Unintended Opportunities 24. February 2013 Rahul value investing (1) I look for opportunities to invest in for a living. In my experience, it is imperative to have an optimistic frame of mind to be able to identify opportunities. Every negative development creates unintended opportunities. I believe that by approaching things with a positive frame of mind one can identify the opportunity for making lemonade when looking at lemons. For example, let us the look at the case of hotels in Chennai, India, the city where I live. As India's growth story came of age in the early part of the previous decade, Chennai was discovered as a potential manufacturing destination in India and foreign investment poured into the city. The vibrant entrepreneur community of the city also played its part and the output and population of the city catapulted upward. One of the bottlenecks that the city faced was the shortage of hotel rooms. There weren't enough rooms in the city both in quantity and in quality. This caught the attention of hotel operators and brands like Marriott, Hyatt, ITC, Taj, Leela, Hilton, Westin and Radisson built new large size hotels in the city. These hotels started operations just as India's and Chennai's economies hit a cyclical slowdown. The result has been a precipitous drop in occupancy followed by a drop room rates. This has forced many of the older hotels to shut down capacity for refurbishment and renovation. The return of this capacity will keep room rates in check even as demand picks up. One could take a look at the above situation and paint a pessimistic outlook for the hotel industry in Chennai. I will not dispute that (at least in the short term). However, the excess supply of high quality hotel rooms and affordable prices are likely to make Chennai an attractive MICE (Meetings, Incentives, Conferences and Exhibitions) destination. What is potentially a problem for hotels has become an opportunity for conference organizers, fleet car operators, event managers, advertising companies etc. Once that ecosystem develops, Chennai will permanently become a MICE destination. The ecosystem is likely to remain a sufficient hook to keep conference organizers in Chennai even after prices begin to rise (obviously it will depend on how high they will go and what prices will be in the rest of the country). A similar situation might develop in the power sector in India several years from now. India is suffering from chronic power shortages in almost all parts of the country (the exception is the state of Gujarat). In some parts of the country blackouts happen because generation capacity has not kept up with demand, in other parts of the country state government owned power distribution companies are bankrupt and do not have funds to buy power from unaffiliated power producers and in several other parts, the power grid and the power transmission infrastructure is inadequate to transport the quantity of power that is being demanded. The problem is so large and has persisted for so long that almost every entrepreneur and government department in the country is trying to fix the situation and to profit in the process. However, I believe that (counter-intuitively) India is likely to experience a severe power glut in about 5 -7 years. This will most likely happen because large industrial consumers of power are almost all building captive power generation plants and their demand for power from the grid is going to disappear. Simultaneously power generation and distribution capacity is being enhanced on a war-footing and the government is trying to bailout the bankrupt state owned power distribution companies. Can we imagine a situation where the potential power glut will make India the go-to destination for power intensive toll processing industries like metal smelting (aluminum, copper, zinc and nickel) and chemical processing? I find that looking for unintended opportunities has two benefits. On the one hand, it keeps one's spirits up when looking at a barrage of negative news and on the other hand, every once in a while it gives one investment opportunities that one would not have otherwise discovered.