Race for top-line growth. Is it always good? - The 5 Minute WrapUp by Equitymaster
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Race for top-line growth. Is it always good?

May 30, 2011

In this issue:
» Struggling to make ends meet, but poor man is not 'poor'
» Are Indian markets still robust?
» New rules would make it difficult for foreigners to sell out?
» FMCG players to cut back ad spend as input costs rise
» ...and more!
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00:00
 
The result season is almost drawing to a close. Most companies have reported a decent growth in their top-line or their revenues. Some have even managed to translate this growth into a healthy growth in their profits as well. However, some have succumbed to the pressures of higher input prices and higher interest costs. But most managements have guided for higher than average growth rates in their top lines for the coming quarters. It is this obsession with constant growth that becomes questionable.

Growth is undoubtedly an important factor for a company. However, this growth is dependent on a number of things. It depends on how fast the underlying markets can grow. It also depends on how quickly the company is able to grab the market share that it needs to meet its goals. In addition to this, growth is also a function of the ability of new products to replace the decline in revenues from the current offerings.

Clearly, not all of these variables are in complete control of the management. Which is why a large number of companies that commit ambitious top line growth guidance, are unable to meet the targets. Very often the management overestimates its organic growth. At times they do not take into account the fact that their competitors are catch up faster using the same growth strategies.

Therefore, it is true that some companies, at times, do exceed average industry/economic growth rates. However, doing this year after year becomes increasingly difficult for any company. And eventually just to meet these high growth targets, the company ends up taking bad business decisions. Silly or expensive acquisitions or diversification into unrelated businesses can do more harm to a business than one can imagine. So while a focus on growth is essential for any company, an over obsession with the same can lead to serious problems. These can eventually destroy the company's value and the shareholders' wealth.

Do you think that the management should focus more on short term high growth targets? Or should they focus on long-term sustainable growth? Share your comments with us or post your views on our facebook page.

01:10
 Chart of the day
 
High inflation is like a termite. It has been slowly and steadily eating away our incomes. It has gnawed into the economic growth by forcing the RBI to adopt monetary tightening measures. And guess what? It has also eaten away the returns from the stock markets. Today's chart of the day, presents the 'real' and the 'nominal' returns of the BSE Sensex. The nominal returns are the point to point annualized returns of the Sensex. On the other hand, the real returns refer to the point to point inflation adjusted returns. The gap between the two has been the worst in the latest fiscal i.e. FY11.

Data source: First Post

01:30
 
Do you have any clue about how poor are India's poor people? The sad reality of our country is that many who are not officially 'poor', meaning not below the poverty line, are indeed very poor. But according to the poverty line, they are not eligible for government assistance. The poverty line for India's cities is Rs 578 (US$ 12.75) per person per month. For rural India, the amount is lower at Rs 450 (US$ 9.93). Now compare this number with the World Bank's global poverty line which is US$ 38 (approx. Rs 1,710) per month. That's a whopping 3 times higher than India's poverty line.

It's clear that while just a minority ride India's economic boom, millions continue to remain poor, officially or unofficially.

02:15
 
'All is well' seems to be sentiment being echoed by experts looking at Indian markets from a long term perspective. The recent volatility seen in Indian markets may have unnerved many investors. But interestingly even the 'experts' quoted in business dailies seem to be voicing their optimism for the long term. Near terms concerns such as inflation and interest rates are certainly taking a toll on corporate margins. They may continue to do so for a few more quarters. Meanwhile even the FIIs remain confused about the US Fed interest rate policy. Hence the inflow of foreign money remains constrained. However, there is nothing to suggest that Indian corporates will not be able to move up the value chain and fetch higher margins going forward. Also better utilization of the additional capacities will ensure higher topline growth. All said, investor would do well to ignore the short term noise and keep an eye only on the long term trends and valuations.

02:50
 
It could be argued that God created all investors equal. However, it is the company promoters that started favouring one over the other. What else can explain the fact that while seeking investments, certain Indian companies extend special privileges to large foreign investors and private equity funds? One of the privileges has to do with providing the foreign partners with an easy exit arrangement. It gives the overseas investor the right to sell back his equity shares to the promoter of the Indian company.

This almost looks like some sort of a financial alchemy to us. Not only does it give the benefit of unlimited upside should the investment do well, it also provides for a safety on the downside when things go wrong. Not surprisingly, India's central bank has started objecting to such kind of an arrangement. It recently disapproved the sellback transaction by a foreign investor based on the grounds just discussed. Bankers though are not convinced and believe that the RBI's decision could hurt private equity investments into India. We are of the view that like on most occasions, the central bank could well be right on this one as well.

03:45
 
High input costs are taking its toll on FMCG (Fast Moving Consumer Goods) players. Since raw material prices have soared, many FMCG players have chosen to reduce their spend on advertisements in a bid to prevent margins from slipping. For instance, on an average ad spend for a big FMCG players averages to around 14-15% of sales. The fourth quarter, however, saw the spend reducing to just 12% of sales. Moreover, product categories which saw the highest rise in input costs were the ones which saw the advertising spends being slashed accordingly. Top players such as Hindustan Unilever, Dabur, Marico, GSK Consumer and the like have seen a drop in advertisement spend. But it seems more likely that this anomaly will not continue for long. Given that competition in the FMCG space is highly intense, players will have to spend on promoting their brands in order to hold on to market share and ensure high brand loyalty and recall. Hence, the move to reduce spend is being viewed as a short term phenomenon and once prices stabilize most FMCG companies will go back to spending on advertisement like they have until now.

04:30
 
In the meanwhile the Indian stock markets are seesawing near the dotted line after opening trade on a firm note. At the time of writing, the benchmark BSE Sensex was trading lower by 1 point (0.01%). Among the stocks that are pulling the indices lower are Reliance Infra and ONGC. There were red marks across all Asian stock markets as well. With the exception of Taiwan, Hong Kong and Singapore, most major Asian stock markets are trading in the negative territory.

04:55
 Today's investing mantra
"You get recessions, you have stock market declines. If you don't understand that's going to happen, then you're not ready, you won't do well in the markets" - Peter Lynch

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2 Responses to "Race for top-line growth. Is it always good?"

Sthnjaithaprag

May 30, 2011

As an ordinary humble aam aadmi of India, herewith my humble comments! : ""There is a famous adage:
"THE DRUM GETS ALL THE BEATINGS AND THE DRUMMER GETS ALL THE PAYMENTs "

It should not so happen that "after mobilising large quantum of resources from investors, the
Company/corporation channels them into productive uses and when once profits start flowing from the acitivity, they cannot turn round and say " look we have managed the activity and we should be entitled to a major(Lion's) share thereof ??
The analogy of gooseberry(AMALA In Hindi!!) comes to mind : When someone eats a raw gooseberry,it is bitter on the tongue,but if the person drinks water, the water itself tastes really SWEET isn't it !!( I mean the investors' money is bitter(like the GOOSEBERRY) at the first glance but to the Top echelons of the company/corporation, the sweetness on their tongues to revel on drinking the water(Profit??)their prerogative ?? I hasen to conclude !!

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Chandrashekhara S

May 30, 2011

Race for top line growth of 15 to 20% is always healthy. Any company should adopt principle of long term sustainable growth factors in all process, products & people.

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