Investing lessons from the fall of Videocon

From the star power of Shahrukh Khan and MS Dhoni to consumer trust, Videocon had it all. But consumer trust slowly turned into consumer nostalgia, and the company is now only alive in sepia-toned memories of the 90s.

Videocon entered the new millennium as the largest consumer electronics company. After initial success as a TV manufacturer, the company decided to venture into other consumer electronic goods and became one of the leading players in the segment.

Today the company is surrounded by uncertainty and headlines of its top brass committing loan fraud. So what happened, and what can you, as an investor, learn from the fall of Videocon?

Too many baskets and not enough foresight
Diversification is good. True. But diversification is good only across businesses you can understand. Further, diversifying across businesses with high capital requirements without a blueprint for the future often turns out to be disastrous.

After living the highs of its consumer electronics business, Videocon decided to foray into the oil and gas segment in 1994, a completely alien segment for an electronics manufacturer.

And the mindless diversification didn't stop there. It decided to try its hand in the DTH business, retail, power generation, lifestyle, general insurance, and even telecom.

To the surprise of none, most of these ventures ended up being a burden. Crude prices took a nosedive from 2014 to 2016, which shot up its debt in the oil and gas business from Rs 2,495 crore in 2010 to Rs 21,490 crore in 2017. And the cut-throat telecom industry was not kind to Videocon either. While the consumer electronics division remained profitable, it could not compensate for the losses in the oil & gas and telecom business, and ultimately 13 of the group companies went bankrupt.

In short, keep your portfolio diversified but diversify across segments you understand. Your portfolio can do without the adventure.

Debt does not lead to wealth
Videocon was ahead of its time in terms of adopting the present unicorn philosophy of growth at all costs. While it's true that even well-managed multibaggers have often taken the debt road, too much debt is always a red flag. Videocon's debt jumped from Rs 6,953 crore in 2007 to Rs 27,283 crore in 2011!

So, consistent investment is the key to wealth, not mindless splurging using debt.

Not learning from your mistakes
Be it investors or businesses, those who do not learn from their past mistakes are doomed to repeat them.

Videocon's telecom venture was never a success. It had one of the worst ARPUs (average revenue per user) in the segment. To add to the injury, the Supreme Court decided to quash all the telecom licences awarded in 2012, putting the entire industry on life support.

So, what did Videocon do? Exit the segment?

No. It pumped an additional Rs 2,200 crore into the segment. As expected, things didn't go according to plan.

Ignoring the bread and butter
Despite all the diversification, Videocon's primary revenue source continued to be its consumer electronics business. Logic dictates that if any threat came to its primary breadwinner, its electronics business, Videocon would prioritise it over its other ventures.

Yet when foreign players like Sony and LG came knocking at the door, Videocon decided to hide behind its other ventures rather than bolstering its core business.

As a result, revenue became stagnant in the late 2000s and slowly started declining in the 2010s.

This shows that as an investor, you should hold on to your core holdings as long as possible. Unless there is a decline in fundamentals, you should hold your core investment through thick and thin.

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