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The Story of Equitymaster...And The Time It Got Nearly Killed!

Apr 18, 2016

In this issue:
» The evolution of the Indian capital markets in the 1990s
» The time Equitymaster got nearly killed...
» Ajit Dayal's message for investors and vision 2036 for Equitymaster
» Has Vishal Sikka transformed Infy's fate?
» ...and more!
0:00
Ankit Shah, Research analyst

We are in celebratory mood as we commemorate Equitymaster's 20th Anniversary this Friday. Many readers and subscribers have been writing to us...telling us about their experiences with Equitymaster.

There is no greater reward than a satisfied customer. It is indeed cheering to know that we made a meaningful difference in your investing journey.

But this investing revolution called Equitymaster wouldn't have existed if not for the vision, passion, and courage of its co-founder, Ajit Dayal.

We recently sat down with Ajit and asked him about the evolution of the Indian financial markets in the 90s and the birth of Equitymaster...

  • Ajit, I want to know about the story of Equitymaster...how it all started. But before that, I would like to have your perspective about some major events that shaped the Indian stock markets.
  • 1992 - Harshad Mehta Scam...

    There was no one to question the valuations; there was no one to give a different view; there was no way to reach out to a large audience with a different view or with questions. Today, even though we have a valuation for Flipkart and other such Unicorn, there are ways to get information that questions these valuations. One may still wish to buy Flipkart if one chooses, but there is a different opinion that one can read about first.
  • 1994 - NSE commences operations...

    The BSE had a sorry history of an opaque system that was stacked against the clients and favoured all brokers and favoured a select few large brokers even more. Getting a phone line through the Indian Telephone Company (later called MTNL and VSNL) was a skill set. But, if you did get that phone, you had an advantage and could do a "line business" between Bombay and Calcutta and make more money than other brokers. The phone connection allowed you a simple arbitrage which, for example, allowed you to buy low in Calcutta and sell the same stock higher in Bombay. Today, though, the NSE has been in the public glare due to allegations that they have favoured a few traders by giving them access to the market a few milliseconds earlier than everyone else. If this is true then it is ironic: the NSE was created to beat the crooks at the BSE and now one can argue the NSE is doing what the BSE did! Technology changed the methodology of the crookedness: as I said, if it is true.
  • 1996 - India adopted the Demat System for electronic storing (Depository Act of 1996)

    Great move. When foreign investors first bought shares in India in 1992/1994, it could take 18 months to get delivery of the shares they purchased because the shares had to be collected from thousands of individual investors by the buying broker who then submitted it to the company for verification of the signatures. If one signature out of thousands did not tally, the entire trade was a 'failed trade'! So, yes, depositories were revolutionary. But, as the recent incidents at Sharepro and others indicate, crooks will find ways to beat any system!
  • April 1996 - S&P CNX Nifty index launched...

    Indian indices are terribly structured and the Nifty is no exception! The name Nifty also suggests a 'bubble' and maybe those who gave it that name did not realise that the phrase Nifty Fifty suggests an overvalued, bubble stock market! I still use the BSE-30 Index - it has history, though it is also a badly constructed Index. But I think the name Sensex is demeaning and the new name is the S&P BSE - 30 Index which is too long...BSE-30 Index is good for me.
  • 22 April 1996 - Equitymaster is launched

    Equitymaster was not directly connected to any of these events. However, we were part of the evolution of the capital markets. We always wished to be the thoughtful, sensible unemotional view on what was happening in the Indian economy, the global economy, or company earnings and its eventual impact on share prices. We were trying to protect the retail Indian investor from their own emotions of fear and greed and from a well-trained army of financial foot soldiers who were out to grab their wallets. We believed then that a better informed investor, a well-educated investor, can make sensible returns on their investments in stock markets. We still believe that but with one modification. There is a saying that you can lead a horse to water, but you cannot force it to drink. In a similar way, I believe that there are many people out there who wish to stay thirsty: they have no desire to learn and understand. They work hard, they save money, then - at some dinner party - they are sold some story and they give away their savings to a smooth-talking financial intermediary. And their wallet is gone. In a bad world, Equitymaster is an open oasis: those who wish to seek shelter and shade are welcome.
  • How was the launch of Equitymaster perceived? There were just about 10,000 internet connections! Did people doubt the idea...mock the idea? What gave you the conviction to believe that this was an idea whose time had come...and that it could be transformed into a financially self-sustainable idea?

