Which Page Industries to Buy? Today's or Tomorrow's?

Mar 10, 2016

In this issue:
» Are Capital Goods stocks making a comeback?
» Is India Inc really reducing its debt load?
» ...and more!
Rahul Shah, Co-Head of Research

Arijit Singh's meteoric rise fascinates me.

There's hardly a Bollywood album these days that does not have a song by him.

Had you handed a list of most promising singers to the biggest experts in industry and music five years back, would they have predicted Arijit Singh's current popularity?

Many experts claim the singer has such a great voice that it would have been easy to predict his success.

Renowned sociologist Duncan Watts does not approve of a claim of this kind.

As much as we would like to believe it, we do not make our decisions independently. We are social animals. And it's quite possible we choose something because everyone else is choosing it. Besides, with so much to choose from, we are never quite sure what we want.

When we like what other people like, a huge difference in popularity can arise. If one thing is more popular than another at just the right time, small differences in popularity will keep adding up. And this could snowball into something very big over time. Competitors that seemed neck-and-neck will soon see a huge gap opening between them. Indeed, Facebook's disproportionate gains in market share and Orkut's decline would have been difficult to tell at the time of their launches.

There's a word for this: cumulative advantage. The uneven popularity of artists across mediums like music, literature, art, etc could be due to cumulative advantage. Arijit Singh being a case in point. I am not saying the guy is not talented. But I really think the small edge he had in popularity kept getting bigger and bigger with time.

Does this have implications for the way we invest? Of course it does. Companies are subject to cumulative advantage. Two companies selling the same products can start at a similar level. But even a small difference in the market share of their products or services and the gap widens over time.

Therefore, no matter how much someone boasts about his ability to find the next Page Industries or Infosys, it remains a difficult exercise. There are too many factors, both internal as well as external, that are at play. We can never be sure when and if cumulative advantage will kick in.

We are much better off investing in companies already benefiting from cumulative advantage and where we believe their advantage will persist long term.

Put differently, don't go looking for the next Page Industries or the next Infosys. Rather, check whether the advantages these companies have will continue for many years in the future. Then see if these stocks are available at a price where good long-term returns can be provided.

This is what our ValuePro editor Radhika has been doing with a good degree of success. She and her team do not believe in trying to find the next Page Industries or Nestle.

Instead, they check the durability of the advantage of these very companies and recommend them to subscribers if they determine the durability is intact and the price is attractive. The strategy produces results like 180%, 156%, and 154% in three to four years.

Buy a stock that already has some cumulative advantage going for it. Do not bet on someone building it from scratch. History proves the former is a better approach for long-term investing success.

Do you think it makes sense to buy a proven, fundamentally strong company or a promising new company? Let us know your comments or share your views in the Equitymaster Club.

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3.10 Chart of the day

The fourth quarter of the fiscal year is typically a strong one for capital goods companies. Many of their clients rush to meet their ordering targets for the year, perking up inflows. But reports in business dailies suggest that this time around this may not be the case. 4QFY16 is seeing muted order inflows. Orders in this space are few, and big order are hard to come by.

Nonetheless, as today's chart of the day shows, may biggies from the capital goods space have seen their stocks move up quite sharply in the last ten days or so. In this short span of time since the budget, many of these have gone up by 15% to 18%.

Many capital goods biggies zoom up since Budget

The current scenario in the capital goods sector looks grim, no doubt. In such a scenario, such sharp moves in stock prices are perhaps indicative of the fact that it always makes sense to look beyond the short term noise and pick up fundamentally strong companies in the space whenever available at beaten down valuations.


Highly leveraged Indian companies may say that they're busy reducing their debt load. But reports indicate that this might be mere lip service, with little by way of actual action.

One big avenue companies claim to be using to pay off debt is selling some of their assets. However, a Livemint report is quick to point out that voluntary asset sales are subject to arduous hurdles and delays. For example, debt burdened Jaiprakash Associates may be counting on Indian legislature passing a bill by next year allowing companies to pass on control of captive coal mines to new owners. It also cites how Reliance Communications' plan to unload its wireless tower business is stuck in valuation negotiations. Many other indebted firms like Reliance Infrastructure and GVK Power and Infra also say they're trying hard to sell assets.

But actual progress remains slow to come by. In the meanwhile, a Credit Suisse note points out that the combined debt of 17 most highly leveraged Indian companies stands at over 8 times EBIDTA. A year earlier, it was 5.5 times. For Jaiprakash Associates, it's almost 80 times.

Until Indian banks crack the whip on such voluntary asset sales by big borrowers, movement on this front may remain slow. A discomforting state of affairs indeed.


The Indian stock markets were trading weak today on the back of sustained selling activity across most index heavyweights. At the time of writing, the BSE-Sensex was trading down by around 275 points. Losses were largely seen in IT and capital goods stocks.

4:50 Today's Investment mantra

"The key to investing is not assessing how much an industry is going to affect society, or how much it will grow, but rather determining the competitive advantage of any given company and, above all, the durability of that advantage." - Warren Buffett

This edition of The 5 Minute WrapUp is authored by Rahul Shah (Research Analyst).

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