The right way to ride India's tech wave

Paytm's role in the fintech economy is commendable, and the company is almost synonymous with cashless transactions. As a user, I couldn’t be more thankful. It's such a convenience to not have to bother with cash when travelling, and functional ATMs are hard to find.

And yet, despite being a great platform with amazing network effects, Paytm never made the cut for us as an investment. Apart from the regulatory minefield, the lack of a barrier to entry kept us away from this tech business. Our caution served us well.

The recent episode highlights the dilemmas and challenges that Indian tech investors are facing. The average lifespan of a company has shortened, thanks to tech disruptions. In the US, eight of the top 10 listed companies are tech firms. As an investor in India, an economy that's slowly aspiring to be an innovation hub, you can't afford to not bet on tech players.

Until a few years ago, this wasn't really possible. But since covid, tech startups have mushroomed, and several – such as Zomato, Policybazaar, Nykaa and Mamaearth – have been publicly listed. However, recent happenings at Paytm and Byju’s highlight the need for caution in this space.

So, can investors be a part of the tech revolution without making an all-or-nothing bet?

I believe there is a way – and it's through betting on companies that create adjacencies. It's like creating optionalities in the tech space in the existing business, while committing reasonable capital to it. Optionality is generated from an investment that has the potential to give huge returns, but the quantum cannot be ascertained while making the investment. One can arrive at a fair value only over a period of time. Such investments also come with their fair share of risks.

What’s exciting about optionality is that losses are limited to the sum invested, but the payoffs could be disproportionate. It was the successful placement of such optionality bets that allowed Infoedge to make a killing when Zomato was listed. Amazon grew from just an online bookseller to taking over practically everything by betting on adjacencies. 

There are many more optionalities in the making. Consider a company such as Dhanuka Agritech, which is betting big on drone applications and planning to set up a joint venture in India for the development and commercialisation of biological products.

Kabra Extrusiontech, a manufacturer of plastic extrusion machinery, is accommodating products that could participate in energy storage. Through its division Battrix, Kabra has entered the EV battery technology and green energy space. Praj Industries has gone from just being a biofuel player to betting on renewable chemicals and materials.

Note that this discussion does not imply a recommendation to buy these stocks.

If these bets fail, they won’t cause the companies much harm, considering their strong positioning in the main businesses, in which they are market leaders. But if they work, they could create a lot of value over and above the main business.

This, I believe, is the right way to ride India's tech revolution.

Do you agree with my views? 

Stay tuned for more such updates on potential optionalities in the listed space.

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. 

This article is syndicated from Equitymaster.com