Added: Apostolos Cargo - Date: 13.03.2022 08:17 - Views: 10705 - Clicks: 4796
IInvestors are often advised to invest in stocks for the long term so as to reap benefits of compounded growth. Power of compounding is an important concept one needs to understand to really appreciate the benefits of long term investing. Compounding is similar to a multiplier effect since the interest that is earned by the initial capital also earns an interest, the value of the investment grows at a multiplicative rate rather than an additive rate. The higher the rate of return, the steeper the curve of growth and wealth creation. Companies run with the objective of primarily earning profits and they strive to continuously grow these profits further.
However, in the process it is the various strategies and decisions taken by them which mould their path to growth. This factor is what differentiates the good companies from the bad ones, the profitable from the unprofitable. The profitable ones generate ificant returns for their shareholders.
Growth of a company comes not only with scale but with efficiency in operations and this is a gradual process. It is also essential to have a macro perspective while running a business and keep in mind various factors such as government policy, interest rates, stakeholder claims including debt and equity holders among others. The next part involves assessing the industry in which the company lies. For example: a dominant theme that has seen phenomenal growth is the FMCG sector.
India is a developing nation with strong growth prospects primarily driven by infrastructure and human capital development along with urbanization in the country. As the country experienced growth in disposable income, the share of processed food consumption grew and companies such as Britannia benefitted. This is the power of compounding. So if the industry is expected to grow, the company in that sector with strong fundamentals will also prosper if all cards fall on the table. The company still continues to grow on their capability and efficient profitability as India continues to flourish on this theme.
The financial sector has seen robust growth in the country with the penetration of banking. As banking grew and became formalized, banking stocks saw heavy inflows and grew exponentially. HDFC Bank was a part of this rally with an upward moving trend in its charts. These are examples of how a company grows gradually to generate strong returns for their shareholders and as an investor you must patiently be a part of this entire rally disregarding the smaller ups and downs.
Hence, when a company establishes its business and grows, its stock value increases, thereby rewarding the shareholders who stick with the company for the longer term. An investor needs to first look at the sector the company currently conducts its business in. This is crucial to understand as the sector which has strong growth potential can offer higher growth of value to the investor. Strong growth potential can come from having scope to either expand or penetrate further into the market or both. If the sector also provides more headroom for increased pricing over time as it expands, that will only benefit companies further.
An investor should also assess the of participants in the sector and the intensity of the competition to determine the growth opportunities and threats it might face going forward. There are industries which have low barriers to entry wherein it is easy to set up a business and compete. If the industry size itself has high growth potential, a larger of players can profitably coexist. An example of this is the FMCG industry where there are a large of competitors offering a wide range of products yet the scope of penetration and expansion is high enough for multiple companies to co-exist profitably.
Companies in intensely competitive industries will experience greater pressure on their profit margins. Hence, the more preferable option is to look for those companies that rise up the ranks to become one of the top players in the given sector, can navigate well in the sector and ensure strong financials despite the competition. Also, look for companies for whom growth potential exists in the form of moving up the value chain in the low growth sector.
For example: Telecom companies moving from voice offerings to data and related services has not only generated a new revenue stream, but has also expanded the overall sector and various other opportunities. Look for companies which are able to build sustainable competitive advantages against other players in the sector. Companies in high-growth industries tend to have better prospects than those in mature industries. In the end, one must consider that an industry with large opportunity is also likely to attract more competition.
The balance between the two contrasting factors of industry potential and competitive intensity must be assessed to determine the opportunity available. Investors need to check the level of regulation that goes into a given sector. An example of this is the coal industry in India.
The industry has been under heavy regulation regarding mining and pricing and was monopolistic with mining rights given to Coal India only. Another example is of the power utility companies regulated by the government. These companies cannot earn excess returns above stipulated limits. Industries such as consumer goods, automobiles, paints and electrical items can be easily produced and sold in India without any ificant government regulation. The economy of any country moves in cycles which is cumulative of all other industry cycles.
As GDP grows, so does production, employment and incomes of consumers which in the rise of demand for products. Similarly, when GDP growth slows or falls, it in the fall of production, employment and incomes. Sectors such as airlines, cement, metals, infrastructure, housing, banking and finance are examples of cyclical industries. Industries such as consumer staples, information technology and pharmaceuticals are comparatively immune to economic cycles thereby weathering through down cycle stress for an industry. Given their relative resistance to economic cycles, these sectors are relatively more stable financial performers and investors are usually willing to as premium valuations to these firms for their stability.
Lower dependence on the economic cycles also means that the companies do not come under stress when the economy faces a downturn and thereby provide some hedge to the portfolio from such downturns. To assess this aspect, an investor needs to calculate certain ratios to determine the return generation as well as the quality of earnings. One such ratio is the ROCE which indicates the efficiency with which the company utilizes its capital and the return it generates on that capital.
While this ratio is a good indicator, it should be used in conjunction with the cost of capital to determine the net return earned by the company. Another ratio to look at is the ROE which tells an investor how much of the profit is attributable to the shareholder and the quantum by which it grows the value of the company. This ratio is to be assessed in conjunction with the Cost of Equity. A low ratio may be indicative of aggressive revenue recognition practices. Among the most important factors in evaluating a business is the quality of its management.
