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Will Your Stocks Soon Face Their Kodak Moment?

Dec 4, 2015

In this issue:
» Are Oil prices set to rise?
» Should promoters' stake change worry you?
» Update on the markets
» ....and more!
00.00
Tanushree Banerjee, Co-Head of Research
  • World's largest taxi company owns no taxis (Uber)
    Largest accommodation provider owns no real estate (Airbnb)
    Largest phone companies own no telecom infra (Skype, WeChat)
    Most valuable retailer has no inventory (Alibaba)
    Largest movie house owns no cinemas (Netflix)
    Largest software vendors don't write the apps (Apple and Google)

A Whatsapp message I received recently cited the above as examples of 'digital disruption'. The term though new to most of us, has been the biggest worry for companies worldwide, for a while.

The scope of digital business is literally forcing brick and mortar businesses to rethink their model. The entire risk-reward tradeoff of traditional businesses is being re-discovered.

In an earlier edition of the WrapUp, we wrote about how Buffett is worried that driverless cars will make GEICO's insurance policies redundant. You can write off such worries as farfetched. Or you look back in history to see what kinds of business were quick to succumb to massive technological upheaval...as well as the ones that survived.

The emergence of new technologies has always had a disruptive effect on business and economy. Once well-known companies disappeared from the face of the earth due to digital disruption.

iDisrupted is a company that examines such digital disruptions. According to their research, of the top 100 global companies in 1912, 29 experienced bankruptcy within a few decades, and 48 had disappeared by 1995.

Eastman Kodak was one of just 19 companies to remain on the list during these years. But it too went bankrupt in the twenty-first century. The imaging solutions company suffered from the arrival of digital cameras and photo-sharing websites.

Kodak foresaw the arrival of digital photography as early as the 1970s. But it took 30 years for the digital products to drive Kodak into bankruptcy.

Similarly, many businesses that are thriving today could be heading for the corporate graveyard within the next few decades.

India's manufacturing sector is in danger of losing a large chunk of business to robots. China is expected to have 430,000 robots by 2017. So to stay cost and technologically competent, Indian companies too cannot defer replacing traditional business with robots.

Companies that continue to invest in their traditional model face the biggest risk of complacency. Energy, telecom, and retailing giants must rethink the focus of their incremental investments.

Digital disruption is bound to make a lot of businesses irrelevant in a few years. Branch-heavy public sector banks, brick and mortar retailing companies, travel and tourism companies, telecom and media giants, and software companies are just a few of them. The sooner they beware of their Kodak moment, the better for investors.

As an investor, you need to examine whether the moats of your favourite companies have the strength to withstand digital disruption.

What kinds of businesses do you think will succumb to digital disruption? Let us know your comments or share your views in the Equitymaster Club

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2.10 Chart of the day

Global commodity prices have remained under pressure since some time now. Factors such as excess supply and subdued demand from China's slowdown have led to a meltdown in demand and prices. Crude oil has been no exception. The plunge in oil price is bad news for the exporting companies while the importing ones witness some relief. Given India's higher dependence on the oil imports, the falling prices have positive consequences. But will this trend sustain?

All eyes are currently on the next meeting of the OPEC countries. Saudi Arabia that controls massive reserves is considered as the prime enforcer of the activities of the OPEC countries. The decision of keeping the supply steady has led to sharp fall in prices in recent months. Crude prices are currently at six year lows ahead of the OPEC meet.

Oil prices remain under pressure

The decision on whether this time around the OPEC countries will decide to cut the output or not is likely to have sharp impact on the oil prices.

Now if these countries decide to curtail the supply, it could inflict sharp rise in oil prices. And this certainly does not bode well for an economy like India. Being heavily dependent on oil imports, India's fiscal position and currency rates could worsen. In fact this could be the other big risk that can thwart India's economic recovery.

3.25

High promoter holding in a company is perceived as a safety net by the minority shareholders of the company. Increase in stake by promoters is yet another positive sign as it shows the promoters' confidence in the business. A decrease in holding is not well accepted. As per article in the Business Standard, the companies that increased their stakes since 2014 have seen sharp surge in their stock price. Almost 136 of the BSE 500 companies saw their average one year return in excess of 40%. To name few, Eveready Industries, Force Motors and Welspun India have seen increase in the promoter holding. On the other hand, the companies where promoters sold their stakes such as Shree Renuka, Adani Ports, GMR Infra and others, have seen sharp plunge in their stock prices

So does promoter buying guarantee better performance by the company going forward? Certainly not! It is important to see change in the holding in the context of the overall business and shareholders wealth creation.

As long as fundamentals remain strong, investors should not bother about small changes in promoters' stake. That said, a heavy stake sale by promoter should worry investors. This is particularly true in cases where management is not very professional.

4.35

After opening on a weak note, the Indian markets have continued to trade below the red dotted line. At the time of writing, BSE Sensex was trading lower by about 167points. Losses were seen in commodity, IT and banking stocks while select metal and pharma stocks were eliciting investor interest. The midcap and smallcap indices were also trading lower.

4.50 Investing mantra

"Asset-heavy businesses generally earn low rates of return - rates that often barely provide enough capital to fund the inflationary needs of the existing business, with nothing left over for real growth, for distribution to owners, or for acquisition of new businesses" - Warren Buffett

This edition of The 5 Minute WrapUp is authored by Tanushree Banerjee (Research Analyst) and Bhavita Nagrani (Research Analyst).

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