Why Pramod Gubbi Says ‘Boring’ Sectors Are Better Than High-Growth Industries

The best investment opportunities in India lie in the “boring sectors” and not in the high-growth industries that seem to attract the most attention, according to Marcellus Investment Managers' Pramod Gubbi.

Over time as the company focused on its three necessary parameters for investment — clean management, reinvestment into high-return business verticals, and high barriers of entry — Gubbi realised that companies that were emerging were involved in producing basic goods or services.

Often the best investment opportunities are where it's boring, not spectacular and has built massive barriers to entry, which will prevent competition from coming in, the founder of the portfolio manager, which managed Rs 2,131.9 crore of assets as of August, told BloombergQuint in an interview.

High-growth industries, on the other hand, are often destroyers of economic profit, he said, citing the example of India's aviation and telecom sectors. The telecom industry has seen 44% growth in subscribers base for last 15-20 years, while the aviation industry has grown 21% during the period, he said. Yet, neither there has been any case of a telecom company generating capital at a rate greater than the cost of capital, nor in aviation. And the same holds for stock price returns, Gubbi said.

“In our experience, we have seen that popularly perceived high-growth industries are big destroyers of value,” he said, explaining how high competition leads to diminishing profits by way of price wars or disbursal of benefits to suppliers or consumers.

Companies in less exciting sectors such as Asian Paints Ltd. have given the higher return on capital of 35-40%, which is substantially greater than the return seen in some of the world's largest monopolies such as Amazon, Google and Facebook, Gubbi said.

This is partly because of the transitional size of the companies and partially because India is still a third-world country that grows relatively at a higher rate than peers.

Gubbi, however, warns that the advantage will attract foreign investors and competition that will want a part of that growth. He advises investors to hence look for companies that have deep moats and a long sustainable dominance in their sector.

Risk Reduction

Finding good companies and betting on them to get exponentially better involves risk. One of the ways to reduce risk is to ensure the company's management is on its toes to an extent that they're almost “paranoid”, Gubbi said.

“You can't be experts in every industry that you invest in and therefore you rather look at it today — if the company can dominate its sector today and that the management is not complicit but still hungry,” he said.

Watch the full conversation here: