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Friday, March 4, 2011

Why economic slowdowns actually help industry leaders.

In her book, 'The Indian Media Business', the noted journalist Vanita Kohli-Khandekar expressed in her foreward that the economic slowdown was one of the best things to happen to the E&M(Entertainment & Media industry) in India because
  • Too much free equity flowing in during the boom, made it remunerative(cost wise) for steady, conservative business models. When actors, directors, staff etc wages go up 2-3 times due to new entrants without corresponding revenue growth, then incumbents have problems
  • So, the exit of these new players allows strong business models to come back
I draw the analogy with difficult exams. Exams like CAT/IIT JEE are difficult and more able to filter the prepared candidates from the rest, when compared to exams like MAT,CET etc which become more a test of speed and luck. Similarly,tough times seperate the best from the rest. That is why incumbents welcome tighter regulations/barriers because they are better placed to navigate them

In retrospect, I could notice that industry leaders like SBI, HDFC, ICICI, L&T, Airtel etc have outperformed their peers(stock price returns wise). So the panicked reaction of selling off industry stocks as a whole, may be bad. If you are an investor in an industry facing a downturn(say real estate at present), shifting investments to the industry leader may be a good bet. In the Media context, firms like Onmobile may make sense in this current period when telecom/VAS stocks are being beaten down, but thats a topic for another post.

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