invested into building captive power generation (wind power energy)
This not only would
1) reduce their cost of making Zinc, and not only
2) they can sell extra power (agreement to nearby areas for selling power at decent rates is already done) but also .....
3) Its incurring expenditure by this investment and hence PROFITS ARE ARTIFICIALLY coming down (or made to look like that) ..... and hence TAXES ARE SAVED ...
Mind Boggling ....
Where on Earth you find companies who pay more taxes than expenditure ? That is the sign of being ultra cash rich ... and look how beautifully they are investing their proceeds ...
That is what i call positive spiral or positive viscous circle or how to benefit immensely from your DEEP POCKETS !!
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Posted By: Vivek Sukhani
Date Posted: 03/Sep/2007 at 10:17am
| exactly...i am plying a similar game in seshasayee papers, thirumalai chemicals , century enka and cheviot. Porritts and spencer asia also fits this bill along with GE Shipping...... |
Posted By: smartcat
Date Posted: 04/Sep/2007 at 12:45pm
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Wow, now that's a nice rosy picture allright.
Companies like Ford/GM used to generate net profits of $4 to $5 billion just 3 years back. And no, they didn't unnecessarily diversify into making spaceships either. But now, just look at their balance sheet. They are now making losses of $2 billion each.
When giants trip, they fall really hard. And cause lots of collateral damage too (Delphi is almost bankrupt).
Lots of things can go wrong with ITC (ban on ciggies), Tata Steel (higher supply pushing down prices affect Corus profitability), Hind Zinc (low demand) etc - and make them reel in massive losses. Of course, these things are unlikely to happen in the near future, but one needs to keep this in mind.
Companies like ITC/RIL are trying to avoid just this, by diverisification. If US investors thrash a stock for diversification, then either the investors are stupid or the company management has terrible project execution skills.
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Posted By: xbox
Date Posted: 04/Sep/2007 at 1:12pm
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If US investors thrash a stock for diversification, then either the investors are stupid or the company management has terrible project execution skills.
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Discussion makes TED a interesting place to be. SmartCat jee, One hypothetical question.. Will shareholders of INFY be happy, if INFY forays into energy sector ? <<assuming, we all know their execution skills are very good>>. Intel should foray into cement ??
As I mentioned several times, diversification is result of ambitious promoters only. No shareholder wants/wishes it. ------------- Don't bet on pig after all bull & bear in circle. |
Posted By: smartcat
Date Posted: 04/Sep/2007 at 1:28pm
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I see foreign dignitaries come to INFY campus in Bangalore and plant samplings. I always hope that they strike rich deposits of oil when they dig the ground! Yes, it makes sense for promoters to think of diversification because 99% of their wealth is in the company. They'd naturally want to diversify a bit. If the management's execution skills are good, what's good for promoters is good for shareholders too.
For me, it does. I just read that Mukesh Ambani takes home Rs. 25 crores as his salary. Now that will be my benchmark. I will only consider investment in companies that have a net profit of more than Rs. 25 crores :)
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Posted By: xbox
Date Posted: 04/Sep/2007 at 1:39pm
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Yes, it makes sense for promoters to think of diversification because 99% of their wealth is in the company. They'd naturally want to diversify a bit.
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Aab sahi hai!!!!. Diversification is like experimentation from promoter funded by shareholder's money.
Smartcat jee, I will give you one example...Flextronics (a electronic OEM) purchased Hughes software from News corp. Hughes soft was telecom software service/product company with much higher margin (as compared to flextronics) but investor forced flextronics to sell this unit and finally they sold to KKR.
*******This is just one example in many.
------------- Don't bet on pig after all bull & bear in circle. |
Posted By: smartcat
Date Posted: 04/Sep/2007 at 2:53pm
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When companies in USA diversify, they have no choice but to diversify into a business that is already saturated. They have to beat well-entrenched competitors who have been in that business for years.
Eg: If Walmart wants to start a bank, they have to compete with Citibank, Bank of America etc. And that is very difficult when USA economy is growing at 3% per annum. Most of Citibank's profits are coming from international markets anyway.
No wonder shareholders denounce diversification in USA. In India, the situation is different. When Indian companies diversify, they do it in sunrise industries like insurance, retail and telecom. They become the first-movers, and that's how Indian companies generate sharholder value while USA companies flounder. That's the difference.
Just because Peter Lynch doesn't like diversification, we shouldn't hold similar opinions even if we are fans of Lynch. The situation in India/China is different. That's why, in the investment world, there is no Bible. We need to pick and choose investment advice from the gurus.
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Posted By: kulman
Date Posted: 04/Sep/2007 at 3:01pm
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That's why, in the investment world, there is no Bible. We need to pick and choose investment advice from the gurus.
