As optimism regarding a bull run gradually spreads to different corners of India and as, after a long time, friends and relatives call me up for stock recommendations, my mind goes back to an episode in January 2008 that changed my perception of how the stock market works.
It was a chilly January morning and with our five-month-old son, my wife and I were heading to the airport to fly back to London having attended a family function at my ancestral home. The year was 2008.
As we watched the first few office workers get on to buses and trams, the taxi driver asked me in Hindi, ‘Reliance Power…sir kya lagta? Company kaisa hai?’ [‘What do you think of Reliance Power?’]. When I replied that since I didn’t live in India, I did not know about Reliance Power, the driver realised that he could help me out. ‘Riks kam hai, security zyada hai’ said the driver [‘The risk associated with the company is low. It looks like a secure company.’] I chided myself for not having realised that the taxi driver was asking me about Reliance Power’s IPO, the largest ever in India.
By now, I was intrigued. I was after all in Kolkata, a city more known for its intellectuals than its risk appetite. And yet almost every second person I had met in the preceding week was discussing the Reliance Power IPO. The evening before, at the dinner table I heard elderly relatives – most of them middle class professionals – discussing how many Reliance Power shares they might be able to get at the upcoming IPO. My Bengali relatives had never before shown such enthusiasm for the stock market.
I asked the driver a few questions to understand how much he was planning to invest in the IPO. The driver earned around Rs 100,000 a year. He was hoping to be able to invest Rs 20,000 in the IPO. These were the savings he had accumulated over the last couple of years. The previous tranche of savings had been invested in buying a water pump back in his village in Bihar where his wife and children lived with the extended family. The sub-brokerage that the driver frequented had told its customers that this IPO would give investors returns of 40 per cent per annum.
A few weeks later, Reliance Power went public on February 11, 2008. I never found out whether the taxi driver was ‘lucky enough’ to buy shares in Reliance Power’s IPO. Several of my relatives did invest in the IPO. They are still trying to figure out what hit them. An investor who bought Reliance Power shares worth Rs 100,000 at the IPO, will have at the prices prevalent in August 2014 a mere Rs 32,000 worth of shares. That translates into a negative rate of return of 17 per cent per annum in the intervening six-and-a-half years.
In totality, the public invested Rs 103 billion in the IPO. That Rs 103 billion has now become Rs 33 billion. Where has the Rs 70 billion gone? This after all is a utility company which promised to invest the public’s money in power plants. Did those investments actually take place? Or did the government short-change the utility and indulge in post-contractual opportunism? Or are their other factors which explain Reliance Power’s post-IPO performance?
Reliance Power is an extreme version of the sort of issues which make investing in the Indian market so challenging. The investment opportunities in India are so obvious that almost every newspaper reader is aware of them. And yet, the overwhelming majority of Indian companies struggle to turn these investment opportunities into returns for their shareholders - over the past 20 years, over 80 per cent of listed Indian companies have failed to give share price returns better than the rate of inflation (which has been around 7 per cent over the period in question). However, whilst the vast majority of companies have failed to generate even double digit shareholder returns, the remaining minority has given healthy returns better than or equal to GDP growth (which has been around 14 per cent, in nominal terms over the past two decades).
These challenges mean that only a very small minority of investors in the Indian stock market are able to deliver market beating returns over long periods of time. Such investors excel in investing in that minority of companies which are able to profit from the Indian economy’s robust performance over the last 20 years.
Ever since I returned from London to work in the Indian stock market, the success of this elite group of investors has fascinated me. How were they able to figure out Reliance Power when the rest of the country was agog with excitement about the company? How are they able to understand which company will deal with politicians and bureaucrats ably and still deliver healthy returns for their shareholders? How are they able to see through the accounting subterfuges that a significant minority of Indian companies resorts to?
My forthcoming book, “Gurus of Chaos: Modern India’s Money Masters” sheds more light on how seven highly successful long term investors have built their portfolios and, just as importantly, nurtured their multi-decadal careers in a turbulent market which, to the untrained eye, seems more characterised by risk than by reward. This book, which is slated for an October release, is the culmination of three years of interviews, analysis, reading and introspection and will be my attempt to give something back to the country which my family and I have called home for the past six years.
(Saurabh Mukherjea is CEO, Institutional Equities, at Ambit Capital. The views expressed here are his own and not Ambit Capital’s.)
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