  • Equitymaster's launch did have a wow impact when we showed it to people. But no one understood where it could lead to. No one understood the power of the internet. There were 10,000 internet connections in all of India...the highest band width speed was 56 kbps...most users had 28 kbps...VSNL and MTNL charged a lot of money for bad quality connections. The internet was seen as something for the rich or for big companies. There was no e-broking then. There were no smart phones. We knew that Bharti had a license and a JV partner with STET of Italy to build a mobile network but no one knew where this would end. The concept of the internet fascinated us. The ability to reach out to thousands - now millions. That was a game-changer.
  • But every idea needs money to survive and we kept some aside for the growth of the business. We persevered.
  • Then we had a terrible experience with HDFC Bank. Their stepping out of from supporting our e-broking venture nearly killed us. We had to shut down the e-broking engine and lay-off people we had hired for that. That was the first time we have ever laid off people. The dream that Equitymaster could reach out to millions of retail investors was killed by this shocking action on the part of HDFC Bank. But that is life. In the 1980's a gentleman from South Africa told me that when you shake someone's hand and you get your hand back, you must count your fingers. We nearly lost our hand! But every door that shuts leads to some other opening. And we met Bill Bonner and Agora: the rest, as they say, is history...today, we stand as the most respected source of independent financial information.
  • What is your message for small retail investors or large HNIs?

    Be vigilant, be careful, be sensible. Regulators cannot protect you from your own greed. The financial industry is inherently crooked: it works for its own enhancement of wealth, not for yours.
  • What is your vision for Equitymaster 2036?

    That all of you will continue to persevere and build something of great value for your growing clients. Your focus on doing the right thing for your customer must not change. The culture of the organization - and the reason for your existence - must never be diluted. I may not be alive then but, wherever I am, I would be ashamed if Equitymaster had a market cap of HDFC Bank without the values of the Equitymaster of today.

That was indeed a bold, inspiring account of Equitymaster's genesis directly from Ajit. I am proud to be part of an organisation whose core pillars are honesty, transparency, and integrity.

Albert Einstein best sums up the core ideology of our organisation: 'Try not to become a person of success, but rather try to become a person of value.'


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3.00

You already know that on 22 April 2016, we will be celebrating our 20th anniversary. In case you wish to share your experience with Equitymaster or read what some of our valued long time subscribers have to say about us, please do so here.

Here's what Sanjay Goel, an Equitymaster Reserve Member and a subscriber since 2009 from Jaipur, has to say about his experience with Equitymaster:

  • Dear Equitymaster Team,
  • Your professionalism in equity recommendation is beyond imagination!! In no profession in India, have I found people working so honestly! Keep this perception spotless. At no time in future should any of your subscribers feel cheated, come what may. An impeccable reputation is what you have earned and maintained so far.
  • I am your Equitymaster Reserve lifetime member for almost 3 years and have been very happy with all your recommendations.
  • We won't have to worry for our retired life any more. With our learning about equity market and faith in your scrip selection, we are sure to have a tension free time even after retiring from the work.
  • Keep introducing your team to members in Tier II cities as well. We must celebrate your 20 years' of success together!!
  • Wish you many many more years of success in all your ventures. Do let us know as to how we can pay back to TEAM EQUITYMASTER!! You all deserve a big round of applause!!

3.30 Chart of the day

The result season kicked off on Friday as India's second largest software firm Infosys announced its March quarter and full year results. Investors have cheered the results...the company has surpassed the financial year 2015-16 growth guidance. What more, the company's latest guidance for 2016-17 beats Nasscom's industry growth forecast! So, it's not surprising that the stock price of Infosys was up 6.5% at the time of writing.

After going through some testing times some years ago, Infosys appears to be back in top gear.

  • Has Infy's fate gone through a transformation after Vishal Sikka took over as CEO and Managing Director in August 2014? Do you think the stock's re-rating is justified?

I posed these questions to our IT analyst, and here is the response:

  • Yes, the re-rating is justified. When Sikka took over on 1st August 2014, there was a lot of uncertainty around the business. Many people in senior management roles did not know what the long-term strategy was. Many project managers felt stuck in their jobs. The company had lost the vibrant culture of its past. This was reflected in the deal momentum to an extent. There was a very real concern that Infosys was not able to communicate the value that it could deliver to its clients.
  • Things have changed significantly since then. The company has a clear (but ambitious) plan for 2020. The rough targets are: Revenues of US$ 20 billion, operating (i.e. EBIT) margin of 30% and revenue/employee of US$ 80,000.
  • To make this a reality, Sikka has appointed the right people in the right positions. He himself decided to reside in Palo Alto instead of Bengaluru, to be closer to Silicon Valley clients. He also decided to be personally involved in all deals of value US$ 50 million and above, as well as in all acquisitions.
  • These decisions have proved crucial. The deal momentum and deal sizes have picked up, as have repeat orders from the company's top clients. The recent acquisitions (Panaya and Skava) have helped Infosys differentiate its services from competitors.
  • Also, the major long-term drivers of profitability, i.e. automation and innovation, are slowly taking root in the company's culture. These are early days...the targets seem far away and are difficult to achieve. But there is no doubt that Infosys under Vishal Sikka, is slowly but surely moving in the right direction.

