Profit is everything

Profit 100, our cover feature of 'Wealth Insight' June 2023 issue, is an annual exercise and has been so for many years. Until recently, I always considered it to be the kind of feature that was extremely useful for investors but a fairly routine exercise. Our team has evolved a unique and effective methodology for working on the data analysis for the feature. Still, at the conceptual or theoretical level, there was nothing much to discuss.

However, things have changed now, and not for the better. Here's what happened. Since time immemorial, everyone has understood that profits are the central feature of businesses and investments, and no discussion is needed on this issue.

Here are some basics any sane businessperson, investor, or analyst considers undeniable: Sustaining profits is crucial for survival. Optimising profits with less resource allocation, such as capital and other inputs, is desirable. It's more beneficial to have rising profits than to be stagnant. Many other rules can be derived from this, but those are just a waste of breath. And yet, the acceptability of these viewpoints seems to have diminished in the past 10 years. Many people, particularly in the endless chatter of media and social media, now perceive profits as non-essential. This is the ideological influence of startup propaganda. Not real startups but those sustained by Venture Predators. Until recently, in India, this attitude was only prevalent in the fantasy worlds of social media and media but not in the real world of equity markets and investors. However, the IPOs of eternal lossmaker 'startups' in India have also introduced these zombies into the equity markets. As long as they were sustained by foreign venture capital, I didn't care. Still, now that Indian equity investors are putting their money into these profitless businesses that are not businesses, we need to counter this propaganda.

This is where Value Research, Wealth Insight, and this issue's cover story come in. Now, I feel this is not just a routine cover story but something with a didactic purpose. We need to blow the trumpets of profits because not only are profits the kings of the realm of investing, but they're also pretty much its only truly important citizens.

It's seven years since we started running this annual series on India's most profitable companies. Through these years, the progression of our research team's annual exercise has transitioned from a simple ranking primarily focused on just profitability to a more comprehensive and multifactorial analysis. We've gradually incorporated various criteria and prerequisites that companies must meet for consideration, irrespective of their apparent profitability. This shift in approach is a systematic departure from the methodologies that such exercises normally use and, indeed, with which we ourselves embarked on this series. Over these last few years, Indian businesses have faced various headwinds - some have faltered while others have flourished. Through all this, our team has analysed the changing conditions and heavily tweaked the real meaning of the word 'profit'. This revised and expanded meaning of the word profit is different from what it means for an accountant or a taxman, but it's what makes more sense for an investor.

As it happens with every one of our data-driven stock selection stories since 2016, when you read our analysis and go through the chosen set of companies, you will see names that will come as a surprise. We all tend to have preconceptions of what 'good companies' are, and we shrink away when we see names that contradict those biases. A key motivation for crafting these highly data-centric narratives is to compel us to face and question our inherent biases.

Suggested read: Profits are profits