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1992 batch of Sensex stocks: GSFC

Sep 24, 2012

It is difficult to imagine that a state run company in a regulated industry like fertilisers was amongst Indiaís bluest of blue chips way back in 1992. However, this was considered perfectly normal back then. For the simple reason that the Indian economy had not yet opened up. Thus, companies from new age sectors like IT, pharma and financial services were pretty much non-existent. And this kept competition for companies like Gujarat State Fertilisers Corporation (GSFC) to the bare minimum.

However, things changed with the ushering in of the era of liberalisation and the subsequent opening up of the Indian economy. The new age sectors, with their high growth rates and professional management at the helm, started finding favour with investors. And public sector enterprises like GSFC were pushed more and more to the backburner. The trend finally culminated in the year of 1996 when the stock was pushed out from the Sensex and replaced by a more agile and unregulated private sector entity.

Good financial performance but not enough

To be fair to GSFC though, its performance hasnít been all that bad. Between 1992 and 2012, it has managed to grow its profits more than 10-fold on the back of around 5-fold jump in sales. It is just that other companies, which went past it in market valuation stakes have fared much better. Take the example of Ambuja Cements, the company that replaced GSFC in the Sensex. Between the period 1994 and 2011, Ambuja Cementsí growth in topline and net profits were much higher and stood at near 30-fold and 20-fold respectively.

Another factor that sticks out like a sore thumb is the companyís inability to reward its shareholders during the past two decades. The price history of the company during the period suggests an increase of just 36% in the adjusted share price. On a CAGR basis, this translates into a paltry 1.5%, lower than what even a savings bank account can give. Contrast this with the near 9-fold jump that the stock of Ambuja Cements has witnessed to put the performance of GSFC into proper perspective.

Lessons for investors

The business performance and the share price performance of GSFC during the past couple of decades contain two very important lessons for investors we believe. The first one has to do with the quality of business itself. A company where prices cannot be increased at will on account of government regulation and where proper incentives are not in place to increase volumes may not reward shareholders in the most profitable manner possible.

However, even if one is tempted to invest in such businesses, one has to make sure that the valuation multiples that one pays for the business are certainly on the lower side. This was certainly not the case in FY92 when the stock was trading at a earnings multiple of close to 30x at one point in time. Thus, it isnít the expulsion from the Sensex that has hurt the shareholders of the company. But the below average business model and the lofty valuations that it was trading at back then.

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Rahul Shah

Rahul Shah (Research Analyst), Managing Editor, Microcap Millionaires has led the team from the front in developing some of our most stringent and rewarding research processes. As per his own admission, the turning point in Rahul's life as a financial analyst came a few years back when he got introduced to the works of Warren Buffett and Charlie Munger. From Buffett, he understood the value of investing in good quality business with powerful moats and strong management teams. Charlie Munger on the other hand inspired him to be a lifelong learner and use mental models in order to arrive at the crux of matters across most disciplines. Rahul firmly believes that in order to be successful at investing, you have to do the big things right and possess a great temperament and a contrarian streak.

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1 Responses to "1992 batch of Sensex stocks: GSFC"


Sep 24, 2012

It is not only interesting reading but also very educating too. Observations are eye openers. At the same time, it raises questions on "Value" investing style or more precisely on the "Investment for Life" style.
More such articles are expected.

Equitymaster requests your view! Post a comment on "1992 batch of Sensex stocks: GSFC". Click here!

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