What do Apple and Bajaj Auto have in common? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

What do Apple and Bajaj Auto have in common? 

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In this issue:
» India's trade balance still in the red
» Are we to see a repeat of the 2008-09 crisis?
» Fed could take 5-8 years to trim its bond portfolio
» Modi offers hope to the steel industry
» ...and more!

A hallmark of a strong company is one that has a strong competitive edge or moat, throws up a lot of cash from its operations, does not require too much debt and ultimately provides strong returns to shareholders. If one takes a look at the average trend over a longer time frame, such companies never fail to display consistent growth and are able to retain their edge even during adverse times.

But there are many companies who did not always get it right at the start and had to transform themselves to become the strong companies and market leaders they are today. Indeed, as Eddie Lampert mentions on his blog, such transformations occur when companies adapt their business model to changes in technology, competitive landscapes, government regulations, and basically find whole new ways of serving their customers.

In the global arena, an example that most stands out is Apple Inc. Today, the i-Pod, i-Pad and i-Phone have become the most sought after gadgets and have made Apple one of the most valuable companies in the world. But it was not always this way. If one looks at the history of Apple, its beginnings were on quite a shaky ground. Indeed, in the 1990s the company was called Apple Computers and in the period 1996-98, it saw a 40% drop in revenues. What more, in one year alone Apple lost as much as US$ 1 bn. Once Steve Jobs came back at the helm, the entire strategy of the company changed. For instance, it decided to focus less on computers and more on developing products and a platform called iTunes. The company was also renamed from Apple Computers to Apple Inc. The rest they say is history.

The Indian space also boasts of some notable examples and one that comes to mind is the transformation of Bajaj Auto. There was a time when Bajaj Auto was the undisputed leader in the two wheeler space. But then came the erstwhile Hero Honda. The latter through the launch of a range of motorcycles captured a dominant share of the Indian two wheeler market and thereby relegated Bajaj Auto into playing the second fiddle. Bajaj Auto had no choice but to go back to the drawing board and re-think its strategy.

The results are there for all to see. Today, Bajaj Auto is still the second largest player in the two wheeler space. But gone is its lackadaisical approach towards investing in R&D and apathy towards coming out with cutting edge products. With the new sets of beliefs and values that Rajiv Bajaj has instilled into the company, Bajaj Auto in no time came out with its most successful launches 'Discover' and 'Pulsar'. Not only were these motorcycles the results of Bajaj Auto's own R&D set up, but they also helped in establishing the company as a market leader in the premium motorcycles space. With the management quite clear that the focus will be on profitability and brand creation and not on chasing market share and revenues, we believe that the company has set the right path for a strong business going forward.

What is also clear from both these examples is the strength and the ability of the management to think out of the box and respond to the changing environment. In Apple Inc's case it was Steve Jobs and for Bajaj Auto, it was Rajiv Bajaj who transformed the fortunes of the company. Investors who can identify such companies in the early stages of their transformation, are probably staring at a massive wealth creating opportunity.

Do you think there are more examples of how companies have transformed themselves into stronger companies that we see today? Can you name such companies either globally or in India? Let us know in the Equitymaster Club or share your comments below.

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01:36  Chart of the day
If one were to look at the trade balance data for the last 12 months, India still continues to languish in the red. Despite placing curbs on gold imports, the trade balance hasn't really improved and the reason for this can be attributed to weaker exports. Indeed, given the global economic slowdown, exports have not really set the pulse racing and this has had its impact on India's overall trade balance as well. Because India still imports a significant portion of oil that it consumes, there will always be the pressure of oil imports on the overall import bill. That is why it is necessary that various steps are taken so that exports become more competitive and ease the pressure on the overall trade balance.

India still needs to improve its trade balance

Editors Note: At 10 AM tomorrow, we are bringing you a special Sunday Edition of The 5 Minute WrapUp where wealth coach Mark Ford, the man behind the globally successful Wealth Builders Club, will share his best wealth-building ideas with you... Do not miss this for anything!

