Big names don't always translate into gains

There is one thing common to crises. They all are eye openers. As the famous saying by Warren Buffet goes, 'Only when the tide goes out do you discover who's been swimming naked'. And the good part about them is that they are precursors to significant corrections. 

In this context, an article in Business Standard offers an interesting analysis. The event in question is the global financial crisis in 2008. 

The period post crisis led to a rerating for India's most valuable businesses. Those which fell from grace include the likes of Anil Ambani group, Essar Group and Jaypee Group etc. Thus some of the biggest bluechips in India have been the wealth destroyers. They have seen erosion in the market valuation since the 2008 crisis, as highlighted in the chart below. Even top 20 corporate groups (pre crisis era) have together gained just 4.8% in terms of market cap (CAGR) between FY08 and FY13. 

Market value erosion across India's top business conglomerates

Some of the main issues with the big groups were overexposure to cyclical sectors and high leveraging. With sole focus on growth and least regard for the risk management, these companies borrowed heavily at a time when debt was cheap and easily available. However, India's growth story did not unfold as expected and hence such companies suffered. Even when the economic scenario improves, we believe the biggest losers will struggle to make comeback. This is because they will be busy cleaning their balance sheets while the performers will race ahead making the most of the growth opportunities. 

Investors have some important lessons from the crisis and its impact.That is, not to get carried away by big names and blue chip stocks. While the latter boast of good track record with regards to growth, balance sheet size and liquidity, what they do not ensure is the robustness of the economic model in bad times. The slowdown that followed the period of crisis exposed some such companies. 

It is with this point in mind that we suggest investors to focus on quality of management and strength of balance sheet (rather than size) and attractive valuations. In short, a growing business that does not offer consistent and adequate returns could eventually erode shareholder wealth.