Review: India's flashier tycoons are best avoided

Astral

14/10/2016 03:53

(The author is a Reuters Breakingviews columnist.  The opinions 
expressed are her own.) 
    By Una Galani 
    HONG KONG, Oct 14 (Reuters Breakingviews) - India's flashier 
tycoons are best avoided. The country is full of colourful 
businessmen. But shareholders looking for ways to profit from 
the world's fastest-growing large economy are better off backing 
quiet introverts. That is the main takeaway from Saurabh 
Mukherjea's "The Unusual Billionaires", a collection of case 
studies of the tiny fraction of listed Indian companies that 
have consistently generated superior returns over the past 
decade. 
    The author is chief executive of institutional equities at 
Ambit Capital, a home-grown brokerage known for its sharp and 
witty research. The book is wordy, technical in large parts, and 
can be tough going.  Nevertheless, it provides a valuable 
insight into the characteristics that companies need to succeed 
in the noisy and evolving emerging market. 
    Unsurprisingly for a cricket-mad nation, analogies to the 
national sport abound. In his hunt for the corporate equivalent 
of Rahul Dravid, the renowned Indian batsman, Mukherjea screens 
companies based on old-fashioned fundamentals. 
    He filters roughly 1,500 sizeable listed companies, picking 
out those that have delivered both annual revenue growth of at 
least 10 percent and a return on capital employed of no less 
than 15 percent for each of the last ten years. Different 
measures are used for financial companies. 
    The hurdle does not seem particularly high given that 
India's nominal GDP has expanded by almost 15 percent a year 
over the same period. Nevertheless, just eight companies make 
the cut: private banks Axis and HDFC Bank  HDBK.NS ; Asian 
Paints  ASPN.NS  and Berger Paints  BRGR.NS ; fast-moving 
consumer goods firm Marico  MRCO.NS ; Page Industries  PAGE.NS , 
which makes Jockey branded underwear; and Astral Poly Technik 
 ASPT.NS , a less sexy manufacturer of pipes and fittings.  
    This select group includes companies controlled by multiple 
families but run by professional management teams - a rarity in 
India. It also counts firms with a truly independent board of 
directors. That's a refreshing affirmation of the importance of 
strong corporate governance in a country where companies often 
appoint friends or relatives to meet a legal requirement that 
independent outsiders make up at up to half the board. 
    India's best companies also stand out for being innovators 
and thinking ahead. Asian Paints, for example, was the first 
company in the country to buy a mainframe computer. Marico 
pioneered the open-plan office and was the first Indian firm to 
start declaring quarterly dividends.  
    The $50 billion HDFC beat its local rivals to launch mobile 
banking. Meanwhile, the story of how a talented management team 
from the public sector turned Axis into a market leading private 
sector bank amid resistance from vested parties is comforting 
considering the bad-loan problem now facing state-controlled 
lenders. The deep dive into the history of each company is 
valuable for anyone with a serious eye on the India's corporate 
landscape.  
    What is really striking, though, is how few of India's 
better-known corporate names made the cut. Mukherjea's list 
excludes Indian outsourcing companies like Infosys  INFY.NS  and 
Wipro  WIPR.NS , which are often cited as examples of how big 
business can thrive when the government doesn't interfere. 
Companies backed by the prominent Ambani, Birla, and Tata 
families are also notable by their absence.  
    Perhaps the book's most important message is that crony 
capitalism no longer pays. Mukherjea's thoughtful analysis 
demonstrates that clean companies can not only survive in India 
but also rank amongst the very best. He happily admits that 
these unusual billionaires are not flamboyant individuals but 
those "bordering on the boring" who engage in sensible capital 
allocation and resist the temptation to take on too much at 
once. 
    Business based on political connections is slowly going out 
of fashion under the government of Prime Minister Narendra Modi. 
Indeed, Ambit has separately tracked 75 companies believed to 
have benefited from government ties in rent-seeking industries. 
An index based on their shares halved between mid-2010 and 
mid-2015, even as India's stock market gained 50 percent. "The 
Unusual Billionaires" is a timely reminder that such murky 
dealings never really benefited anyone apart from a few 
well-connected insiders. 
 
    On Twitter https://twitter.com/ugalani 
     
    CONTEXT NEWS 
    - "The Unusual Billionaires" by Saurabh Mukherjea was 
published by Penguin on Aug. 17. 
     - For previous columns by the author, Reuters customers can 
click on  GALANI/    
    - SIGN UP FOR BREAKINGVIEWS EMAIL ALERTS: http://bit.ly/BVsubscribe 
 
 (Editing by Peter Thal Larsen and Kathy Gao) 
 ((una.galani@thomsonreuters.com;  Reuters Messaging: 
una.galani.thomsonreuters.com@reuters.net)) 
 
Keywords: INDIA/BREAKINGVIEWS