Rise of the fallen

Imagine you're wagering on the UEFA Champions League. You might be tempted to pool all your money on Arsenal, the underdogs who could deliver a jackpot if they manage to pull off the improbable. But a seasoned bettor would go for a far higher chance of a solid payoff. That would be Real Madrid, a team with a proven track record of success and a knack for delivering when it counts. Equity investing is no different. Market leaders with pole positions in their industries, unmatched scale, financial heft, and credible history of weathering downturns make for the obvious choice for savvy investors. They might stumble occasionally, much like Madrid's turbulent 2017-18 season, when the team struggled to find form, but champions are rarely down for long. By the end of that very season, Madrid clinched the title once again, proving why they are the best in class. Market leaders find themselves in a similar position right now. The ongoing correction has humbled these giants and their premium pricing. But as history tells us, when giants stumble, it's often just a prelude to their next big move. Why market leaders are ripe for the picking Leaders who dominate their industries and have the balance sheets to prove it are rarely cheap. But right now, the market's feeling generous, handing them at markdown prices. The Sensex has cooled off about 10 per cent from its hot highs reached a few months ago. About 26 market leaders, meaning the highest-revenue-generating companies in their industries, have fallen more than 20 per cent in the last six months. What this decline has done is claw back many of these companies by over 30 per cent below their five-year highs. The market has mistaken the kings for paupers. However, this is good news. The best time to get behind a champion is when the world mistakenly writes them off. Pull up any record and you will see fallen leaders bounce back resoundingly and go on to deliver extraordinary returns. Not just that, they tend to fare much better during market declines than their less competent peers. Check the data in 'Quality comes to rescue'. Proof that leaders rise again Century Plyboards, India's largest organised plywood player, is a textbook example of a fallen leader that staged an extraordinary comeback. In 2013, its stock price crumbled, falling 68 per cent from its previous year's high as the demerger of its cement business, which contributed over a third of its revenue, dragged down revenue down by 29 per cent and profit after tax by 61 per cent. Panic set in and investors bolted. But what they failed to notice was that the demerged cement and ferro alloys businesses were already a drag, riddled with inconsistent return ratios. Meanwhile, Century's plywood and laminates divisions—its core focus—were growing briskly, with enviable capital efficiency. The market, ever quick to punish and slow to reflect, marked the stock down to bargain-bin levels. For those who recognised this mispricing, the rewards were extraordinary. A Rs 10,000 investment in August 2013 would have grown to Rs 3.7 lakh today—a tidy 36x return. Not that Century hasn't had its challenges. The plywood market is famously cyclical, and the company has endured several severe drawdowns of over 30 per cent. But its strong brand, scale, and distribution have seen it bounce back, time and again. This isn't an isolated story. As seen in the table titled 'Leaders through thick and thin', 12 industry leaders have faced 50 per cent drawdowns 10 times or more over the last 20 years. Yet most recovered: Eight went on to become multibaggers, while just one resulted in losses. What makes them unshakeable? There's money to be made from betting on bruised titans as long as you know how to spot those primed for revival. Century Plyboards is one such example, and others that follow its playbook tick the following two boxes: They own the playing field: A market leader is defined by its ability to dominate its core market, and this dominance is often achieved through deliberate investments. Century Plyboards, for instance, carved out its niche through steady investments in brand building, which is uncommon for a commodity business. High marketing spends made it a household name, ensuring repeat customers. It further fortified its dominance by nurturing distributors, rewarding them beyond commissions and incorporating their feedback to improve products. The result? Solid volume growth, healthy profits, and enviable capital efficiency. What to look for: Companies that can invest strategically to solidify their position in the industry. Their financial muscle holds the fort: A true market leader demonstrates resilience during challenging times, especially when their dominance is threatened. This is ensured by their large scale and deep pockets. Century Plyboards had both. It thrived in a crowded market--teeming with informal players and cheap imports--aided by its financial heft and extensive distribution network. What to look for: Leaders possessing the scale and resources to fend off rivals and maintain their dominance during tough times. Watch out for pitfalls Not all fallen leaders are equal. While some rebound spectacularly, others turn into costly regrets. Here are some risks to be wary of when assessing giants that look like potential comebacks: Poor capital allocation is a silent killer. Leadership means nothing if the money is mismanaged. Even the bigwigs with poor financial discipline can collapse under their own weight. Jyoti Structures is a cautionary tale. Once a powerhouse in transmission towers, it thrived during the infrastructure boom. But mounting debt to expand international operations sent it spiralling. Investors who chased its drawdowns in the late 2000s learned a harsh truth: no amount of market dominance can save a company from its poor capital allocation decisions. So, if the leader i

This article was originally published on February 01, 2025.