It was an unusually warm winter in the European continent in 1989. The western pacific was unusually warm due to El Nino conditions. Demolition of the Berlin Wall had just started. Under these settings the US President George Herbert Walker Bush and USSR General Secretary Mikhail Sergeyevich Gorbachev met at Malta, an archipelago in the central Mediterranean between Sicily and the North African coast, to discuss the end of the Cold War. The summit marked a watershed in the East West relationship. The summit was followed by formal end of cold war, completion of nuclear disarmament in pursuance of INF Treaty (1987) and dissolution of USSR in 1990-91. The apparition of the Second World War was finally liberated. The world looked forward to an era of peace, cooperation and progress ahead.
The two decades that followed 1990 would see unprecedented growth in global economics. Global trade and commerce flourished. The highest number of people got elevated from poverty in the third world countries across Asia and African continents. Information technology advancement revolutionized the way people worked and lived.
We could find many instances in history to show that when two arch rivals decided to bury the hatchet, the event marked the beginning of a new era of progress.
In business parlance, conventionally it is believed that when the largest competitors decide to merge their operations, it is usually marked by the end of a decline business cycle; even though beginning of a fresh ascending business cycle might not immediately happen.
The recent deals between Zee Entertainment and Sony Pictures Network; and PVR and INOX Leisure, in my view, are indicative of the tide ebbing in the Indian entertainment industry. The consolidation in broadcasting and exhibition businesses would create few mega players with a larger pool of resources and reach to face the threats from alternative sources like social media and pure OTT platforms. Of course, the improvement in the business conditions and profitability may not happen immediately, it is highly likely that the future of the Indian entertainment industry is much better than it would have been otherwise.
Overall market also seems to have begun to assimilate, though reluctantly, the tougher business conditions and growth challenges. The adjustment may be two dimensional, like always. First, the poor liquidity, higher bond yields and slower growth would require PE multiples to be derated (revised downwards). Second, margin pressures due to higher raw material and wage costs and lack of pricing power due to poor demand; and lower profitability due to higher cost of capital and lower capacity utilizations would warrant earnings downgrades.
Obviously, the 25-30% earnings growth forecasts for FY22-FY24 looks difficult to meet. From this point of view, the “fair value of Nifty” argument would require reassessment from both the angles – (i) achievable earnings growth; and (ii) sustainability of earnings growth trajectory.