Famous words of Mr. R Subramaniam (Subhiksha, Subiksha fame)
The problem is that Indian retail was doing too much, too soon. The kind of investments and expansion that Indian retail was attempting was unprecedented. We ourselves added 1,500-plus stores in under 24 months — even for a small store format, this would surely be a global record. Big players like Reliance and Birla were investing as if there was no tomorrow — the mirage of retail being the next telecom in respect of market capitalisation opportunity was so alluring that no investment was too large, and no loss was too big to take in the quest for size and scale. And most organised retailers had nothing but consultant reports to work on since none of them had any exposure to retail — and consultants could not figure what the issues peculiar to Indian retail were.
This is not a story on retail. Nor on R Subramanian or Subhiksha..but on ‘the mirage…market capitalisation’ . LOL. If businessmen ran their businesses because people should be impressed with their net worth, there has to be something wrong. Completely wrong. Market capitalisation in the long run is a function of EPS * Price Earning Ratio.
EPS is a function of profit after tax/ share capital and Price Earning Ratio is a function of how much the market likes you. So if you think you can increase your market capitalisation without EPS (cash flow) but just on hype there is something wrong with you. Completely wrong.
Look at the ADA group – there is no new creation of this group which has generated cash in the recent past -( telecom was created by MDA). There is no sensible profitability in the mutual fund, life insurance, general insurance, power businesses, but market cap is high. So high that he is called the 3rd richest man in India.
The Kumar Mangalam Group is generating cash from Aluminium, Copper (but poor margins), Cement, etc. but burning very fast on Telecom, Financial services, Retail, – and not generating cash flow! Hopefully it will generate market capitalisation!
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