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 AAA Profit Analytics Pvt. Ltd. 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 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)