Trends in business keep changing. Not long ago conglomerates were one of the most popular business models. Huge conglomerates dominated the markets; in those days stand-alone businesses were not of such vital importance as today. However, having said that it does not mean that conglomerates have lost their relevance to the Indian markets of today. 

Conglomerates are companies that either own completely or partially companies within one or multiple industries and sectors. Good examples of Indian conglomerates are ITC, Reliance Group, Tata Group, Grasim and more recent conglomerates like Indiabulls, Pantaloon, etc.  

Understanding conglomerates and their relevance:

Conglomerates are plainly speaking, groups of companies owned by a single company. There is no fixed criterion for defining such companies because they can own companies either in the area of operation of the parent company or even own a very diverse set of companies. As an example, Bajaj Auto owns Bajaj Finance, although Bajaj Auto makes two wheelers, Bajaj Finance is a private sector moneylender specializing in consumer finance. Conglomerates are of importance to the investor because they offer diversification; some conglomerates are well and truly diversified. As it is well known that business cycles among various sectors are different and it is also true that recession in one sector may not traverse across all sectors, these companies can provide good support for the investor in trying times. Conglomerates unlike other companies also have the ability to survive by counterbalancing the downturn in one subsidiary company by growth and expansion of other businesses. An opportunity that is not available to stand-alone businesses.  

Advantages of investing in conglomerates:

Conglomerates are well known for surviving economic storms. Western conglomerates like GE, 3M and Berkshire Hathaway have all weathered and survived economic downturns. The following can be termed as advantages of investing in conglomerates: -

i)        Diversification: Conglomerates are diverse by nature. They are less likely to be influenced by downturns in one sector of their operations.

ii)      Expertise: Many conglomerates have a better grip at managing diverse businesses and running them.

iii)     Synergies: Various synergies can arise within one conglomerate among various companies of the flagship.

iv)    Growth: Conglomerates are generally focused on growth, and acquisition plays an important part in such growth. Many conglomerates have built successful businesses after acquiring companies.

Disadvantages of investing in conglomerates  

There are some disadvantages of investing in conglomerates as well. These disadvantages are mainly based on how these companies are valued by the investors and the markets in general. Let’s examine them below: - 

i)        Conglomerate discount: This is one of the most prominent criticisms of conglomerates as investments. Conglomerate discount is basically the stock market’s penchant to undervalue the stocks of such companies. So plainly speaking, conglomerate discount is the addition of each of the subsidiary companies intrinsic value to that of the parent company and the subtracting the conglomerates market capitalization from that figure.

ii)      Lack of focus: - The old adage “Jack of all trades, master of none” can be used to describe some conglomerates. Some conglomerates are unable to achieve any synergy or efficiency at managing diverse business interests.

iii)     Better ways to diversify: Conglomerates may or may not be diverse. You will have to study the company deeply to understand how diversified it may be but if you just invest in stand-alone businesses which are operating across various sectors you can diversify your investments by yourself in a far more effective and easier way.

iv)    Subsidiary burden: Certain subsidiary companies come under un-necessary burden because they have to back other conglomerate companies that may not be doing well. This is not a problem with stand-alone businesses. 

Should you invest in a conglomerate?

That would depend entirely on the conglomerate. It is important to look for value as you would elsewhere while investing. Certain conglomerates are very well managed and have built wealth for their shareholders across many years. However you should consider the subsidiary companies of conglomerates in your analysis when making up your mind, if tomorrow the conglomerate is broken up will these companies generate wealth for you a shareholder? As long as conglomerates have solid financial discipline, good management and an ability to be flexible with their subsidiary businesses they make excellent investments especially in the times of market volatility.

In this volatile market, what should you do as an investor? What strategy to adopt while picking up stocks? Let’s take a look....

The equity markets have been in a volatile mode since last few quarters. Most of the retail investors have been stranded with long positions, after the massive fall in the month of January. Since then their participation in the equity markets has been very low. The reason behind this is that most of the investors are confused in which way the market will head because of the high volatility. In such a situation a retail investor should stick to the fundamentals. 

Top down or bottom up?

Analyzing the basic fundamentals of various companies is relatively simple and any average investor can do it. Such analysis can be done by two different approaches viz. the bottom-up approach and the top-down approach. 

The bottom-up approach: In the bottom-up approach the main focus is the target company and other parameters like the overall sentiment, economic cycle, political condition, Sectoral outlook etc. The basic belief under this approach is that companies with good management will survive and do well even in tough conditions and outperform their peers in the same sector.

The top-down approach: In the top-down method emphasis is given to the broader economy as a whole. If the prospects of growth of the economy are good then various sectors in the economy are studied and the sectors with healthy growth prospects are identified. Once the sectors are identified various companies falling under these sectors are studied and the companies which may outperform its peers are selected for investment. 

Which approach to adopt?

Though both the approaches are different, both of them are effective. They also have their own pros and cons. For example, in the case of bottom-up approach though one may select a fundamentally strong stock, one may have to wait for the returns for a longer period of time if the economy is passing through a rough patch. On the other hand, in the top-down approach though all the factors are analyzed to zero down to certain investment ideas; some of the niche sectors may get overlooked. Also small sectors with very few companies may be overlooked. Good companies in sectors with modest growth prospects may skip attention. In current scenario, the fundamentals of the economy change very fast due to the volatility in commodity, global political conditions etc. In such a case the prospects for certain sectors may change very fast. Thus, investors need to be in touch with the market situation constantly and should always remember the reason behind investing in a particular stock. 

Analyzing the economy and the industry at regular intervals has become extremely necessary in today’s situation. Thus, the top-down approach is more advisable to investors instead of bottom-up as it considers the overall picture of the economy and the industry as well.