India’s super rich have benefited immensely from the unbridled consumer boom fuelled by the influential middle class
India’s super rich in 2009-10 rode one of those memorable upswings as the Sensex nearly doubled from 9708 on 31 March 2009 to 17528 on 31 March 2010. The value of equity holding of the Top 500 in the list climbed 106.72 per cent to
Rs 16,56,490.88 crore when the fiscal ended. And the world looks rosy all over again. But just two years ago, the economic downturn brought us face to face with the harsh reality of the fickle nature of equity as a repository of wealth. Yet, everything gets forgotten when the market takes off.
But this may just be the right time to remind ourselves about the chimera of wealth that equity tends to create. And how factors that make equity go wild can equally be the factors that bring it down. Here’s how the capricious equity can play truant. Mukesh Ambani’s Reliance group whose revenues grew 39.82 per cent in 2009-10 and net profits 3.94 per cent, recorded just 5 per cent growth in marketcap. Sunil Bharti Mittal’s Bharti Airtel, whose revenues fell 1.16 per cent but net profits rose 2.63 per cent, showed an even more anaemic 1 per cent growth in marketcap. In comparison, Savitri Jindal group’s (OP Jindal group) revenues and profits grew 14 per cent and 112 per cent, but marketcap shot up 389 per cent (largely, thanks to the listing of JSW Energy).
India’s super rich are the beneficiaries of a sustained consumption boom fuelled by the middle class. It is driving demand for two-wheelers, cars, white goods, homes, etc. which, in turn, is fuelling growth for commercial real estate, factories and infrastructure such as roads and ports on the one hand and aviation and telecom on the other.
The only downside of such boom cycles is that they lure entrepreneurs into over-leveraging themselves to build factories for future demand on the basis of current demand. More often than not, such hopes of a linear demand growth never hold good. And then industries get into the familiar cycle of sickness, sellouts, consolidation and corporate debt restructuring.
For those, whose wealth flows from the companies they own, that risk has never been higher than it is today, because the global exposure of Indian businesses is at an all-time high. In the years 2002 to 2007 when some of India’s biggest corporates emerged lean, mean and hungry from the technology bust of 1999-2000, they went on a global shopping spree. Many such as Tata Steel, Hindalco Industries, Suzlon Energy and Tata Motors spread themselves really thin. And they are yet to emerge from the consequences of that burden of debt.
Today, as we enter yet another boom phase in India, global markets such as Europe and the US — barring a few hiccups — too are on the recovery path. It may have taken India 60 years to hit the $1-trillion mark in GDP (gross domestic product) in 2007-08, but Motilal Oswal Securities’ Wealth Creation Study, 2010 predicts that India will add the next trillion dollars of GDP in five-six years. China achieved the $1-trillion landmark a decade ahead of India in 1998 and it took China another six years to add the next trillion in 2005. The next trillion took three years and the fourth just a year in 2008.
At home, in keeping with the coming boom, the investment phase has already begun in sectors such as automobiles, steel, durables and power. The domestic and global boom in demand will inevitably lull certain entrepreneurs into taking risks higher than they can afford. It would be futile to expect a businessman to let a money-making opportunity go by.
But investors must identify which super rich should they be backing? The steady horse, or the perpetually over-leveraged businessman? Take your pick. According to a December 2009 study by Motilal Oswal Securities on India’s Top 10 wealth creators, while Reliance Industries was the biggest wealth creator in absolute numbers and Unitech was the fastest wealth creator over a five-year period, the most consistent wealth creator was HDFC with a 10-year compounded annual growth rate (CAGR) of 25 per cent followed by Sun Pharma’s 24 per cent.
But remember, rising fuel prices, inflation and the stockmarket that is already at 18000 (Sensex) would pose the biggest challenges to the future growth of the valuations of the super rich (India’s ratio of market cap to GDP is already over 100 per cent). One way to identify the super rich you would back could be to look for the entrepreneur’s dependence on the business he or she owns. StandardChartered Bank’s Futurewealth report says that 57 per cent of the 1,100-odd wealthy it surveyed around the globe said income from their business was not an important contributor to their wealth. But 61 per cent said income from listed investments and 29 per cent said income from unlisted investments were either very important or somewhat important contributors to wealth. The wealthy in the domestic market may not be far from this reality.
From the global trends, it seems, good tidings have begun. The World Wealth Report released earlier this month by Merrill Lynch Global Wealth Management and Capgemini says total wealth of the world’s millionaires grew 18.9 per cent to $39 trillion in 2009. Worldwide marketcap shot up nearly 50 per cent from $32.6 trillion to $47.9 trillion, adding $15.3 trillion to the stockholders’ kitty. An interesting trend the report noticed is that north American millionaires slashed their US portfolio by 5 per cent in 2009 to 76 per cent. But by 2011, it is projected to be cut further to 68 per cent, releasing $1.3 trillion to be directed to Asia, Latin America and the rest of the world.
There may be more to follow to ease the tight liquidity in the financial markets. According to a study by London-based research firm Scorpio Partnership, the world’s rich — those with a wealth of $1 million and above — are hoarding nearly $10 trillion in cash. That’s a lot of investible money. What’s preventing the high net worth individuals from releasing the hoard into the system is the beating their investments took in the past two-three years. But Scorpio estimates that as soon as some of this money gets released into the system, global liquidity worries should subside.
