The Great Indian Pivot
How Indian Market perceives “Pivot”?
Our Fundamental belief is that companies which are failing to grow their Core Business or have exhausted opportunities should either move to give hefty dividend payouts/Buybacks or start planting newer Moonshots (well before maturity of Legacy business) which can be complementary to Legacy line of business or something completely new.
No Pivot. No change. No Risks. No Growth = Status Quo = Value Destruction in Markets.
And, hoarding Cash on the books is also a kind of “No Risks=Status Quo” where value is destroyed, and PE ratios starts shrinking for those stocks.
We at Stallion believe “Pivots” are
- New sources of Growth for a company.
- The fire in the belly of the Promoter/Management hasn’t extinguished as of yet.
- It expands horizons, adds optionality,
And if the company has proven management (basically achieved a Terminal valuation w.r.t. Market) stock prices doesn’t fall on bad capital allocation (Trent, Jubilant Food, Havells India, etc.)
There are 5 sources of Pivot – which increases the Target Addressable Market (TAM) for a Company
- New Product Category
- New Company size Segment (Premium-Mid-Economy)
- New Geography
- New Channels (Online, Modern Trade, General Trade)
Pivot has generated lot of wealth in the Indian Markets. But, not all “Pivots” generate Wealth. There are some prerequisites in the Indian Markets where Pivots can be successful. There are probable 6 conditions –
Strong B2C Franchise of Legacy business. (Deeply Penetrated Distribution Franchise) (e.g. Havells India)
Strong Unit Economics of Legacy business. (in terms of store metrics, lowest cost, highest ROCE)(e.g. Trent and Jubilant Food works i.e. failure of Dunkin Donuts was short-term pain)
Opportunity Size to Sales should be significantly high of Legacy business. (e.g.Titan)
Cash flow from Operations of Legacy business should be very very large. (e.g.Reliance Industries)
Company belonging to a trusted Corporate house. (which has been shareholder friendly, of course!)(e.g. Tata Group)
High Institutional or High Promoter holding or Low-Float of shares.
A company achieves a “Terminal” Valuation where it’s successful in Pivots. Markets start believing in the longevity of the overall Franchise (Legacy + New). (A “Terminal” stage is that stage of a company, where the stock stops reacting on Quarterly Aberrations but moves on Strategic Direction of the Promoters or the Management. And, during times of lull in terms of news-flow there is intrinsic compounding which keeps pushing the stock higher.)
Companies which achieve “Terminal Valuation” definition as per Market, typically trade at Price-to-Opportunity size rather than Price-to-Earnings. We have to keep finding new methodologies to value these companies, which keep defying normal Logic.
What are successful Pivots?
When the new business starts exceeding 30% of Consolidated Profits. (e.g. Laurus Labs)
New business protects the down cycle earnings of Legacy business (e.g. Reliance Industries in Q4FY20)
Incremental growth of New business > incremental growth of Old business in absolute terms. (e.g. Deepak Nitrite)
When the Margins of New Business (with a proper ramp-up) > Margins of Legacy business. (e.g. Navin Fluorine)
Built good Market share in the new Business with new Technology/pricing disrupting the Incumbents. (e.g. Reliance Jio)
The decisions for management teams while pivoting or expanding Total Addressable Market for Companies should be divided in 4 quadrants as given below –
- New Customers, New Technology (Bottom Right) – These are disruptive technologies, no one knows the ultimate market size nor the speed of adoption, these are pure moonshots in earlier lifecycles of Company. Most of the Consumer Tech Companies fall in this category, they invented Social Media basically.
- Current Customer, Current Technology (Top Left) – Here, the market size is known, Technology hasn’t changed for a reasonable time-frame, there are no surprises, there are market share shifts only. Everyone’s competing for the same market with same technology. TAM analysis is useless in this segment. Where the longevity only matters for Dominant players.
The Pivots which makes sense in the Indian Market Context with respect to Risk-to-Reward –
New Customers, Current Technology – These kind of companies work on an Innovation Matrix.
