Are the high-flying “new economy” stocks crashing or just grinding through a patch of rough turbulence? Well, this circumspect question often crops-up in the mind of investors when relatively young companies witness sharp correction, especially, followed by rise to unprecedented price-to-earnings ratios during the bull phase.
In new economy the value is created by intangible assets: ideas, brands, ways of working, and franchises. The risk premium demanded by such companies ride on the assumption that in a few years time, they will win out over the competition. However, investors may not fully factor in the consequences of the transition from a growth market to a mature market.
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Dot-com Bubble
The tech bubble, which originated before the turn of the century, marks a striking example of new economy stocks going through a classic boom and bust cycle. However, the silver lining is that every new economy-led story, even after shaving off its speculative froth, leaves behind a semblance of new technological innovation, on the back of which the sector climbed to unsustainable market valuations.
The internet boom heralded steady commercial growth of the internet with the advent of the World Wide Web. Fortunately, today the tech stocks promise the greatest return despite their nerve wrecking variations. IT bellwether stocks have, now, gone past their bubbly valuations on the back of firmly footed fundamentals. It took almost a decade for these stocks to climb back to their earlier peaks recorded during the dot-com bubble.
Media & Entertainment
However, not all new economy revolutions end up with the same fate of gung-ho revelations. The introduction of new technology also comes with circumspection that all newly-sparked changes might not necessarily generate strong long-term sustainable cycles on the stock markets.
In India, the media and entertainment industry went through a similar rusty cycle; though it was not a full-scale bubble, expectations were built big-time that media would emerge as a sun-shine sector. The crisis led by 2008-recession spelled rough waters for businesses involved in creation, aggregation and distribution of content on account of acute slowdown in discretionary spending by public.
Reliance Mediaworks, formerly Adlabs Films, touched dizzy valuations in January 2008. The stock price of this ADAG firm slumped from its all-time highs of Rs.1600 to Rs.100 now. Deccan Chronicle Holdings is way off from regaining its peak price of Rs.270 recorded in early 2008; the stock lingers down at sub-Rs.60 levels now.
Social Media
While we speak about media, how can we forget to make mention of the incredible social media? This niche concept media has emerged as the biggest wonder of the new millennium; and no wonder that the stakes have also climbed up the ladder along with its frenetic fame.
In short, social media became the ‘Face’ of the internet ‘Book’. Whatever small connection gap that the internet had left within the virtual world, has been bridged by social media and exploited to its fullest ever; so much so that the virtual world now stays closely connected with the real world by the virtue of social media platform.
This has sent valuations of the social media industry soaring high and wide. The social media gold rush started way back in 2005 when Rupert Murdoch’s News Corp. bought into MySpace as an act of visionary. But, on the hindsight, the so-called vision turned out to be blurred when Facebook came up with superior offerings and News Corp. had to make an exit from its stake at a substantial loss.
In June 2011, Facebook was valued at $70 billion when Investment fund GSV Capital bought 225,000 shares in the company; though officially Facebook claimed its valuations at $50 billion during December 2010. However, some expect the social media giant to be valued at around $100 billion by the time it goes public, which is rumoured as soon as Q1-2012.
Education
Fast growing education industry is next in line of fire and investors’ apathy. Though, each beaten down stock in the sector has its own bit of negative news to narrate, the fact of the matter remains that industry has been de-rated on the bourses. The latest to join the row is Chennai-based education company Everonn Education, which has been hammered down by 40% in last 2 sessions after the arrest on bribery and tax evasion charge of its managing director, P Kishore.
Another education giant Educomp Solutions has already corrected 40-45% in one month on the back of income tax raids in its offices, indicating susceptible quality of accounting standards followed by the company; this, despite positive vibes of a story that boasts of secular growth prospects, but PE multiples taking a beating on account of corporate governance issues.
Both the education companies have shown formidable progress and growth backed by smart FII money. While Educomp’s shareholding pattern comprises of 35% FII holding, showcasing smart non-promoter back up; Everonn Education boasted a little over 29% institutional investor holding as on June 2011. The Blackstone Group invested $42 million in Everonn in 2009.
