Be careful of 'The great Indian growth story' - Views on News from Equitymaster

Helping You Build Wealth With Honest Research
Since 1996. Try Now

  • MyStocks


Login Failure
(Please do not use this option on a public machine)
  Sign Up | Forgot Password?  

Be careful of 'The great Indian growth story'

Dec 14, 2009

The Indian telecom story was an enticing one. India's huge market for telecom to capitalise on, its low teledensity, high growth rate of subscriber additions, increasing mobile usage, increasing per capita incomes, the large rural population that could be tapped etc. all made for quite a convincing story. All you had to do was to look at the immense potential of the industry and you were almost sure to be bowled over.

Riding on this enthusiasm from the public, Idea Cellular made its initial public offering (IPO) debut on February 12, 2007. The response was tremendous. The issue was oversubscribed almost 50 times.

Investors were falling head over heels to get a pie of the Indian telecom industry. As on the closing date for Idea's IPO, the demand of approximately US$ 25.5 bn for the QIB (Qualified Institutional Buyers) category was the highest for any Indian issue in US dollar terms until that date. This, despite the fact that the issue was priced exorbitantly. At a price to earnings ratio of almost 48 times.

But price wasn't seen as a problem. Earnings were sure to increase in such a fast growing and lucrative industry. And when earnings are said to increase fast enough in future, a high price can always be justified.

Guess how investors who were smart enough to buy at the time performed after a little under the three years that have gone by since. Your long wait till now would have fetched you a loss of 23% at the level of about Rs 60 that the stock is trading for currently.

If you had missed it in the IPO and bought in on the first day of its listing (9th March, 2007- when it closed at about Rs 85), you would be sitting on an even bigger loss of 33%. Compare that to a simple bank fixed deposit earning about 8%. If you had put the same money in such an FD, you would have made a total return of about 26% in those same three years.

So what went wrong? Would you have made a mistake by buying into Idea Cellular and India's booming telecom story? Or was it just plain bad luck.

Idea Cellular is mainly suffering from the way things have shaped up in the telecom industry. Competition has heated up like never before. The potential of the industry and the growth it was witnessing attracted numerous Indian and foreign players to it. There are now about 12 to 14 players in the market, many of them backed by large parents with a lot of financial resources. They are all pitting their might against each other, no holds barred. The last few months have seen tariffs being cut to ultra low levels in a bid by new entrants to gain market share. The big established players have had to respond by reluctantly cutting their own tariffs. Thus revenues and profits have been put in the limbo. And until some sanity returns to the proceedings in the industry, many companies are sure to bleed.

What's the lesson for investors? By being aware of one fundamental law of investing, you could have made a much more informed and wise decision -

"Obvious prospects for physical growth in a business do not translate into obvious profits for investors" said Benjamin Graham many years ago in his seminal book 'The Intelligent Investor'.

"The key to investing is not assessing how much an industry is going to affect society, or how much it will grow, but rather determining the competitive advantage of any given company and, above all, the durability of that advantage. The products or services that have wide, sustainable moats around them are the ones that deliver rewards to investors" said Warren Buffett, the world's most successful investor.

The fact of the matter is that even if an industry is poised for major growth, potential future competitive forces can never be ignored. Even if they might be less at that moment, they are almost sure to intensify in any industry that is poised for major growth. Over the long term, competitive forces exert a downward force on the profitability of every company. In such a scenario, only companies that have a strong solid advantage that will help them maintain their profitability are the ones that will come out winners. Indeed, much of the qualitative understanding of a business should go towards identifying if a company actually possesses any such advantage.

Infact, the same would apply to even countries as a whole. So, India may be said to be on the cusp of high GDP growth for many years to come. But it does not automatically mean that all the companies in the country will witness unbridled profitability. For as markets, industries and companies evolve, you can expect the competitive environment to get tougher as we go along. And only companies that posses that elusive 'competitive advantage' will make it through without any nasty surprises for investors.

Equitymaster requests your view! Post a comment on "Be careful of 'The great Indian growth story'". Click here!

3 Responses to "Be careful of 'The great Indian growth story'"

R Sathyamurthy

Dec 27, 2009

If you look at your IPO reviews, for about 80% of the times you have said "Avoid" and several of them are still doing well.

One thing I do not like about Equitymaster, despite all its pluses is, the "Holier than thou" attitude. Please underplay this a bit.


A S Mahadi

Dec 25, 2009

Was it possible for anyone to write such an article in 2007 or 2008?



Dec 15, 2009

A similar analogy can be drawn on the DTH sector in India. Dish TV is a case in point.

Equitymaster requests your view! Post a comment on "Be careful of 'The great Indian growth story'". Click here!

More Views on News

Can the Nifty Fall to 10,200? (Fast Profits Daily)

Sep 24, 2020

The Nifty has reached an important support level today. If it breaks then we could see further downside.

How to Save Money by Exiting Stocks Before They Fall podcast (Views On News)

Sep 24, 2020

A penny saved is a penny earned. It doesn't matter where you enter. All that matter is where you exit. Watch this video to identify an opportune time to exit your investments and book profits.

ICICI Prudential ESG Fund: Aims for Sustainability (Outside View)

Sep 24, 2020

PersonalFN briefly explains the newly launched fund : ICICI Prudential ESG Fund.

What to Do if there is a Second Wave of the Stock Market Crash (Profit Hunter)

Sep 24, 2020

Here's what I think investors should do in this selloff.

IDFC Mutual Fund Starts Campaign 'SIFI'. Should Buy Into the Idea? (Outside View)

Sep 23, 2020

IDFC Mutual Fund is taking the road less travelled and hence started a campaign SIFI (SIP in Fixed Income) to promote the concept of SIP for its debt funds investors.

More Views on News

Most Popular

Will the IPOs in 2020 Be as Rewarding as the Ones in 2019

In 2017 funds raised through IPOs is highest over a decade. And the stock market still flying high, some observers are predic...

How the 8-Year Cycle Can Help Identify Multibaggers (Fast Profits Daily)

Sep 11, 2020

This is how you can apply the greed and fear cycle in the market to pick stocks.

Why We Picked This Small-cap Stock for Our Hidden Treasure Subscribers (Profit Hunter)

Sep 17, 2020

This leading household brand will profit big time in a post covid world.

This Could Be the Best September for Auto Stocks (Profit Hunter)

Sep 11, 2020

Here's why I think this month could be a great for auto stocks.

What Do the Charts Say About Buying Smallcaps Now? (Fast Profits Daily)

Sep 18, 2020

Everyone seems to be excited about buying smallcaps now...but is it the right thing to do? What do the charts tell us? Find out in this video...


Covid-19 Proof
Multibagger Stocks

Covid19 Proof Multibaggers
Get this special report, authored by Equitymaster's top analysts now!
We will never sell or rent your email id.
Please read our Terms


Sep 24, 2020 (Close)