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Interesting and true.
On diversification.....if the management is able to maintain ROE & ROCE in newer ventures, it does make sense.
------------- Life can only be understood backwards—but it must be lived forwards |
Posted By: ndzapak
Date Posted: 04/Sep/2007 at 4:00pm
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I agree with Smartcatjee, case of Note that RIL is not moving from its core strength-taking advantage of integration & scale by its big bang execution. That’s why probably it never went in to software services. Infosys was never catering to the Indian Economy and thus like the US corporation it serves it will find a case for diversification difficult- may be it can start by taking care of Indian Corporations IT needs where the multinationals like IBM seems to be beating it presently. ------------- the Equitydesk is the best |
Posted By: India_Bull
Date Posted: 04/Sep/2007 at 4:03pm
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How about Parsvanath developer venturing into telecom business? ------------- India_Bull forever Bull ! www.kapilcomedynights.com |
Posted By: ndzapak
Date Posted: 04/Sep/2007 at 4:11pm
Its about size and resultant huge free cash flows. I doubt if Parsvnath fulfils that criteria. ------------- the Equitydesk is the best |
Posted By: xbox
Date Posted: 04/Sep/2007 at 5:36am
On diversification.....if the management is able to maintain ROE & ROCE in newer ventures, it does make sense.
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Kulman jee, yeh to wahi baat hui...ki mai to test paper tabhi likhho ga jab mere marks 75% aayenge.  ------------- Don't bet on pig after all bull & bear in circle. |
Posted By: shivkumar
Date Posted: 24/Nov/2007 at 3:08pm
Can vivek or anyone else comment on the cash flows of Century Enka and how the company is investing its profits? |
Posted By: Vivek Sukhani
Date Posted: 24/Nov/2007 at 5:23pm
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Cash flows of Century Enka is quite good. The company is genrating a money which is not getting reflected owing to very high depreciation. The company provides depreciation to the tune of nearly 25 rupees per share. Although the debt/equity is less than 1:1, yet the quantum of jump in debt last year has led to extremely high interest pay-out. I think if the company goes for a rights issue at a premium of 140 per share, and in the ratio of 1:2, the distortions can be easily rectified. That ways the company can raise 150 crores and repay a major chunk of the borrowings. The company has completed its capex, and the only thing which the CFO has to do is to repay the borrowings. It is generating 50 crores from depreciation which can be jollywell utilised to settle off borrowings. And if sound working capital management is done, a lot of unlocking can be done.
Also, we shall remember we are getting an A-group, dividend paying stock at about 25 p.c. discount to book, excluding this year's earnings. As an investor, I think this leaves quite a bit on the plate.....
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Posted By: Blues Soul
Date Posted: 24/Nov/2007 at 6:17pm
| Diversification is important for an organisation as a de-risking strategy. Hence, if large companies have deep pockets, they should diversify. Suppose there is a major US recession and IT outsourcing from the US gets severly reduced, what will happen to companies like Infosys, Satyam? If they were diversified, they would be in a better position to handle the adverse environmental conditions. Ford, Enron, IBM etc - single product / sector companies have faced problems whenever their sectors have faced a slowdown. In contrast, GE - a highly diversified conglomerate and Sony have weathered such stroms much better. |
Posted By: Vivek Sukhani
Date Posted: 24/Nov/2007 at 7:05pm
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You can indulge in anything you feel like, so long as it is your own money. Diversification is sometimes taken avail of, thanks to shareholders like me who start shouting for higher and still higher dividends at the AGM. So, they are forced to kill cash and hence forced to diversify |
Posted By: Blues Soul
Date Posted: 25/Nov/2007 at 7:02pm
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Boards that manage large public companies and decide in favour of diversification, are normally controlled by the promoters / largest group of shareholders. Hence, the "owner's" / shareholders' interest are adequately protected - at the same time, what is good for the company in the long term, principally drives such decisions.
Hence, such boards should not get swayed by vocal minority shareholders, who are interested in getting cash at the fastest. Tomorrow, when the company runs out of new cash since it did not diversify and mitigate its risks by broad-basing its revenue streams, the minority shareholder will sell the shares and again "invest" in other cash rich companies.
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Posted By: Ajith
Date Posted: 25/Nov/2007 at 10:20pm
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Smartcat made a good point some time back about there being more opportunities in India than in US and further even in their(Reliance,ITC,Tatas) diversifification strategy there is a gameplan -a unifying link with core strenths like distibution network,project execution skills ,abilty to attract talent etc etc.
But diversification is almost always only for such large companies able to withstand setbacks. ------------- Ajith |