Infrastructure
Lastly, we have also witnessed a classic boom and bust cycle in India’s infrastructure sector. Theoretically, infrastructure sector can not be included exactly in the new economy space, but looking at India’s new dawn as fast-paced growing economy starved of infrastructural facilities, I would like to categorize this sector as a new-age sector.
Recently, this crucial sector has witnessed a massive meltdown on the bourses bogged down by high interest rates and leveraged debt positions of the infrastructure companies. The space requires a voice on the policy front from the government, initiatives in terms of land acquisition, non-availability of coal and gas linkages, high working capital requirements and fast tracking of bigger projects, and delay in payments by state electricity boards.
Today, most infrastructure stocks are languishing substantially below their 2008-recessionary lows, leave alone 52-week lows on the bourses.
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@ Viral,
If such steep fall occurs, no doubt investors will be worried irrespective of short term or long term.
Few companies believe in the intrinsic value of the company and try to reassure investors by offering buyback facility. Recent example being Reliance Infra. They reserved 1000 crores for this activity. This gives investors confidence. If they still dont have confidence, they can always exit. Another stock that comes to my mind is Sasken in IT sector few years back.
Educomp has a good name. I too had few shares but came out long time back. My dad still owns some. Though they are now caught in scandal now, the management should come out with such buy back offer which will give the investors confidence.
Viral, good post. I am believer in the opportunity the new age sectors present be it education, infrastructure, social media etc. It’s only a matter of time before Education or Infrastructure become the poster child of the stock markets and potentially something like Infrastructure could become the bellwether of the economy. Short term corrections are not predictors of the importance/ value of these companies. My char anna.
Altaf, I agree with you that there are no global food brands from India. I see that as an opportunity for existing players like Haldiram or what ever to take it to the global scene. They have snacks that can be accepted outside India. They could also customize their snacks just like KFC or McDonalds customizes their burgers. I believe that Indian economy has a long way to go… India shining!
Madhav,
Exactly, corrections are the part and parcels of the stock market life, you can not wish it away. But, if these corrections are so steep, say, for example, Educomp Solutions has corrected from Rs.1000 since Oct 2009 to Rs.225 now, the charm of the stock is lost substantially.
If the correction or P/E contractions are so steep, investors tend to become circumspect about such stocks. Even though the sector prospects remain bright, such unusual correction beats the investors confidence and exuberance to keep moving on with it.
They start questioning their own decision or investment dynamics into the specific company. They feel that they’ve missed out on something which market knows, but they don’t know. Only time comes out with an appropriate answer for such skepticism, but until than it could be too late to take corrective steps.
However, I continue to hold a positive stance on Educomp shares, myself :)
The best “New Economy stock” if it can be termed as one is Titan Ind.
Many others may have fallen but Titan represents the best New Economy stock. It diversified from just watches to total Life Style.
Coming to foods, I am surprised how things are “NOT” working for Indian dishes.
Take the case of Western fast foods. Take Pizza or fried chicken or noodles or burgers. There is no patented process. Its only ingradients (which also are same but flavorings differ) These foods came into existance less than 100 years back. Still westerners succeeded in getting so many brands registered and made simple foods as global household names.
Now take our Indian foods. Every one in the world knows what is Idli, wada. They are in existance since thousands of years. Still !! Did we manage to create a single brand?? NOOOOOOO.
Take Chicken Tikka Masala. It succeeded so much that it became the national dish of UK. Is there a single established brand name?? NOOOOOOOOOOOOO!!
Why??
With so many of our regional dishes instantly recognized, appreciated do not have a single brand name.
When I see Pizza Hut, KFC, Mc Donalds, Burger King, Coke, Pepsi become household names globally, I think we have something wrong in our way of looking at things. We dont know how to create a single brand with our so many established dishes.
A simple consolation : Saravana Bhavan has created a brand name in its small way in South Indian Vegitarian Restaurants in very few cities in West, Far East and GCC. I can think of no more brands. Kamat is another example in a very small way.
Just my two paisa :)
ADD ON:
The list just goes on… Even the companies from renewable / alternate energy sector languishes on the bourses, be it Suzlon Energy from wind-energy space or Praj Industries from bio-fuel equipment space.
Guess what? We’re already witnessing frothy valuation in the niche Food Retail space in form of soaring stock price of Dominos pizza-fame Jubilant Foodworks.