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Yashika Narang

@yashika_narang
2 years ago ~2040 views
๐ˆ๐ฌ ๐๐ข๐ฏ๐ž๐ซ๐ฌ๐ข๐Ÿ๐ข๐œ๐š๐ญ๐ข๐จ๐ง ๐ข๐ง ๐›๐ฎ๐ฌ๐ข๐ง๐ž๐ฌ๐ฌ ๐š๐ฅ๐ฐ๐š๐ฒ๐ฌ โ€œ๐๐ข-๐–๐จ๐ซ๐ฌ๐ž-๐ข๐Ÿ๐ข๐œ๐š๐ญ๐ข๐จ๐งโ€?๐Ÿง

Big titans- Adani, Tata & Reliance are on a swing!๐Ÿš€

Adani into Cements, Drones, Media; Tatas into Diagnostics; Birlas into Paints (Grasim).

Business diversification can happen in 4 ways:

1. Customer diversification
2. Geographical diversification
3. Product diversification
4. Sector diversification (related & unrelated)

Customer, geographical, and product diversifications are considered good as it reduces the dependence and risk from the same business.

But the perception of sector diversification is โ€œDiversifications in new sectors usually fail & managements generally end up misallocating capitalโ€.

A detailed thread on how investors should think of businesses that diversify into new segments and why all diversifications are not bad

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Yashika Narang

@yashika_narang
2 years ago ~190 views
And of course, this perception is not formed out of thin air because according to the statistical study, unrelated diversifications (diversification in a totally different industry) have had a very low success rate in the past.

One such case is Exide Industries, which diversified and entered into the insurance business by acquiring a 50% stake in ING Vysya Life Insurance Company Limited in 2005. Since then, the segment has barely generated any operating profits.

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Yashika Narang

@yashika_narang
2 years ago ~200 views
We can clearly make out from the above trend that the insurance business was clearly Diworsification the business. This is the reason, when the company announced to sell off its insurance business to HDFC life in Septโ€™21, Exideโ€™s share price surged by ~14% on that day itself!๐Ÿ˜…

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Yashika Narang

@yashika_narang
2 years ago ~190 views
But is it always the case?

No! As we have a few exceptions like Berkshire Hathaway which is also a diversified conglomerate as it operates in different businesses such as investments, insurance, railroad systems, and utilities-energy.

So, you must be thinking that how should one come to a judgment that whether misallocation of capital is happening in a company which is diversifying?

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Yashika Narang

@yashika_narang
2 years ago ~190 views
Even I had a similar question in my mind, so I read a Thread on diversification and got an opportunity to ask the same & understand in detail from Sanjay Bakshi sir himself in the session organized by Finnacle Academy.

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Yashika Narang

@yashika_narang
2 years ago ~190 views
Key learnings:

As investors, we canโ€™t go by the base rates every time, information specific to each situation needs to be analyzed.
It doesnโ€™t matter whether the diversification is related or unrelated, the important thing to consider is:

1. The โ€œlogicโ€ behind the diversification
2. Managementโ€™s capabilities to build a new business (considering whether they can do better than peers by diversifying; have enough resources, etc.)
3. Is it making economic sense (ROI of new business should not deteriorate the overall ROI of the company)

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Yashika Narang

@yashika_narang
2 years ago ~210 views
Sanjay sir also explained on Berkshire Hathaway that it has a very strong internal discipline on capital allocation. Each manager is responsible for its own segment, every business under Berkshire has to stand on its own, and there are no cross-subsidies.

So, everything here is very rationale and in this case, all of the three mentioned factors are present which makes it a successfully diversified conglomerate.

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Yashika Narang

@yashika_narang
2 years ago ~200 views
If I were to give one example of any Indian successful diversified conglomerate, it will definitely be the Bajaj group. The way each of its businesses is being operated till now- with a focus & vision of both the brothers in their respective businesses is wonderful.

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Yashika Narang

@yashika_narang
2 years ago ~100 views
Bottom line:

Rather than having a hard-core cemented judgments in the head about diversification as a cause of misallocation of capital, one needs to study each companyโ€™s situation from a 360ยฐ view and then come to a conclusion. And not denying that successful diversifications rarely happen, but the key to wealth creation remains in finding those rarities itself..!๐Ÿ’ฐ

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