The
market does not seem to apply a uniform yardstick to judge companies by
governance track record and growth potential
By Mohan Sule
As
if the mixed signals emanating from domestic and global economies were not
confusing enough, the market’s fancy towards companies without any common
grounds is confounding investors further. The issue is if precedence should be
given to track record of capital appreciation and payouts or transparency in
operations while making investment calls. Seasoned investors might point out
that the two cannot be separated. Companies based on sound business model are
able to make money ethically and judiciously utilize their cash. Yet this is
not always observed in the trading ring. It is understandable that companies in
the same industry get different discounting based on their governance and
growth qualities. Not all players in the FMCG and tech sectors, generally known
for their clean balance sheets, are treated alike by the market. When Satyam
Computer Services formed one of the quartets of the sought-after IT stocks and
there was not much to differentiate between them except for their marketing
efforts in bagging million-dollar clients, Infosys and TCS led the pack. In
hindsight, there appeared to be better comfort level with the body language of
NRN Murthy, Aziz Premji and N Chandrasekaran rather than Ramalinga Raju, who
was often seen with politicians. Eventually, the market’s judgement proved
correct when the account fudging explosion extinguished Satyam in 2009. At
times, even the canniest of investors can be fooled by glib management speak
and carefully orchestrated coverage of bosses in the business press. The
insider trading scandal was a huge blow to HUL but not an existential crisis
largely due to its robust product portfolio.
If
companies in sectors depending on openness as a prerequisite to surviving and
prospering because of the nature of their revenue streams and the profile of
their major investors are subject to discrimination, those whose earnings are
dependent on order flows from sources requiring intense lobbying and are prone
to fluctuate with changes in regulations should be, going by the logic, treated
with circumspection by the market. Commodity producers’ prosperity is mainly
linked to licences and construction players to orders from government. Till
recently, spectrum was awarded on a first-come-first basis and the telecom
space was invaded by real estate developers, cement makers, private sector
lenders, steel producers and oil explorers and refiners just like coal mines
were sought not for captive use but for to gain from scarcity. Despite the
stench of wheeling-dealing, big-ticket investors did not and are not likely to
shun these sectors. The reason for their interest is the same for the rush
among entrepreneurs and established groups’ foray: to capitalize on the
potential. In fact, institutional presence has enabled the small investors to separate
those with staying power from fly-by-night operators and given them courage to
take exposure to rewarding but extremely risky plays. Real estate players
traded on the stock exchanges are looked at with interest due to the discipline
listing brings in spite of operating in an industry known as a recipient and
conduit of unaccounted wealth. The dispersed shareholding and professional
managers of L&T have attracted large domestic and overseas funds despite
its presence in an industry dependent on PSU contracts.
The
preference for companies with dispersed shareholding compared with those with
major promoter control is seen in the better discounting enjoyed by Infosys,
where all the original promoters have stepped aside in favour of outside
managers, in comparison with Wipro, where the promoter has given a key position
to his son. In contrast, investors seem to prefer automobile makers run by a
dominant shareholder. The Japanese owners of Maruti Suzuki India have installed
their own team at vantage points. Almost all sought-after two-wheeler makers
are controlled by families. The premium pricing varies only to the degree of
market share and growth plans. The same story is repeated in the pharmaceutical
sector that was till liberalization dominated by MNCs, enjoying huge valuations
even though operating under Fera. The situation has reversed and
promoter-driven local drug makers are chased for making cheap generics for the
developed markets. The uncertainty about regulatory overhang scares ordinary
investors but not institutional investors. An extension of the investment story
can be found in the RIL stock. It escapes from getting trapped in the commodity
cycle because of economics of scale, ending sacrificing growth for stability.
When in a position to eject from the predictable orbit on to the growth
trajectory on the back of the cellular business, it was, ironically, the rush
of institutional investors despite the tight grip on ownership and opaqueness
that boosted the scrip.
