Investing legend Warren Buffet has this advice on “turnaround plays”: Both our operating and investment experience cause us to conclude that turnarounds seldom turn, and that the same energies and talent are much better employed in a good business purchased at a fair price than in a poor business purchased at a bargain price. In other words; “Stay away from turnaround plays”
But then, another legendary economist (and also a successful investor), John Maynard Keynes is quoted as saying:“When facts change, I change my mind. What do you do, sir?” They can’t both be right? At least not at the same time and on the same issue.
Take the case of Symphony Ltd.This well-known air cooler company, with a market share of over 50% among organised players, was once a failure story.Sometimes the Right Thing to do is Turn Around
After a stellar run for the first few years, around two decades ago, the company had a near brush with bankruptcy. What led to its fall was biting off more than it uld chew.
From a single product company – air coolers – it diversified into geysers, water purifiers, washing machines and exhaust fans. It could not face the competition from the cheaper products in the market, and filed for bankruptcy in 2001-02.
Now, had you taken Mr Buffett’s advice on face value and written an obituary for Symphony Ltd, you would be sitting on an opportunity loss of 1,99,014%.
Yes, that’s the returns the stock has offered in the last two decades. Rs 1,000 invested in the stock in 2001 would be a pretty sum of Rs 20 lacs. What catapulted this penny stock (priced at less than Rs 1 per share in 2001-02) to a multibagger was a focused management. MrAchalBakeri, the owner operator, was hell bent to revive the company and claim back the glory. Over the next five years, he restructured the business, continuing just with coolers and geysers. By 2007, the company had turned debt free. And profitable.
But how do we spot such opportunities? A shrewd investor is one who can look beyond the history, assess the future and spot such rare plays. But then shrewd investors are a rarity. So what does an average investor do? Well there are at least a few funds who employ shrewd Fund Managers. Here is GautamSinha Roy of MotilalOswal who had identified two multibaggers, Eicher Motors and Symphony, more than decade ago. When asked, “Is it really possible to identify long-term compounders many years ahead?”, this is what he said.
Ten years ago not many would have thought Symphony or Eicher Motors were long-term compounders. The simple mantra to identify long-term compounders is to look for ‘moat with growth’. Hence, it is important to ascertain whether the moat is strong enough and sustainable enough. Then and only then, we will have a high probability of getting sustainable high growth in a company.
Symphony and Eicher both came up with conventional products, which addressed a latent demand in the economy. With rising per capita income and shifting patterns of consumer spending, air coolers and premium bikes exploded as categories and these brands were present as entrenched market leaders in these categories. The contributing factors to such compounding stories is a strong product with a decent brand pull and presence in a category set to explode, riding the tails of an economic trend. Well, we lesser mortals might as well explore mid, small and multicap funds with value orientation to land some of these successful turnaround stories.
Airbnb – Valued at US$ 38 Billion?
If you are a travel bug, chances are that you have already availed of accommodation by the likes of OYO Rooms or Airbnb. In fact the smart phone generation is likely to bypass the traditional hotels and look at options such as smaller ‘bed & breakfast’ accommodation or even apartments, if they are part of a larger group. These are not only low cost alternatives but also convenient. For instance,Airbnb lets you book accommodation through website or app, pay as you want, and stay for a pre-decided duration and for this, Airbnb gets a commission.
The folks who run Airbnb believe they will earn as much as US$ 3.5 billion a year by 2020, before interest, taxes, and depreciation, according to Fortune’s Leigh Gallagher. What’s the key to achieving such high profits so quickly?
Airbnb wouldn’t have been such a success in such a short time had they planned on building or buying hotels. Since its founding in 2008, Airbnb has spent less than US$ 300 million of the $3 billion it has raised from outside. On the other hand, Hilton Hotel had US$ 7.2 billion in expenses in the first nine months of last year alone!
Airbnb has nearly 5 million lodging options across 81,000 cities all around the world. It was reportedly valued at least US$ 38 billion in May 2018, as reported by the Trefis team in Forbes.com.
The point is that Airbnb’s growth has been fueled by following an asset light business model.
Many businesses these days are seeking new and innovative ways to scale up fast, effectively, and efficiently, chiefly by harnessing technology.
This has given rise many alternate models of operations, including the concept of going ‘asset-light’. Companies go asset-light by owning fewer capital assets compared to their operational assets. They do this by reducing various capital assets like land, buildings, plant and machinery, cars, etc. Thus, the costs reduce and companies can adapt faster to changing demand. In other words, they become more agile.
And this phenomenon is not just confined to global companies.
Asset light business models in India have rewarded shareholders greatly. Jubilant FoodWorks is a good example of this approach. Those who could spot such asset-light companies are likely ride the equity gravy train going forward.
Sevices Sector & Real Estate
A keen observer of the Indian economy is likely to find the picture gloomy with so many high frequency indicators, such as IIP (Index of Industrial Production), PMI, Vehicle and FMCG sales showing declining or stagnant trends. But most high-frequency indicators in India are designed to track consumer demand for goods and sales of manufactured products. Yet, industry today chips in with just a fifth of India’s GDP, while services is three times as big with a 60 per cent contribution.Within the services sector, speaking specifically of real estate subsector, one sees a revival of sorts in FY19 after nascent signs of demand pick up in the previous financial year.Organised retail and hospitality subsectors have contributed handsomely to the growth of real estate revenues.
Trade analysts put the retail sector’s growth at 8-10 per cent in FY19, with organised retail growing faster. Listed retail players have clocked a 21 per cent revenue growth in the latest March quarter and value retailer Avenue Supermarts clocked same-store sales growth of 17.8 per cent for FY19, rebounding from 14 per cent in FY18.If demand for premium mall space is an indicator of the sector’s health, consultant JLL noted that retailers, who absorbed 3.9 million sqft of mall space in 2018, were looking to double that to 7.7 million sqft in 2019. But while organised retail seems to be back on its feet, it is difficult to know if the mom-and-pop stores which make up most of the sector are mirroring this rebound.
Holidaying in exotic spots seems to top the leisure spending of affluent Indians and that’s showing up in demand for hotel rooms consistently outpacing supply in the last five years. Indian Hotels checked out of FY19 on an upbeat note, recording a 10 per cent revenue growth and its highest profit in 11 years. It shared industry data showing that demand for hotel rooms grew by 3.4 per cent in FY19 even as supply expanded 2.6 per cent.Occupancy rates have climbed from 57 to 65 per cent in five years. Should this sustain, players expect to take hikes in their room rates that they have been putting off for five years now. This is expected to strengthen the demand for rental accommodation.
After battling activist regulators and reluctant buyers between 2013 and 2017, real estate players saw some light at the end of the tunnel in 2018. Knight Frank noted that 2018 was the first calendar year in a decade, in which sales of new homes in key cities increased (they rose by 6 per cent to 2.42 lakh units).
The pick-up helped the industry’s unsold inventory recede from 7.2 lakh units in 2014 to 4.7 lakh in 2018. RBI data reiterates healthy home loan growth at 19 per cent in FY19.