Expect the unexpected then. First, big loan refinancing would turn a new leaf. Second, corporate financing would get aggressive. Third, liquidity will fuel the next wave in mergers and acquisitions. Before taking the plunge, investors may want to examine the track record of their favourites during the last downturn, rather than getting sucked in by an acquisition or a capex spree.
Rs 16,56,490.88 crore when the fiscal ended. And the world looks rosy all over again. But just two years ago, the economic downturn brought us face to face with the harsh reality of the fickle nature of equity as a repository of wealth. Yet, everything gets forgotten when the market takes off.
But this may just be the right time to remind ourselves about the chimera of wealth that equity tends to create. And how factors that make equity go wild can equally be the factors that bring it down. Here’s how the capricious equity can play truant. Mukesh Ambani’s Reliance group whose revenues grew 39.82 per cent in 2009-10 and net profits 3.94 per cent, recorded just 5 per cent growth in marketcap. Sunil Bharti Mittal’s Bharti Airtel, whose revenues fell 1.16 per cent but net profits rose 2.63 per cent, showed an even more anaemic 1 per cent growth in marketcap. In comparison, Savitri Jindal group’s (OP Jindal group) revenues and profits grew 14 per cent and 112 per cent, but marketcap shot up 389 per cent (largely, thanks to the listing of JSW Energy).
India’s super rich are the beneficiaries of a sustained consumption boom fuelled by the middle class. It is driving demand for two-wheelers, cars, white goods, homes, etc. which, in turn, is fuelling growth for commercial real estate, factories and infrastructure such as roads and ports on the one hand and aviation and telecom on the other.
The only downside of such boom cycles is that they lure entrepreneurs into over-leveraging themselves to build factories for future demand on the basis of current demand. More often than not, such hopes of a linear demand growth never hold good. And then industries get into the familiar cycle of sickness, sellouts, consolidation and corporate debt restructuring.
For those, whose wealth flows from the companies they own, that risk has never been higher than it is today, because the global exposure of Indian businesses is at an all-time high. In the years 2002 to 2007 when some of India’s biggest corporates emerged lean, mean and hungry from the technology bust of 1999-2000, they went on a global shopping spree. Many such as Tata Steel, Hindalco Industries, Suzlon Energy and Tata Motors spread themselves really thin. And they are yet to emerge from the consequences of that burden of debt.
Today, as we enter yet another boom phase in India, global markets such as Europe and the US — barring a few hiccups — too are on the recovery path. It may have taken India 60 years to hit the $1-trillion mark in GDP (gross domestic product) in 2007-08, but Motilal Oswal Securities’ Wealth Creation Study, 2010 predicts that India will add the next trillion dollars of GDP in five-six years. China achieved the $1-trillion landmark a decade ahead of India in 1998 and it took China another six years to add the next trillion in 2005. The next trillion took three years and the fourth just a year in 2008.
At home, in keeping with the coming boom, the investment phase has already begun in sectors such as automobiles, steel, durables and power. The domestic and global boom in demand will inevitably lull certain entrepreneurs into taking risks higher than they can afford. It would be futile to expect a businessman to let a money-making opportunity go by.
But investors must identify which super rich should they be backing? The steady horse, or the perpetually over-leveraged businessman? Take your pick. According to a December 2009 study by Motilal Oswal Securities on India’s Top 10 wealth creators, while Reliance Industries was the biggest wealth creator in absolute numbers and Unitech was the fastest wealth creator over a five-year period, the most consistent wealth creator was HDFC with a 10-year compounded annual growth rate (CAGR) of 25 per cent followed by Sun Pharma’s 24 per cent.
But remember, rising fuel prices, inflation and the stockmarket that is already at 18000 (Sensex) would pose the biggest challenges to the future growth of the valuations of the super rich (India’s ratio of market cap to GDP is already over 100 per cent). One way to identify the super rich you would back could be to look for the entrepreneur’s dependence on the business he or she owns. StandardChartered Bank’s Futurewealth report says that 57 per cent of the 1,100-odd wealthy it surveyed around the globe said income from their business was not an important contributor to their wealth. But 61 per cent said income from listed investments and 29 per cent said income from unlisted investments were either very important or somewhat important contributors to wealth. The wealthy in the domestic market may not be far from this reality.
From the global trends, it seems, good tidings have begun. The World Wealth Report released earlier this month by Merrill Lynch Global Wealth Management and Capgemini says total wealth of the world’s millionaires grew 18.9 per cent to $39 trillion in 2009. Worldwide marketcap shot up nearly 50 per cent from $32.6 trillion to $47.9 trillion, adding $15.3 trillion to the stockholders’ kitty. An interesting trend the report noticed is that north American millionaires slashed their US portfolio by 5 per cent in 2009 to 76 per cent. But by 2011, it is projected to be cut further to 68 per cent, releasing $1.3 trillion to be directed to Asia, Latin America and the rest of the world.
There may be more to follow to ease the tight liquidity in the financial markets. According to a study by London-based research firm Scorpio Partnership, the world’s rich — those with a wealth of $1 million and above — are hoarding nearly $10 trillion in cash. That’s a lot of investible money. What’s preventing the high net worth individuals from releasing the hoard into the system is the beating their investments took in the past two-three years. But Scorpio estimates that as soon as some of this money gets released into the system, global liquidity worries should subside.
Expect the unexpected then. First, big loan refinancing would turn a new leaf. Second, corporate financing would get aggressive. Third, liquidity will fuel the next wave in mergers and acquisitions. Before taking the plunge, investors may want to examine the track record of their favourites during the last downturn, rather than getting sucked in by an acquisition or a capex spree.
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