India’s top companies are navigating the tricky waters of growth and diversification. While industry giants like Reliance Industries (RIL), Larsen & Toubro (L&T), and Marico explore acquisitions to drive inorganic growth, tech stalwarts such as Infosys and TCS reward shareholders with high dividends.
However, Aswath Damodaran, professor of finance at NYU Stern School of Business, questions whether this race to reinvent can pay off in the long run.
Speaking on The Meb Faber Show, Damodaran shared his perspective on the strategies aging companies employ to remain relevant. “In practice, companies fight ageing. They don’t want to get older. They want to be young growth companies,” he said, pointing out that middle-aged firms often refuse to return cash to shareholders, opting instead for risky investments.
Damodaran noted that while diversification sometimes works, as in L&T’s entry into the software space, such successes are rare. “Microsoft and Apple managed it, but these cases are exceptions, not the rule,” he said. He highlighted how markets initially reward older companies with higher price-to-earnings (PE) multiples when they diversify but are quick to penalize them if growth fails to materialize.
Younger firms like Adani Green and Zomato prioritize reinvestment, trading profitability for high growth. For instance, Zomato trades at a massive 336x trailing 12-month PE, while Adani Green trades at 186x. By contrast, older firms like RIL and L&T have much lower PEs of 26x and 39x, reflecting a balance of growth and shareholder returns.
Damodaran pointed out that sectors like FMCG and PSUs remain consistent dividend payers, with IT companies such as Infosys and TCS now leading in payouts. However, many middle-aged firms attempting diversification struggle to provide consistent returns.
Damodaran warned against blind optimism for young tech firms, citing examples like Tesla and Amazon, which took years to become profitable. While companies like Adani Green have delivered stellar returns (50x since its 2018 listing), others like Byju’s and Paytm have faced sharp declines in valuations.
In the podcast, he also cautioned against investing in businesses deeply intertwined with politics. “The darkest part of valuation is where politics and business intersect,” he said, referencing the late Charlie Munger’s regret over his investment in Alibaba.