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Clean capital

14 October 2016 By Una Galani

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; Asian Paints and Berger Paints; fast-moving consumer goods firm Marico; Page Industries, which makes Jockey branded underwear; and Astral Poly Technik, 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 as much as half of 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 and Wipro, 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.


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