|»5 Minute Wrap Up by Equitymaster|
On This Day - 30 MAY 2011
Race for top-line growth. Is it always good?
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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.
It's clear that while just a minority ride India's economic boom, millions continue to remain poor, officially or unofficially.
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.
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