What made Idea Cellular investors' delight over past decade... - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

What made Idea Cellular investors' delight over past decade... 

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In this issue:
» Will dilution of government stake revive PSU banks?
» Is Infosys' management confused?
» The secret to China's economic growth revealed!
» PIMCO: Bull markets will end in 3-5 years
» ...and more!

Surviving in a fiercely competitive telecom industry mired by corruption and crony capitalism is no mean feat. Not withering to the financial muscle of the Bharti's, the Tata's and the Vodafone's of the telecom world, Idea Cellular managed to do what even a foreign giant like NTT DoCoMo couldn't. Survive. In fact, survival would be an understatement. It has not only survived but also thrived in an industry where more than you it is the policymakers who decide the future of your company.

Let us rewind and see how Idea stood this test of competition and gave biggies a run for their money. When you are a small fish in a big pond, which Idea was about a decade back, management competence could make a huge difference. And this is where Idea scored. Being a late entrant into telecom space it knew the only scope to expand was to exploit India's rural demographic dividend. But this was risky as average revenue per user in rural areas could be low.

However, the plan paid off as Idea Cellular was able to capitalize on subsequent rural boom eschewing urban competition. While the bigger players were busy fighting urban war, Idea was building a healthy rural subscriber base at a snail's pace. And this helped as rural disposable incomes rose. Being averse to debt was another advantage in its kitty. Over the last decade, while Idea's debt may have grown, the stress on its balance sheet has been much low when compared to others.

In short, Idea's success highlights two very important factors which every investor should pay attention to. It pertains to management quality and balance sheet strength. Companies with strong management capability and low leverage can withstand the vagaries of competition and to an extent bureaucracy too as was the case with Idea.

There are many such companies in the mid cap space that can become the 'Idea Cellular' of tomorrow. And it is not that investors should have eagle eyes to identify the same. Just focus on the business model and management capability. These two things go a long way in understanding any company.

Which factors do you look at while buying a company? Does management quality and debt analysis figure in your list? Let us know in the Equitymaster Club or share your comments below.

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01:36  Chart of the day
Equities have sparked more attention than other asset classes owing to the former's outperformance in the recent periods. Thanks to the sticky inflation, the real return on asset classes like bank deposits are still lying in the negative territory. Sizeable money has flowed into gold and real estate. And therefore lucrative asset classes like gold, real estate, equities have become the flavor of the season. Seems that the Indian household is actively rebalancing its savings portfolio to seek inflation-adjusted returns!. That's because household financial savings as a percentage of GDP has been steadily falling till 2012.

The chart data sourced from Livemint shows that household financial savings fell from higher levels of 12% of GDP in FY08 to 8% in FY12. The ratio has hardly improved since FY12. Slowing economy and high inflation has played a major spoilsport. And therefore households were compelled to take resort to assets other than financial assets to protect their wealth. But not all the money that flow into various asset classes trickle down into the formal financial sector. Significant fall in savings can stall economic recovery. Hence the recent trend in household savings is definitely a matter of concern. Reason why the new government should try to address the inflation problem.

Have financial savings become immaterial?

Shifts and paradigm changes are inevitable across all industries. And if the industry under consideration is the IT industry, then it better be sooner than later. Therefore we weren't surprised when an executive from the technological research firm Gartner opined recently that the Indian IT services firm cannot be talked about as one single unit anymore. The time has come when we'll have to talk about individual companies and talk about their fortunes in terms of how they are evolving. Therefore, the need of the hour is to have a proper management team in place so that the strategy for the next phase of growth can be worked out. In that sense, the task is really cut out for homegrown IT giant Infosys. It seems to be really struggling to find the right combination for the top job. Of course NR Narayana Murthy's return has indeed been of great help. But the company is still quite some distance behind other IT giants like TCS when it comes to pursuing new growth areas. And investors are already getting nervous going by the recent stock downgrades. Therefore, the faster the company gets its act together, the better it will be for all the stake holders we reckon.

It is said that too many cooks spoil the broth. Unfortunately the adage applies perfectly to our public sector banks. To say that the banks were mismanaged would be an understatement. In fact despite constituting nearly 60% of the banking sector in India, the PSU behemoths hardly have any autonomous decision making. More often than not the government has treated them as cash coffers. The lending rate decisions and priority sector loans are predominantly influenced by political agenda. Hence despite being regulated by the RBI, the PSU banks have to abide by the mandate of the Finance Ministry. To add to their woes, the top management of these banks are selected and transferred as per the government's will. The result being that there is very little continuity and long term planning. While the government continues to draw dollops of dividend from these banks, the interests of depositors and minority share holders are heavily compromised .

