X

Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2017 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.


Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
What's wrong with India's growth stocks? - Views on News from Equitymaster
 
 
  • PRINT
  • E-MAIL
  • FEEDBACK
  • A  A  A
  • Mar 25, 2010

    What's wrong with India's growth stocks?

    Investors generally classify stocks into two broad categories - value stocks and growth stocks. But we are of the opinion that such a classification exists only in the mind. Value and growth in our opinion, cannot be separated from each other. We believe that they are joined at the hip. However, this discussion is for another article. Here, let us assume that value and growth stocks do in fact exist.

    In a fast growing economy like India, most stocks tend to be classified in the 'growth' category. This is especially true for stocks from sectors like auto, infrastructure, telecom, media, financial services, retailing, FMCG, pharma, and realty. Or practically almost all major sectors of the economy!

    A lot of companies from these sectors are growing by leaps and bounds. Some have also made their shareholders rich in the past. But will history repeat is questionable! Will all companies from these sectors continue to grow fast in the future? Will these be able to provide good returns to their shareholders in the future?

    When you look around at the huge opportunities that the Indian economy presents to companies from these sectors, you might believe that good times will definitely follow them. You might also believe that, you as an investor will end up making tidy profits from them over the long run. These beliefs are given, we think. After all, it's normal to expect good returns from stocks if companies are growing fast.

    Right? Probably not!

    The thing that matters in the long run in not growth in earnings, but the quality of that growth! A company can grow its earnings by simply cutting its prices and trying to grab a larger market share. A company can also grow its earnings by expanding aggressively using borrowed funds or diluting equity. But whether such a growth is profitable for the investor is doubtful. Of course, it can be a profitable in the short run as the stock might rise on 'expansion' news. But over a long term, a company has to improve the quality of its earnings to be a real rewarding investment for an investor.

    Let's now come to what's wrong with India's growth stocks. It's the country's entrepreneurial spirit! Confused?

    Well, in simple terms, a growth opportunity in India does not last for long as many new players are quick to enter the fray and be party to that growth story. So you won't have one auto company that will continue to grow and the others in the sector that won't. Or for that matter, one infrastructure company that will bag all orders and won't face any competition.

    We are not saying that 'competition' is true only for the Indian economy. We are just talking about the intensity of competition that most growth sector companies face. Be it high competition for new mobile subscribers. Or be it high competition for new small car buyers. Or for that matter, a high competition for the next bank home loan borrower.

    In such cases, while companies grow their earnings, most are able to do this only by way of price cuts. And like all price wars, the end result is a lot of blood-shed. Some companies come out stronger from such price wars, but they emerge with such damaged balance sheets that getting into the growth mode again is really difficult.

    Given this, should you not buy stocks of growing companies at all? We don't believe so. Identifying the right kind of growth companies - that have competitive advantages over their peers, and are more focused on maintaining the quality of their earnings than market share - is the way to go. It is also to remember that all companies in growing sectors won't fit these criteria. Thus, the search will be difficult.

    But if you are able to zero in on a quality opportunity and long term growth in earnings, handsome rewards will come to you in the long term.

    So, look around you. Deeply research the opportunities you like at first glance. And invest with conviction in the stocks that you think fulfill the quality criteria as we've discussed above. You never know, you might come face to face with an opportunity like Infosys was in 1993!

     

     

    Equitymaster requests your view! Post a comment on "What's wrong with India's growth stocks?". Click here!

      
     

    More Views on News

    How to Ride Alongside India's Best Fund Managers (The 5 Minute Wrapup)

    Jun 10, 2017

    Forty Indian investing gurus, as worthy of imitation as the legendary Peter Lynch, can help you get rich in the stock market.

    You've Heard of Timeless Books... Ever Heard of Timeless Stocks? (The 5 Minute Wrapup)

    Aug 19, 2017

    Ever heard of Lindy Effect? Find out how you can use it to pick timeless stocks.

    Why NOW Is the WORST Time for Index Investing (The 5 Minute Wrapup)

    Aug 18, 2017

    Buying the index now will hardly help make money in stocks even in ten years.

    Trump Takes a Beating (Vivek Kaul's Diary)

    Aug 18, 2017

    Donald J Trump, a wrasslin' fan, took a 'Holy Sh*t!' blow on Tuesday.

    How To Read Your Mutual Fund Account Statement Correctly (Outside View)

    Aug 17, 2017

    PersonalFN simplifies the mutual fund account statement for you.

    More Views on News

    Most Popular

    Demonetisation Barely Made Any Difference to Tax Collections(Vivek Kaul's Diary)

    Aug 7, 2017

    The data tells us quite a different story from the one the government is trying to project.

    A 'Backdoor' to Multibaggers: It's Like Investing in Asian Paints Ten Years Ago(The 5 Minute Wrapup)

    Aug 10, 2017

    Don't miss these proxy bets on growing companies or in a few years you will be looking back with regret.

    Should You Invest In Bharat-22 ETF? Know Here...(Outside View)

    Aug 8, 2017

    Bharat-22 is one of the most diverse ETFs offered so far by the Government. Know here if you should invest...

    Signs of Life in the India VIX(Daily Profit Hunter)

    Aug 12, 2017

    The India VIX is up 36% in the last week. Fear has gone up but is still low by historical standards.

    7 Financial Gifts For Your Sister This Raksha Bandhan(Outside View)

    Aug 7, 2017

    Raksha Bandhan signifies the brother-sister bond. Here are 7 thoughtful financial gifts for sisters...

    More
    Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
    Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement.

    LEGAL DISCLAIMER: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

    SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

    Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
    Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407
     

    Become A Smarter Investor In
    Just 5 Minutes

    Multibagger Stocks Guide 2017
    Get our special report, Multibagger Stocks Guide (2017 Edition) Now!
    We will never sell or rent your email id.
    Please read our Terms

    S&P BSE SENSEX


    Aug 18, 2017 (Close)

    MARKET STATS