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Don’t put all your eggs in one basket, goes the hoary adage. That’s fine, but it doesn’t always work for companies which have to decide whether to diversify or not.
Diversification could mean entering new market, new industries, either related to an existing business or something completely different. As a management concept, it keeps on coming into and going out of fashion frequently. That’s probably because it is not a sure shot way of boosting revenues and profit growth.
This word came to my mind today, as a bunch of articles and news stories are all related to it in one way or the other.
Take the case of Exide Industries which sold its insurance business to HDFC Life. The entry into insurance was clearly a case of diversification gone wrong for Exide. Shareholders cheered the deal immensely. You can read our analyses on this here and here. We also have a piece on what the deal means for HDFC Life shareholders.
The case of ITC, which has become something of an Internet meme stock, is more complicated. It has a longer history of diversification. The company is present in hotels, agri-trading, and paper, besides cigarettes. But the latter segment still accounts for 85 percent of its profits. A cigarette focussed business has a lot of risks like punitive taxes and ESG (environment, social and governance) issues. In ITC’s case, perhaps it has to do with a diversification strategy pursued half-heartedly. My colleague Ravi Ananthanarayanan has written that ITC should perhaps take a leaf out of Zomato’s playbook. See what it is here.
What about the winners?
In an otherwise tepid day for the markets, Reliance Industries* hit a new high as investors bought its diversification story into telecom and now, renewable energy.
In speciality chemicals, it’s not so much about companies as much as their customers diversifying. After the pandemic, the China Plus One sourcing is in vogue and speciality chemicals could gain disproportionately.
Apart from Exide and HDFC Life, our research team has also written the following notes full of investment insights:
Ujjivan SFB – What next after the big fall?
Defence stocks move to restock their ammo
What else are we reading today?
Is global growth slowing while India’s growth is accelerating?
The Eastern Window: The significance of China's rail link with Myanmar
Monsoon Watch 2021 | Rains improve, but season still in deficit
Revival in engineering services spend puts L&T Tech, Tata Elxsi firmly on growth path
GuruSpeak | How to use options data and technical analysis in swing trading
The downside of the economics of self-reliance (Republished from the FT)
The Chinese control revolution: the Maoist echoes of Xi’s power play (Republished from the FT)
Picks from our Technical Analysts: ONGC, Bajaj Auto, ONGC and Tata Motors (These are published every trading day before markets open and can be read on the app)
*(Disclosure: Network18 is controlled by Independent Media Trust, whose sole beneficiary is Reliance Industries)
Ravi Krishnan
Moneycontrol Pro
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