As per Firstbiz, the latest report by an RBI panel has come as a huge relief to the PSU banks. The panel headed by none other than PJ Nayak suggests that the government should let go of its majority ownership of these banks. Reducing stake in the banks to below 50% would be a beneficial trade-off for both the government and the banks. The government would continue to be the dominant shareholder and the banks will be in a position to compete more successfully. Moreover the government will not be under the obligation to recapitalize the banks every now and then. We believe that the suggestion if implemented with the caveat of no government interference in day-today activities will do a lot of good to PSU banks. In fact investors can then also expect PSU banks to fetch valuations closer to their private sector peers over time.

If you thought that the US, Europe and Japan were the only ones printing money by the truckload, you are wrong. China seems to be at it too. Indeed, China's economic growth has largely been driven by investment. This means that it requires huge injections of capital. And how does it get this capital? By printing more of its currency Yuan.

As reported in an article in the Economic Times, at the end of 2013, the excess of money supply surged to around US$ 17.8 trillion. This is 4 times more than what it was 10 years earlier. This is proof that the government is printing money faster than the economy expanding. But typically, when the rate of money printing increases, inflation begins to rear its ugly head. But this does not seem to be happening in China. China's CPI in the last 2 years has oscillated in the range of 2-3% on an average. This is hardly much given the large scale money printing that the government has resorted to. One of the reasons cited for this anomaly is corruption by officials. Most of these money is trough bribes and kickbacks. Since officials do not want to spend the same or deposit it in banks, that money does not become part of the system chasing good and services. And so price inflation to that extent is curtailed. But that is hardly something the government can be proud of. And so it will have to find a more meaningful solution to bolster economic growth so that inflation is kept under check and its currency does not lose too much value.

The global financial crisis of 2008 will be remembered not just for what it did to the economy, but also for adding new jargons and concepts. Sometime back, the world's largest bond fund PIMCO had popularized the term 'New Normal'. The term signalled a period of below average return post the crisis. However, PIMCO now believes that the economy is in a natural transition phase from 'New Normal' to 'New Neutral'. The latter is the term coined to express PIMCO's outlook for next three to five years. PIMCO believes that the so called neutral rate that neither promotes expansion nor slows it will be at around 2%, or 0% when adjusted for inflation. This compares to a number of 4% as per the belief of Federal market participants. The report states that financial assets may not be as bullish as people are suggesting.

As per the report, the low central bank interest rates suggest an end to bull markets. At the same time, it does not imply that the market will display bearish sentiments. The report further suggests that US economy despite energy revolution will not be able to grow. For debt ridden Eurozone, PIMCO expects lower interest rates and further monetary easing programme.

Whether the new neutral holds true for next three to five is something that time will tell. But it certainly does not leave much hope for making good returns from the markets.

After rallying for the past two days, the Indian stock markets have entered the correction phase and were trading weak. At the time of writing, the benchmark BSE-Sensex was down by 81 points (-0.3%). Sectoral indices were trading mixed with realty and metal stocks leading the gainers. However, oil & gas and capital goods stocks were trading in the red. Majority of the Asian stock markets were trading positive with Hong Kong and Singapore being among major gainers. But the Chinese and Japanese indices were trading down. Most of the European markets have opened the day on a negative note.

04:50  Today's investing mantra
"Wall Street is the only place that people ride to in a Rolls-Royce to get advice from those who take the subway" - Warren Buffet
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2 Responses to "What made Idea Cellular investors' delight over past decade..."


May 17, 2014

thank you very much for the news letters you are sending, the % minute wrap up is interesting and it deserves my attention.



May 14, 2014

I haven't seen such a worst stock.Everybody is praising it. The stock is always in a bearish mood.One analyst priced its balance sheet extremely neat and nobody mention about the company's huge debt.Cost of this scrip was Rs. 188/- in 2013 October and today the CMP is 139/-. At the same period the cost of Aurobido Pharma was Rs.181/-, now Auro is Rs. 615/-.People are investing money for good returns, not to get "MOKSHA". A gang of manipulators are there to do good PR work for this scrip.Never buy it for trading or invest in it.

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