That's indeed insightful. In fact, we have put up our latest analysis and view on Infosys that answers questions like...

  • How did Infosys perform during the March quarter and the full year?
  • How did it do in terms of business verticals, service lines, and geographies?
  • How does the global IT scenario appear?
  • Which business strategies have been rewarding for Infosys?
  • What is the company doing to boost employee morale and innovation?
  • Finally, is this a good time to invest in Infosys? What should you do?
Has Vishal Sikka's Leadership Transformed Infy's Fate?

Do you think Vishal Sikka's leadership has put Infosys back to industry-leading growth? Let us know your comments or share your views in the Equitymaster Club.

4.30

Enthused by the positive results and growth guidance by Infosys, Indians markets are trending higher since the start of the trading session. The BSE Sensex was trading higher by 165 points (0.65%) at the time of writing. Information technology sector stocks were the leading gainers. Mid cap and small cap indices were also trading in positive territory, each higher by about 1%.

4:50 Today's investing Mantra

"Somebody once said that in looking for people to hire, you look for three qualities: integrity, intelligence, and energy. And if you don't have the first, the other two will kill you." - Warren Buffett

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

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DISCLOSURES UNDER SEBI (RESEARCH ANALYSTS) REGULATIONS, 2014
INTRODUCTION:
Equitymaster Agora Research Private Limited (hereinafter referred to as "Equitymaster"/"Company") was incorporated on October 25, 2007. Equitymaster is a joint venture between Quantum Information Services Private Limited (QIS) and Agora group. Equitymaster is a SEBI registered Research Analyst under the SEBI (Research Analysts) Regulations, 2014 with registration number INH000000537.

BUSINESS ACTIVITY:
An independent research initiative, Equitymaster is committed to providing honest and unbiased views, opinions and recommendations on various investment opportunities across asset classes.

DISCIPLINARY HISTORY:
There are no outstanding litigations against the Company, it subsidiaries and its Directors.

GENERAL TERMS AND CONDITIONS FOR RESEARCH REPORT:
For the terms and conditions for research reports click here.

DETAILS OF ASSOCIATES:
Details of Associates are available here.

DISCLOSURE WITH REGARDS TO OWNERSHIP AND MATERIAL CONFLICTS OF INTEREST:
  1. 'subject company' is a company on which a buy/sell/hold view or target price is given/changed in this Research Report
  2. Neither Equitymaster, it's Associates, Research Analyst or his/her relative have any financial interest in the subject company.
  3. Neither Equitymaster, it's Associates, Research Analyst or his/her relative have actual/beneficial ownership of one percent or more securities of the subject company at the end of the month immediately preceding the date of publication of the research report.
  4. Neither Equitymaster, it's Associates, Research Analyst or his/her relative have any other material conflict of interest at the time of publication of the research report.
DISCLOSURE WITH REGARDS TO RECEIPT OF COMPENSATION:
  1. Neither Equitymaster nor it's Associates have received any compensation from the subject company in the past twelve months.
  2. Neither Equitymaster nor it's Associates have managed or co-managed public offering of securities for the subject company in the past twelve months.
  3. Neither Equitymaster nor it's Associates have received any compensation for investment banking or merchant banking or brokerage services from the subject company in the past twelve months.
  4. Neither Equitymaster nor it's Associates have received any compensation for products or services other than investment banking or merchant banking or brokerage services from the subject company in the past twelve months.
  5. Neither Equitymaster nor it's Associates have received any compensation or other benefits from the subject company or third party in connection with the research report.
GENERAL DISCLOSURES:
  1. The Research Analyst has not served as an officer, director or employee of the subject company.
  2. Equitymaster or the Research Analyst has not been engaged in market making activity for the subject company.
Definitions of Terms Used:
  1. Buy recommendation: This means that the investor could consider buying the concerned stock at current market price keeping in mind the tenure and objective of the recommendation service.
  2. Hold recommendation: This means that the investor could consider holding on to the shares of the company until further update and not buy more of the stock at current market price.
  3. Buy at lower price: This means that the investor should wait for some correction in the market price so that the stock can be bought at more attractive valuations keeping in mind the tenure and the objective of the service.
  4. Sell recommendation: This means that the investor could consider selling the stock at current market price keeping in mind the objective of the recommendation service.
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