Efficient management teams will not only see through the various challenges facing an industry and navigate through them, but also transform their business models towards more attractive industries and higher growth of value of the business. Assess whether the board of directors and the management are different from each other as the BOD is responsible for larger company decisions while the management is engaged in the daily activities.
Hence, the process of running a company involves balancing relationships and interests between the board, the promoters, the management, minority shareholders, auditors as well as other stakeholders. The efficient handling of this balance indicates the strength of corporate governance. The higher and better the standards of corporate governance are, the better protected the minority shareholders of the company are and can be assured that the management will act for the benefit of shareholders. This can be ascertained by going through the annual report. While there are many other factors which are to be assessed by investors, the above-mentioned ones are key factors to assess and find long term wealth builders.
The Indian pharmaceuticals market is in a good space and has the characteristics that make it unique. Firstly, branded generics dominate this making up for 70 to 80 percent of the retail market. Secondly, local players have enjoyed a dominant position driven by formulation development capabilities and early investments. Third, price levels are low driven by intense competition. While India ranks tenth globally in terms of value, it is ranked third in volumes. These characteristics present their own opportunities and challenges for pharma companies.
While the ongoing pandemic has provided huge opportunities for pharma, another factor is the development of domestic pharma demand.
Pharma companies are well equipped with expertise and scale and as the demand for pharma stocks picks up, these companies stand to benefit from their growth by a great deal. Caplin Point Labs is one such company in this sector which is engaged in the business of producing and selling generic pharmaceutical products both domestically and overseas markets.
The pharmaceutical company currently produces medicines and sells largely to overseas developed markets such as the USA, China, Europe and others which are large consumers of medicines. On risks, the pharma business involves high amounts of regulation and changes in such regulations can impact their business and in turn profitability. Accordingly, investors should be cautious and closely monitor these factors.
ITC is engaged in multiple consumer businesses ranging from cigarettes to food products and stationery.
The company generates about The cigarette market has growth opportunities as the market moves from unorganized to organized segment which will result in market consolidation and huge market share gains for ITC. Its second largest segment FMCG is where the company has been putting efforts to derive the highest revenues and it has become its highest growth segment. Other products sold by the company include agri-products, paper products and IT solutions.
The company faces risks from regulation for the cigarette industry which can impact the pricing power for ITC, impacting revenues and growth. Another risk is from competitors as the industry sees intense competition, hence the company needs to be very proactive with their strategy. The IT sector is one of the most crucial sectors of the Indian industry as well as one the largest drivers of export revenue for the country.
The industry currently contributes to about 7. India is currently the largest IT services provider in the world. The country has an edge primarily due to the availability of highly skilled and less costly manpower available. Mphasis has a strong portfolio of cloud based solutions, machine learning capabilities, blockchain solutions and IoT Internet of Things among others, which enables it to provide tech solutions for future technologies. Mphasis has been seeing strong growth in its order book along with strong penetration on wallet share from its existing customers, whilst also acquiring new customers consistently.
It sees competition risk in gaining new contracts as the competition for new technologies remains intense. Another risk is from the currency value fluctuation as the company derives maximum revenue from overseas sources. Another factor to look at is the political and economic relations between countries to determine the ea The company has major growth opportunities as the country sees development of infrastructure and as electricity distribution and consumption grows in India. Another trend that has been rampant is the consolidation of copper manufacturers moving from unorganized to organized players, thereby allowing Polycab to increase its market share and market size as well.
Another theme playing out for the company is the penetration of electric goods among household consumers which provides a huge growth opportunity to Polycab as the consumption of durable goods rises. As this segment starts expanding further, it can grow both revenues and profitability for the company. RIsks from the copper wiring segment where copper price volatility can influence margins as well as regulation around the segment. Infrastructure is the general term for basic physical systems of a business, region, or nation; for instance, transportation systems, communication networks, sewage, water, and electric systems are examples of infrastructure.
APL Apollo tubes stand to benefit as the country sees growth in infrastructure development and it provides steel tubes and pipes which are critical to building infrastructure. The company is currently the largest supplier of galvanized pipes in India which have multiple applications such as Fencing, Cabling and Ducting, Automotive Bus BodyGreenhouse Structures, Gates and Grills, Electrical Conduit and Scaffolding among others.
It also manufactures black pipes which are used for water transmission and sees immense growth opportunities as water provisions and transmission networks are developed across the country. In the union budget ofthe government has proposed a major infrastructure development plan from which the company can gain largely as the capex cycle sees strong momentum. The risk of changes in regulations along with changing prices of steel could impact their margins.
Open a Free Demat and Trading today! Excellent analysis based on very good understanding of corporate values and contribution of good corporate governance for sustained growth of industries. Very educative and detailed explanations have been given of the industrial growth and the opportunities under various situations. The authors must be complimented for very lucid explanations given by him. In which 5 stocks a fix amt to be invested for 10 years… And expected Corpus amt. On maturity.
Save my name,and website in this browser for the next time I comment. post. Next post. Hello Ajay, Thank you for reaching out to us! Looking forward to serving you soon. Caplin Point Labs. Avanti Feeds. Tata Metaliks. HCL Technologies. Bajaj Auto. KEI Industries. Polycab India. Coromandel International. KEC International.Looking for a long term top
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