Business Growth (Part 2 of 3)

In post 11, we identified the first three avenues of growth for companies:

1) Inflation driven growth

2) Commodity price driven growth

3) Consumption driven growth

The above types of growth are more a function of external drivers rather than Company specific achievement. Many a times, the entire sector benefit or suffers due to impact of these three growth factors. Hence I term them as “Market Driven Growth”.

The next three growth types/factors are more driven by the Company rather than the external forces. Lets understand them:

4) Innovation driven growth

Companies innovate, bring in products which were non-existent, markets for which were unknown and customers unaware of the need. These types of companies are mostly identified once they are successful, good investors probably can identify them in their infancy. One great example of such a company is Tesla. Electric Vehicles, though known conceptually what not a market need. 

Apple is another such company. Ipod & Iphone created new product segments.

Unfortunately, Indian stock markets lack such companies in the listed space. I can think of Biocon as once such company. Their work in BioSimilars is very innovative and technologically very challenging. 

Predicting the success of the innovations is the toughest aspect and by the time the success is evident, the stock prices are usually at sky-high levels. Multiples or valuations do not matter for such companies. Market expects them to innovate and bring in newer products and more profits every year. 

5) New Lines of Business

This is similar to setting up a new company within a company. The key difference being the setup is funded by the parent company and hence the profits are attributed back to the parent company. The new company may be split off later in the life cycle to generate even more value for the share holders.

Reliance is an excellent example. From Oil to Polymers to Retail to Jio, each step was new line of business. There were others which were not successful, but when a few of them clicked, the business intrinsic value shot up.

Unfortunately, not all new lines of business are always successful. Many a times it is taken up as it is the promoter’s dream and clearly has no correlation to the core business. It is a means to use the profits from the parent company to the benefit of promoters. Either ways, if there is growth to be shown on the books for a new line of business, we need to take notice. 

6) Acquisitions & Mergers

The seemingly most easy way to grow is to acquire or merge. There are many examples of M&A every year. According to Aswath Damodaran, it is the quick and easy way destroy shareholder value. 

When we analyse company’s growth, we understand how the company has been able to achieve that growth. Whether the past growth is sustainable or one-off.  In simple terms, can you trust that growth to be consistent in nature. Remember, we analyse growth only after analysing business quality/efficiency. So we can be assured that the growth has come at an acceptable price. 

….Continued in the next post.

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