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Stockmarkets: What to look for in stocks?

Aug 10, 2000

Investors look at a multitude of factors before deciding to invest in a stock, both qualitative and quantitative. However, especially in this 'new economy', productivity growth should be given prime importance. Read our special report "A guide to investing in stock markets"

What is productivity? In simple terms it means getting more output from a given set of inputs. Although the computation of productivity may be difficult (indeed it has raised a lot of debate), it is nevertheless evident in most cases. Say for example, with the benefit of improved technologies, we are able to work more efficiently. Computers speed up our work, even as the Internet is diluting the time delay involved in sourcing information. And this is just one aspect of the productivity revolution.

The technology revolution has also made the environment more competitive, in most sectors. Margins are under pressure even as anti competitive policies become more stringent. All these factors necessitate that companies use existing capital to generate better returns. The days when rights issues were deemed to be a good sign are passé.

The solution is in joining the revolution, rather than fighting with it. And the stock markets seem to give adequate recognition to this. Companies like Hindustan Lever and Gujarat Ambuja are prime examples of companies that have made 'productivity' their daily mantra. And this is rightly reflected in their valuations.

One way companies are pursuing their goals of productivity growth is by capital deepening i.e. the proportion of capital in a given set of inputs (land, labour and capital) is increasing. An example of this is Tisco, which now produces more steel today than a decade back, even though its labour force has shrunk by 25%. However, by international standards, the company still has a very long way to go! It is important for companies to become leaders in the race to enhance productivity growth.

Applying the productivity criterion will definitely help investors to improve the stock selection process. It will probably also enable them participate in the process of value creation. For themselves and for others!

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