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Lessons from the past

The telecom industry looks like it's heading for an upheaval, but that's nothing new

Disasters in equity investments--like the one in 2008-09--draw far more attention and stick to the mind far more than long and gentle periods of gains. At the pre-crisis peak eight years ago, the BSE Sensex was just under 21,000. By March 2009, it touched a low of 8,325. It was the biggest disaster in investing that any equity investor could remember. Since then, the markets have gained back everything and more. The BSE Sensex is now at 28,500 points and investors have been steadily making money for years. And yet, these gains have happened so slowly and steadily that it doesn't stick in the mind as some great event.

The nature of equity investing has changed over the years. Once upon a time, you needed some kind of an information advantage, some access to people or institutions that was not commonly available. Today, that's emphatically not the case. All information and all analytical techniques are available to everyone. For the most part, everything is free. Investors are limited only by their own intelligence, knowledge and the time that they can dedicate to investing. What's more, by using equity mutual funds, the amount of attention required and the quantum of risk become even lower, while the likelihood of steady gains becomes that much higher.

That is not to say that the equity markets are in any kind of a steady state. Look at the disruption that will likely be caused in the telecom industry over the next few years by Reliance Jio. This isn't a small industry. In fact, it's a giant one, selling more than ₹2 lakh crore worth of services to almost a billion customers. And yet, in a matter of hours, the details of Jio's services have thrown all assumptions out of the window. The kind of services that will be sold, what customers will do with them, how much they will pay for them, everything is suddenly up in the air again. It would be downright foolhardy to guess what the Indian telecom industry would look like five years from now. Suddenly, we are in a situation where no analyst should be trying to sound at all certain about where the various companies in this industry are going.

But even this degree of change is not unprecedented. Twenty years ago, the top five companies in India, by market capitalisation, were ONGC, State Bank of India, Hindustan Unilever, Tata Motors and MTNL. These five were worth a total ₹81,000 crore, at a time when all listed companies put together were worth just 2.45 lakh crore. That's one third of the market. Now, the top five companies alone are worth ₹17 lakh crore while the market on the whole is worth ₹110 lakh crore. The five are TCS, Reliance, HDFC Bank, ITC and Infosys. MTNL which was worth 4.8 per cent of the market then is worth 0.001 per cent now. Of course, we all know that the Government of India is a champion at value destruction so nothing new can be read into this amazing decline, but the scale of the upheavals over the long term are amazing--during these years, MTNL was in the top five more often than Bharti was. The top five companies are now worth just 15.4 per cent of the entire market.

Given this past, would you be willing to make any kind of prediction as to what this list would look like twenty years ahead? Or even ten years ahead? And yet, it should not actually matter for the investor. That's because the actual identity of the companies is just information, which has to change. As a straight guide to investing, today's information will be as worthless a decade ahead as a decade ago's is today. However, what remains constant are the basic principles of business and investing, the rules by which companies reach the top and stay there. As the telecom industry enters a period of even deeper turmoil, it's worth keeping that in mind.