How to find honest and minority shareholder friendly companies?

Investment Learning
1

I am in stock market for 5+ years and I had my share of mistakes and learning. One of major learning is if I am with honest management who is open, transparent and focused to increase long term shareholder value by proper capital allocation, dividend distribution, I am much better off. The biggest risk in stock market in India is unscrupulous promoters trying to use public money for private gains. Hence I felt that this should be one of the most important criteria to select stocks for investment.

Hence I started looking for place where I can find information about

  1. How to look for these excellent promoters/managements?
  2. Are there any names out there which you have come across as high integrity owners/leaders?

I will start with my experience with two names which comes to my mind.

  1. Ajay Piramal - Piramal Enterprises - One of the best capital allocator I came across. Very shrewd businessman with excellent minority invest friendly policies.
  2. Anand Deshpande - Persistent Systems - Highest Corporate governance standards. Very Humble and down to earth promoter.

My way of finding these individuals is to look at shareholder returns for past 5 years, names of other board members, auditors, glassdoor employee feedbacks, youtube videos of their speeches, if available etc.

I would invite other value pickrs to add value to discussion by their own experiences with different companies and their leaders.

Disclosure : I am investor in Piramal Enterprise and Persistent Systems for more than one year. No recent investment in last 90 days.

4 Likes
2

The management, who is honest, walks the talk, excellent capital allocator and have long term vision ,transparent he bound to be minority shareholder friendly :slight_smile:
To me below points need to be watched from management

  1. Capital Allocation Skill of Management: How company’s management invest their funds/earning
    a) Reinvest in the company’s assets to maintain the business;
    b) Grow Organically: Expanding the existing business if it is scalable and have good ROE
    c) Grow Inorganically: Acquired Company should add value in the acquiring company(Best if the ROC of the acquired company is better than acquirer)
    d) Use of Free Cash Flows: Paying generous Dividend /Share buyback (depends on the priority)
    e) Payback Liabilities
  2. Management should inform exchange before CNBC TV /ET Now flashing news about company (like marksans pharma UKMHRA GMP certificate withdrawal news in Dec 2015)
  3. . Need to find out the sectoral risk where the company belongs. Now need to check how management proactive in that risk. Example: USFDA warning in pharma sector(Sectoral Risk) . AP Crisis in MFI sector etc
  4. Last but not least : Most Important : Risk mitigation: Like How Management spreading the revenue generation source across products/factories/states/countries/continents so that if any factory/country/state get affected due to some sudden unfortunate circumstance then EPS should not be affected
3 Likes
3

Amitayu, that’s a nice post. Would you mind taking up a company as an example and describe the points you mentioned above? That would be really nice and helpful :slight_smile:

1 Like
4

Thanks for the compliment . :slight_smile:

Regarding the Capital allocation , as buffet said that it is not a cause of celebration that if a business grows its earnings year after year Because the same thing happens to a savings account if you add more capital each year, which does not make a savings account a good investment. It’s the basically return on this additional invested capital that determines whether allocated capital by management was good investment or not.This is known as ROIIC (Return on Incremental Invested Capital)

For Example, suppose XYZ Corp In 2010 had shareholders’ equity of Rs 10 million. At the end of 2015, its shareholders’ equity had grown to Rs 50 million. So in these 5 years, XYZ invested Rs 40 million back into the business.

At that same time, suppose earnings grew Rs 10 million , from Rs 4 million in 2010 to Rs14 million in 2015.

By dividing the additional earnings of Rs 10 million by the additional Rs 40 million in capital, we can see that XYZ earned a return of 25% on its investment, which is very good.

Now we need to check what what percentage of its total net earnings XYZ reinvested back into the business. Since 2010 to 2015, let us assume XYZ earned total Rs 50 million and as we know that
XYZ corp reinvested back Rs 40 million over the same time we can calculate XYZ’s rate of reinvestment which is 80%.

So next year if XYZ Corp continues to earn 25 % on investment and reinvest 80 % of its earnings, earnings should grow at about 20% .In other words if XYZ earns Rs 100 in a year , it will invest Rs 80 in next year and the return of on that investment will be Rs 80 * 25% =Rs 20 which is basically Return on Incremental Invested Capital (ROIIC) . This rate of return on incremental capital is the maximum growth rate in operating profit a business can reach without external financing.

Regarding the Risk mitigation, one example, I once got my fingers burnt on Marksans Pharma. Marksans Pharma had a single USFDA ,UKMHRA approved factory situated in Goa,India. The company had other factories in other countries but the margin was lower compared to Indian plant and the lion share of revenue got generated from that factory. I ignored the fact and later Marksans got GMP certification withdrawal warning from UKMHRA. The stock price halved within 3-4 days. At that time it was 10% of my portfolio (so there was a damage in portfolio cagr :frowning: ) and I learnt some lessons from this mistake like Management Quality, Valuation, Risk mitigation from Black Swan event is most integral part in investment.

Hope it will helps…

7 Likes
5

Did’nt Piramal delist Piramal Glass at low valuations and are now offering shareholders who did not give their shares 250/-

6

This is my checklist:

Promoters politically connected
Receivables outstanding increasing continuously
Companies with part-time chairman, CEO etc
M&A transaction with group companies
Competing unlisted subsidiaries
High royalty payments to parent companies (applicable to MNC)
Resignation of directors, CFO, company secetary, auditors etc
Credit rating (ICRA, CRISIL, CARE)
Not paying FD interest
FCCB borrowings, dollar denoted debt
foreign acquisitions
resignation of auditors directors cfo etc
hedging policy
Showing major part of the earnings overseas - easier to book fake transactions in tax-free jurisdictions like the UAE, BVI, and Mauritius with tiny auditors than it is in India

Sectors which require lot of political patronage – iron ore mining, realty & construction, liquor, bus transport, logistics, stone crushing, sand mining,
As a percentage of bank defaulters Diamond and Jewellery businesses tops the list.

Maintain a list of offenders who have had issues in the past.

7 Likes
7

Can someone share insights on the ethical best practices and actions expected from the following with respect to minority shareholder interest protection.

I’m assuming that in a publicly listed company these are the key professionals/organisations who have an important role to play with respect to the company’s money as well as shareholder interests, especially in promotor run firms. There is an incentive for them to act ethically failing which they could even be penalised.

CFO of the company

Company Secretary

Internal Auditor

External Auditor

Independent Director

SEBI

Can a fellow VPer can share their pointers on an ideal scenerio so the rest of it can use as a benchmark while analysing quarterly numbers and annual reports? Thanks

8

Straightforwardly disagrees with @amitayu & @Marathondreams . Good capital allocation skills can’t b justified as a trait of minority friendly promoter.

Wud request fellow investors…Think on it ,go deeper.
Check past actions, verify Walk the talk, response to individual investors during concalls,etc r some of examples for getting signals of quality of promoters

Seen ajay piramal’s transferring of debt to piramal pharma during demerger , where does the allocation skills helped here

Integrity n ability to share wealth with all respect n same breadth is rare

1 Like