Current Customers, New Technology – These kinds of Companies work on leveraging existing Distribution Matrix.
For other two matrices, New Customers and New Tech, Indian Markets aren’t mature enough to value them yet. Even when Reliance was investing heavily behind Jio, Markets started re-rating when the numbers started reflecting. It was targeting customers with disruptive pricing and new Tech ie. 4G.
Companies like Nazara will be underappreciated because with every new acquisition it is planting a moonshot for newer Customers and newer technology in terms of experience. For new Customers and New Tech, once Market agrees on the terminal valuations it’s difficult to catch hold of them.
And, for Current Customers and Current Technology, the Indian Markets would have already experienced losses due to low competitive advantage, low pricing power leading to lower Return Ratios. They move in spurts and spikes, but difficult to retain wealth and aren’t secular in nature.
The Great Indian Pivot –
We at Stallion Asset belief that the next leg of “Great Indian Pivot” will emerge this decade. This is when Proven Monopolies will find newer ways to reach Customers using Technology.
We have already witnessed how global Consumer Monopolies are finding newer ways to reach the consumers, and again these brands are continuing to win. Who would buy clothes online was the premise of skeptic investors, but Zara pivoted to report 30% sales from its Online Channel. Nike the global Consumer Monopoly for Athleisure-wear has pivoted 40% Direct Sales from 13% a decade back.
Reliance Industries alone added 9 lakh crores market cap once it pivoted from O2C to Telecom and Retail.
Chemical companies using the windfall gains of 2013-14 pivoted to new technology which was ESG Compliant, letting go off older plants and technologies leading to winning contracts with large MNCs and innovators. Covid-19 just accelerated these discussions; markets discounted them to a new “Terminal Valuation”.
When Markets realized the potential of Music Streaming business from Q3FY21, markets are trying to find a new terminal valuation in this space. Though, this pivot more was a result of Industry Evolution rather than Management’s skill. Be Skill or Luck, when there is change in Quality of cash-flows, the markets will hit the 5th Gear.
Astral in 2014, pivoted to Adhesives, the core business of CPVC Pipes was strong and in 2020 now added a new segment of Water Tanks. The markets didn’t wait to re-rate this new franchise given the success of its Adhesive Pivot previously.
Havells has seen multiple Pivot failures seen in the past. The strength of core business supported these bad Pivots. Like the one in Europe with Sylvania. Lloyds also seemed to be a bad allocation after the acquisition and failure to ramp-up sales, since the distribution channel was different than the Wires & Cables Channel.
Trent has pivoted multiple times. It has seen a failed JV with Tesco. Even its own Grocery venture hasn’t seen much success. Zara still is a financial Investment for Trent. But, when the company started disclosing Zudio numbers, the Markets did not wait to re-rate it from 400-800 levels. The growth was in excess of 40% here in Q3FY19.
Pidilite has continued to spread its distribution strengths in adjacent businesses of Adhesives. Customers like Carpenters, School-going children. Contractors working with water proofing solution, electricians, etc. Now, with Araldite acquisition, it is trying to capture different surfaces for Adhesive solutions.
Angel Broking went from 18 lakh customers to 53 lakh customers in a span of 2 years. This is one of the largest pivots we have witnessed in recent times, where business has completely pivoted from traditional channels to digital channel.
Indian Businesses are speaking about change and how want to move digitally ahead reaching Customers. We believe that this transformational change will lead to multiple triggers on Earnings. Cutting Middlemen, having complete control over supply chain.
Leading to Data analytics -> Better Decision Making -> Better Resource planning -> Unlocking of Locked Capital -> Either goes to Shareholders or Higher Reinvestment -> Value Creation.
Disclosure: The above blog is in no means a recommendation in any manner and should be used for educational purposes only. Stallion Asset is a SEBI registered Portfolio manager and Research Analyst. We may or may not have vested interest in the examples above. The examples given are no means a recommendation in any manner and should be used for educational purposes only.