These sectors doubled shareholder wealth in 4 yrs - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

These sectors doubled shareholder wealth in 4 yrs 

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In this issue:
» Most of diesel subsidies goes to truckers not farmers
» Subsidies will bleed us to death: ONGC
» Plagued by financial woes but aviation essential for economic growth
» US on the path to reinvent itself
» ...and more!

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Stock investing is all about identifying and adopting a goal and sticking to it with discipline. The goal could be anything from earning x% returns to holding the stock for your period. The important thing is to identify what works best and stick to it without compromise. But an important question that any investor would have in mind is which investment philosophy works best?

An article carried by Business Standard appears to be addressing this question. It has identified 8 sectors where investors have been able to double their money. But investors have been able to do so only by holding on to the stocks over a period of 4 years. The sectors include tobacco, FMCG, tyres, auto, pharma, auto ancillaries, banks and fertilizers. These sectors have seen a robust financial performance even during the not so good times. And this performance has translated to healthy gains for investors who remained committed to them.

The driving force behind the performance of these sectors was healthy domestic consumption. With rising income levels particularly in the rural sector, consumption has been growing in recent times. As a result, these sectors have seen their top lines outperform the overall economic growth. At the same time the ability to pass on increases in costs, keeping their administrative costs under control and maintaining their brands has helped these companies in growing their bottom lines as well.

On the other hand the "in the news" sectors like infrastructure, construction, sugar, etc have actually doled out negative returns for the investors during the same period. Though they have seen a growth on the financial front, but neither has the performance been outstanding. Nor have they helped investors in any way. With compounded annual returns ranging between -1% to -33% over the past 4 years, these sectors have actually destroyed shareholder wealth.

This leads to one key learning for investors. Something we always keep talking about. That is that in order to earn healthy returns over long term, it is essential to identify businesses with strong fundamentals. And having identified these it is necessary to hold on to them for a long time period. Investing in hot news items rather than the stronger business fundamentals can only lead to one thing. And that is losses.

Which sectors do you think are capable of delivering superior investor returns over the long term? You can also share your comments with us or post your views on our Facebook page / Google+ page.

01:25  Chart of the day
The Government has drawn a lot of flak recently for its inertia with regards to fuel price reforms. As per a study done by leading financial daily, subsidies doled out on diesel are finding their way mainly to transportation sector and that too in private hands. Today's chart shows that transport sector accounts for nearly 67% of the subsidy benefits. Prominently, the truckers and cars account for nearly 45% of the total subsidy bill. On the other hand, the agriculture sector, on which the Government rests its case accounts for a mere 12.3% of the subsidies. With a flawed subsidy system leading to dieselization of economy, one should expect the share to go up. The argument that linking diesel prices to market prices will lead to inflation doesn't hold water either. Higher fuel subsidies and huge fiscal deficit are feeding the vicious circle of low growth and high inflation anyway. If it is well being of the farm sector stalling reforms, there is a better way to take care of it. The sector will be better off using direct cash subsidies and strong price support system. It's time that the Government stops coming up with lame excuses and bites the bullet of fuel reforms.

Source: Business Standard

"What's in a name?" said Shakespeare. But our government seems to have taken these words too seriously! What else can justify the fact that it is draining a "Maharatna" company to bankruptcy? That too one of the stature of Oil and Natural Gas Corporation (ONGC)? The company is the undisputed leader in India's energy starved oil exploration sector. However, a Business Standard report has quoted the company's chairman claiming gross abuse of its resources by the government. As per the company, half of its current surplus of Rs 280 bn is earmarked for annuity payments for employees and oil well restoration. This leaves very little money for investment to raise oil production. Ironically, when global oil prices are quoting at over US$100-105 a barrel, ONGC makes a margin of only US$ 8! Obviously the company's pitiable P&L health is thanks to the government's magnanimous subsidies for oil marketers. Particularly for selling diesel, kerosene and cooking gas at subsidised prices. ONGC's fears of being bled dry are not new. But this time it is in two years flat! No wonder investors gave a cold shoulder to its follow on offer. It was only LIC that came to its rescue. But the government is still not showing any remorse over its fiscal profligacy! One can only wonder how many such 'ratnas' will be sacrificed!

