Smart is the new Green! Such Mega Trends fetch super profits - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Smart is the new Green! Such Mega Trends fetch super profits 

A  A  A
In this issue:
» Will we see a pickup in corporate profits?
» The problem of PSUs outperforming
» Infra companies see debt levels reduce
» Wage rise in Japan can't keep pace with inflation
» ...and more!

Diversification is certainly a good method of de-risking. However, diversification without following the Mega Trends is certainly not the best way to grow.

One look at the history of corporate profits suggests that niche and focused business have had a better run than conglomerates. And even amongst the latter, ones that focused on certain trends prospered the most.

So investors too, need to realize that the businesses that they are investing in need to constantly make decisions about their future. Ones that recognize the Mega Trends while planning their R&D, expansion, skill sets and geographical presence have the undisputed edge. The rest keep battling mundane business challenges and never really see an inflection point!

Take the past decade for instance. The realization and concerns over environmental hazards were huge. Hence, businesses that reacted to or at least attempted to offer solutions that were environment friendly found takers. So everything from clean energy to energy efficient vehicles and electronic item manufacturers participated in 'Going green' Mega Trend. For most this translated into new or improved products and significantly higher profits.

That was not all! Several such Mega Trends dominated the technological scene which saw even the world's largest companies adapt big changes. IBM transformed its computer hardware business to become a solution provider. Amazon, having carved out a dominant position in online retailing, moved into hardware with Kindle and then into services with its cloud data-storage solutions. Social networking trends saw the emergence of heavyweights like Facebook. The only thing common between the three was that they were the earliest to spot and adapt to major societal and transformative forces, or the Mega Trends.

Looking at India, one can safely predict that 'Smart' is the new 'Green'...with everything from cities and rail networks to electronics, mobiles and medical devices attempting to get technologically 'smarter'. Needless to say companies that are geared to capitalize on the trend will see their profits grow at a multiple of their peers' over the next decade.

And it is not just the advent of new technology but several demographic and macroeconomic changes that will drive such a Mega Trend.

Investors, therefore, need to keep an eye not just on such Mega Trends, but also the best companies to profit from them. Neither will the trends last forever nor will every company in the space be a winner! Hence it is as important to know the business merits thoroughly as it is to spot the trend.

The research team at Equitymaster is meeting several such companies that could possibly offer unimaginable returns over the next decade thanks to such Mega Trends. And we will keep you posted.

Meanwhile, do let us know your experiences, if any, of investing based on such Mega Trends. Let us know in the Equitymaster Club or share your comments below.

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02:11  Chart of the day
The June quarter has seen the Indian economy grow by 5.7%, which is the highest in over two years. This has led to the rally both on the Sensex as well as the Nifty, both of which were already inching upwards riding the Modi wave. So will this rally continue? It all depends on how the growth in corporate profits pans out. As per an article in Mint, one metric to determine this is the ratio of profit after tax (PAT) to nominal GDP. The mean of the last decade has been around 3.3%. And the last three years has seen the ratio hover below this mean. Indeed, it has especially been worse in the last two years. Will the coming years see a reversal in this trend? It all depends on what kind of structural reforms the Modi government puts in place so that stalled projects are revived and the investment climate is made easier and friendlier.

Is growth in corporate profits set to revive?

Are the Indian PSUs working well within the comfort zone and not stretching themselves enough? Well, at least the Government thinks so. And therefore if a leading daily is to be believed, a consistent run of out-performance by the state run companies can actually invite scrutiny instead of rewards. Simply because the Government is of the view that in order to make themselves look good, PSUs routinely under-promise and over-deliver. And the Government is going to have none of these. It wants to make PSUs the torch bearers of Indian economic growth and therefore wants to encourage them to grow in a more aggressive manner.

PSUs however don't seem too pleased with the idea. They see this as nothing but pressure tactics to force higher targets and then demand higher dividends if the targets are not met. In fact a PSU Chairman has even gone to the extent of saying that steep targets could force some firms to take undue risks.

Well, while we certainly don't want such a situation to arise, the hoarding of cash by PSUs is also not the most optimal use of capital according to us. They should therefore make an attempt to put the excess capital to use in a way that enables them to earn more than the cost of capital in the long term. If they can't do this, then the excess money should certainly be returned to shareholders in the form of dividends.

Infrastructure is one sector which is the biggest beneficiary since Narendra Modi came to power this May. The ease of doing business increased dramatically after the elections. Not only that, even the financial condition of these firms has improved quite a bit. As an article in Business Standard points out, the combined debt to equity ratio of the top 17 infra companies has declined to 3.5x in FY14 from 3.7x in the previous year. Fund raising and non-core asset sales have helped these companies improve their financial health. With the investor appetite failing to wane amidst the promise of ache din, it appears that the balance sheet of these companies may improve further.

So, should investors lap onto them? Well, not really. Our regular readers may know our averseness to infra as a theme, in general. High working capital, huge debt and wafer thin margins makes infra as a business quite susceptible. Bureaucracy adds another layer of susceptibility. Though bureaucracy may not be a big worry now with Mr Modi assuming power, financial risks remain. Hence investors should be careful while investing in them as the current euphoria may be short lived.

Wages in Japan showed the highest increase since 1997 in July this year. As per an article in Bloomberg, average monthly earnings increased by 2.6% on a year-on-year basis. Does this mean 'Abenomics' is working? Is the Japanese economy really on a road to revival?

Scratch just slightly over the surface and the truth is not very encouraging. Increasing wages seen in isolation mean nothing at all. The parameter that really matters is purchasing power. Do the rising wages translate into better purchasing power? Or at least, are they able to maintain purchasing power? The answer to both these questions is no. Inflation in Japan is rising way faster than the rise in wages. This effectively means that real income in the hands of Japanese consumers is declining. Data suggests that adjusted for inflation, wages in Japan actually shrank by 1.4%. And to give you a perspective, this is the 13th consecutive month when real wages have fallen.

Already, the economy contracted an annualized 6.8% in the second quarter from the previous three months after sales taxes were raised in April. So while Japanese policymakers may want to cheer the wage increases, the truth is that Japanese consumers are losing purchasing power and the economy is going nowhere.

The Indian stock markets continued to trade firm in the post noon trading session. At the time of writing, the BSE-Sensex was trading up by 181points (0.7%). All the sectoral indices, barring metal, were trading in the green. Pharma and realty stocks were the major gainers today. Most of the Asian stock markets were trading in the green with China and Japan being the major gainers. Even European markets have opened the day on a strong note.

04:56  Today's investing mantra
"A good business is not always a good purchase - although it's a good place to look for one." - Warren Buffett

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1 Responses to "Smart is the new Green! Such Mega Trends fetch super profits"


Sep 3, 2014

I felt that yr abservtion comments worth reading.I will wait for good opertunity to invest.thnks.

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