Moody or sensible?

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.