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Should you invest in loss-making companies?

Should you invest in loss-making companies?

Invest in a company that is making profits because its financial performance is important.

Rule: Invest in a company that is making profits because its financial performance is important.

Exception: A company may be reporting losses because it is in the investment phase or the industry requires a long gestation period. Such shares typically remain underpriced for long periods before they turn around and become multi-baggers.

47.3% is the compounded annual growth rate of the Bharti Airtel stock price since its IPO in February 2002. In comparison, the Nifty registered a CAGR of 22.3% during this period.

Rs 2 was the dividend per share paid by Bharti Airtel in 2009, its first ever payout to shareholders. During the investment phase, the company had preferred to reinvest its profits.

When Bharti Tele-Ventures was listed in 2002, the company was in the investment phase. It posted a loss of Rs 176 crore in 2002-3. Bharti has been among the biggest wealth creators in the past eight years, but its shares traded below the issue price of Rs 45 for several months.

For Bharti and other telecom companies, the turning point was the change in the government policy in 2002-3, which helped them reduce tariffs and take mobile telephony to the masses. After 2003-4, Bharti’s financial performance perked up. In the first quarter of 2009-10, it surpassed expectations by reporting a net profit of Rs 2,687 crore.

dishTV is a loss-making gem with tremendous potential. Its losses are gradually coming down—from Rs 154 crore in the second quarter of 2008-9 to Rs 69 crore in the first quarter of 2009-10. As the direct-to-home concept becomes popular, the company is likely to see its profits rise. Right now, dishTV shares are trading at Rs 45.

Published on: Nov 05, 2009, 3:45 PM IST
Posted by: AtMigration, Nov 05, 2009, 3:45 PM IST