Now that the annus horribilis for the Indian bourses has ended, bringing an end to the five-year bull run—finding out the biggest wealth creators in the past five years could give a sense of where your money should flow. A report released by Motilal Oswal Securities throws up some useful pointers—the great companies to invest in, the good ones and the “gruesome ones”, which one should avoid.
Of course, identifying the great from the good and the good from the gruesome is what’s pertinent, as an investor. The great brigade usually has a long-term competitive advantage achieved through a lower cost of production and brand power. Additionally, all great businesses depend very little on managerial prima donnas to run them. Good companies, on the other hand, while enjoying a competitive cost advantage, are largely dependent on management expertise to execute processes for success. The gruesome platoon could be led by two kinds of leadership— highly laid-back who are content with low-profit operations or aggressive management that goes on an external fund-raising binge leading to value destruction.
As the report points out, great companies have significantly lower growth rates than good and “gruesome companies”. This is typically achieved by infusion of very little additional capital to give a steadily rising RoE (Return on Equity) and high dividends. Good companies grow at healthy rates but typically require large doses of protein intake— read capital—to sustain their growth. The black sheep, so to speak, are the gruesome firms, which demonstrate a very high growth rate—a sort of honey trap for investors. It requires pumping in a lot of capital with little or no returns. That, however, does not mean that all great companies make for great investments, if they are bought at gruesome price. If there’s very little margin of safety, it could turn out to be a gruesome, or an ugly investment, says the study.
—Tejeesh N.S. Behl