Can all businesses create wealth for investors? The answer is no. Take the aviation industry for instance. Ever since the Wright brothers invented the flying machine, it has revolutionized the way people travel. Without airplanes, the world would not have been as closely connected as it is today. So there is no doubt that the airline industry has been a great boon for the global economy. But for investors it has been an utter disaster. In other words, it has made no money at all.

The Indian aviation industry is no exception. The sector continues to be in troubled waters with players such as Kingfisher Airlines and Air India facing severe financial woes. However, some players have reported profits in the June quarter. For example, Jet Airways, India's largest airline by market share, has reported a profit after five consecutive loss-making quarters. But wait, it may be a bit premature to raise the toast. These profits have come from exceptional items and not from regular operations. At the operating level, costs continue to remain high. And do not forget that the cumulative losses for domestic airlines are a staggering Rs 120 bn. This just reinforces the fact that the industry is great for the economy, but terrible for investors.

It may not have the most intelligent people within its borders. It may also not be as well endowed in terms of natural resources as compared to some of the other nations. But the one thing that the US does better than all other nations is that it has a system that unleashes human potential like no other. And this is what made the country the most prosperous nation on the planet. True that some of these strengths have worn off in the past few years and its excesses have caused a great deal of damage to the economy. But if the Economist is to be believed, the world's biggest economy is well on its way to reinventing itself.

To be honest, the signs are hard to miss for us as well. Its exports are looking up, the overleveraged balance sheets are deleveraging themselves and its energy bills are also going down, thanks to the shale gas revolution. Having said that, any thoughts of a quick turnaround should quickly be set aside. Besides, there is always this threat of the next man in the President's chair doing something silly. It all depends on how the US private sector is treated. The more it is left to its own devices; the better will be the odds of the world seeing a US renaissance we believe.

The auto sector is going through a tough phase right now what with the economy slowing down and interest rates plus fuel prices staying firm. But this does not seem to have had impacted the appetite of the super rich for luxury cars. Indeed, the super rich who would like to own cars that cost upwards of Rs 1.5 crore seem to be immune to economic vagaries. Thus, sales of automobiles from the stables of Rolls-Royce, Lamborghini, Ferrari, Bugatti, Maserati and Porsche continue to rise fast. This has, however, been on a small base. As reported in the Mint, Indians bought around 98-100 so-called super-luxury cars in 2011. This is expected to rise 50% by the end of the year, driven primarily by model launches. The demand drivers are many. One of them is the fact the average age of the wealthy buyer has dropped from 35-50 years to 25-35 years in recent times. Thus, to a large extent the younger generation of the super wealthy is driven by peer pressure to opt for such opulent cars. However, even though the incomes of middle class have risen tremendously in the past many years, India still remains a small car market unlike its peer China.

In the meanwhile, after opening the day in the green, the Indian equity markets continued to trade above the dotted line. At the time of writing, Sensex was up by 214 points (1.3%). Among the stocks leading the gains were Reliance Industries and Tata Motors. Other major Asian stock markets have closed the day on a positive note as well with Japan and Korea leading the gains in the region.

04:55  Today's investing mantra
"Chains of habit are too light to be felt until they are too heavy to be broken." - Warren Buffett

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    2 Responses to "These sectors doubled shareholder wealth in 4 yrs"

    saby chacko

    Aug 8, 2012

    I totally disagree with the views saying removal of diesel subsidy will not cause rise in inflation!!
    It is not required to be an economist to disagree with the author's view as even a child knows that an increase in diesel price has a cascading effect leading to higher inflation. Increase in diesel price will cause increase in bus/taxi/ truck fare, leading to higher cost of goods, vegetables and all products in india. On the other side daily labour cost will increase leading to higher expenses from every household and also industries.
    So it is a simple theory which people sitting in plush govt offices or sitting outside India do not realise abou the effect of Increase in Diesel price on inflation!!!
    Of course I do agree that the fuel subsidy is causing heavy burden on to our fiscal deficit but that can be reduced by various other means.


    radical synergy

    Aug 7, 2012

    it is a ready nutshell report , really wonderful...

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