The doomsayer seems to be back in full form. We are referring to none other than Marc Faber, the author of The Gloom, Boom & Doom report. Faber has once again pointed out at debt as the crux of the problem. The legendary investor has made some dire predictions about how both government and consumer debt could impact the US economy. As per Moneynews, Faber sees financial crisis of the proportions seen in 2008 and 2009 coming towards us. And besides debt, geopolitical problems will accentuate the crisis to global levels. Citing the turmoil in Ukraine and the South China Sea, Faber has reasoned that investors have a lot to worry about. And he has recommended that investors hold on to some cash for the next six months. While we would certainly take his advice, we believe a small proportion of gold could also help investors in such risky times.

What do you think should be the standard reaction of a person or an organisation when it finds itself in a hole? Of course, the concerned entity should stop digging, isn't it? So far so good. But then what? Well, then an effort has to be made to climb out of the hole as soon as possible. The reason we are using these metaphors is to highlight the current predicament of the US Fed. As is well known, in order to pursue its quantitative easing program, the US central bank had been buying bonds by the billions. However, with its pace now slowing down and with expectations of it eventually coming to a halt, an even bigger dilemma seems to await the Fed. The dilemma of how and when to shrink its gigantic bond portfolio.

In what could be termed as a first ever explicit time frame, Janet Yellen, the current Fed Chairperson, opined that the process of shrinking its bond portfolio to meaningful levels could take as much as 5-8 years. In other words, the whole climbing out of the hole process will take a pretty long time to culminate. However, we won't be surprised if there's some more digging before that as the US economy doesn't look like it's out of the woods yet. And who knows, should there be some unintended consequences, the whole process of coming out of the hole would need a massive rescue operation in place of one step at a time approach.

The hope of a new business friendly Government seems to have done wonders for the market sentiments. And among others, one industry that would be fervently praying for Mr. Modi's victory is steel industry. Lack of environmental clearances, land acquisition issues and shortage of the key raw material - iron ore, have limited the potential of steel makers in India since long. The ban on illegal mining few years back has already been a huge blow to the steel makers. What is even more ironical is that we are exporting iron ore and importing steel.

So instead of using natural resources internally and promoting value addition, India is exporting the raw iron and importing the finished steel. This has affected steel firms that are running below capacity. Not to mention the resulting impact on the jobs. This indeed is a no win situation for all.

However, recent promises by Mr. Modi to limit the exports of iron ore and to offer incentives to steel makers have given new hope to the industry. Some are of the view that this will impact forex earned to pay for huge oil imports. However, we don't think there is any weight in the argument. This is because a better way to earn forex will be by exporting the finished steel than the iron ore.

Equity markets across the world delivered a mixed performance this week. Barring India, most of the Asian indices witnessed selling pressures; thanks to the tense situations in Ukraine making investors adopt cautious stance. Coming to U.S. markets, the jobless claims data suggested that the labor market is improving. That helped lift the U.S. broader indices. Barring U.K., the European indices too remained buoyant. The European Central Bank has assured to act to stem slowing inflation and help boost the eurozone economy. While Asian indices remained weak, the softening of China inflation data did help in restricting the losses. Back home in India, ahead of the election results outcome next Friday, the benchmark indices scaled up to new all-time highs.

Going ahead, the tense situations in Ukraine will continue to decide the fate of emerging markets. That said, the positive comments coming from both the central banks of U.S. and Eurozone will help boost sentiments in western markets and the European region. The euphoria in the Indian markets will sustain with the anticipation of positive outcome of the general elections. However, the possibility of volatility in Indian indices cannot be ruled out. However, investors should invest in stocks with strong fundamentals for the long term keeping aside these short term considerations.

Performance during the week ended May 9th, 2014
Source: Yahoo Finance, Kitco

04:56  Weekend investing mantra
"Owning stocks is like having children; don't get involved with more than you can handle" - Peter Lynch
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1 Responses to "What do Apple and Bajaj Auto have in common?"


May 16, 2014

Comparing Bajaj to Jobs. You must be out of your mind...
or you just are in a blind spot as far as Apple and Jobs go.
You do not know the legacy of Jobs...
How can we trust your opinions when they are so blatantly naive?

Equitymaster requests your view! Post a comment on "What do Apple and Bajaj Auto have in common?". Click here!


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