How this Unknown Company Scores Over the Tatas and Infosys

Feb 13, 2017

In this issue
» Value Investing in the times of Corporate Governance fiascos
» When will government stop supporting Air India?
» Yet another proof that demonetization was a failed experiment
» And more...
Richa Agarwal, Research analyst

These are turbulent times for India Inc., the regulatory watchdog, and the individual shareholders. Companies that once prided themselves on corporate governance are making the headlines for possible violations.

First, it was Tata Group for the standoff between Mr Ratan Tata and Mr Cyrus Mistry. The latest company to air its dirty linen in public is Infosys.

The biggest blow has been to the confidence of individual investors who saw these companies as exemplars of corporate governance. And who still associate these companies with their founders, irrespective of the changes at the management level.

As Tanushree stated in a recent edition of The 5 Minute Wrap Up...

  • The companies may continue to grow under the new management. They may continue to have a lean balance sheet with surplus cash. But the new managements cannot escape the skepticism over their ability to stay grounded. Or act in the interest of all stakeholders. And that's when valuations take a beating.

    The tussle between the founders of Infosys and its board of directors has long been in the making. We won't pass judgement on who went wrong. But the minority shareholders certainly need to re-anchor their expectations.

Mr Narayan Murthy has raised concerns about falling standards of corporate governance at Infosys. He's also questioned if large severance payments to departing employees is 'hush money' to hide something.

If it is really about hiding something, then the issue goes beyond the huge salaries paid to the top managers. But we'll have to wait till the verdict to know the extent of the damage and if the regulator thinks the corporate governance rules were flouted. But as staunch value investors, our concerns go beyond that.

For us, it is not just about the managements following the letter of the law. We want to recommend companies with managements who go a step further and satisfy the spirit of the law.

We are glad to look beyond the visible large and mid-cap space to recommend companies run by ethical and competent managements. In the last nine years, we have come across managements in the small cap space, who without any media attention or publicity, have exemplified the highest standards in corporate governance.

Take for instance this small-cap company we recommended in July 2015. The chairman (also the managing director) of this company operates from a simple room in his house. He has willingly foregone his commission (a performance incentive linked to net profit), believing his simple lifestyle does not require that much money. And since his shareholders receive only dividends, it should be the same for him. He is determined to live up to the minority shareholders' expectations.

Our latest recommendation for February 2017 is another such case. During our meeting, the management's concern for minority shareholders was evident.

Our interaction with the MD started with some warnings and disclaimers from him. He wanted to know if we were big traders. If we were, he wouldn't be inclined to entertain us. You see, normally, the traders end up speculating and driving up the stock price. The victim here is always the individual investor, who enters and exits at the most inopportune time. The MD was not interested in encouraging any interest in the stock that could trap minority shareholders.

Next came the disclaimer: 'We are in the commodity business. If and when you are writing about the company, please do not present an unrealistic picture to the readers.' He was worried that portraying a glorious picture could lead to unnecessary speculation.

We were impressed. We often come across managements who only want to pitch their stocks. So our interaction with this management was like a breath of fresh air.

And these are just a few examples. Our experience with some of the managements in the small-cap space has been overwhelmingly positive. And what makes these stocks special is that big investors are yet to get a whiff of them.

As some of the most established companies disappoint on corporate governance front, we believe that investors need to cast their net wider...and consider the well-managed companies in the most ignored equity class to multiply their wealth.

02:30 Chart of the Day

When it comes to corporate governance, one entity that seriously deserves a rap on the knuckles is the big government. While the financials dailies are awash with speculations on whether corporate governance norms were flouted at Infosys, here is an established case of unethical standards in managing a company that is not getting enough attention.

The company in question is Air India. And the management at the helm of its affairs is, well... the Big Government.

As reported in an article in Firstpost, the government has not yet been able to decide who to nominate as independent directors on the board. Years of financial losses and a crucial role in burdening public banks with NPAs, nothing seems enough for the government to consider its privatization.

In fact, if the reports are to be believed, the government plans to get 19 PSU banks to convert their loan of about Rs 200 billion to the ailing Air India into equity. This could cut interest expense of Rs 40 billion per annum for Air India by a quarter. So basically, the mismanagement will not just be limited to Air India but will spill over to PSU banks and ultimately, to tax payers' money.

The chart below shows the history of losses Air India has been mounting. The reason why 2015-16 losses look low is fall in crude price that lowered the jet fuel advantage that does not exist anymore.

Loss Making PSUs: Who Is Bearing the Ultimate Cost?

In fact, it's not just Air India. Vivek has written an eye-opening piece on another such entity - MTNL. According to him, both these examples in part highlight India's debt bubble, which keeps getting bigger and bigger.

It's time the government admits its lack of knowledge to run businesses.

A lot of PSUs have had history of bad management by the government and have reached a point of no return when it comes to profitability. The accumulated losses of sick public sector enterprises as of March 31, 2014, stood at Rs 1.04 lakh crore.

But this is just part of the story.

In his latest book, India's Big Government-The Intrusive State and How It is Hurting Us, Vivek has exposed the big government's lies. And I'm sure you would want to know the full story as this affects your money and wealth.

The readers of Equitymaster can get an autographed hardback copy of the book, which will not be available anywhere else. We will post the details of this offer and how you can go about getting an exclusive hardback copy of India's Big Government, in the days to come.

Watch this space!


It's not just business...the government has messed up big time in public policies as well. The recent blunder was poorly executed demonetization of Rs 500 and Rs 1,000 notes.

While the government has not offered any mathematics or hard proof to show how and why demonetisation was good for the economy, there is enough data reflecting the damage due to the move. As per reports, the industrial production for December 2016 contracted to four-month low. The consumer durables output was down by over 10%. The manufacturing sector witnessed a contraction of 2% YoY.

The government may not have to face public fury, thanks to the short public memory. But this entire debacle begs a question - Was demonetization ever a move against black money? The change in the narrative, from black money to cashless economy does not suggest so.

Here too, Vivek's book - India's Big Government-The Intrusive State and How It is Hurting Us offers significant cues.


After opening the day on a positive note, the Indian share markets witnessed selling activity and were trading below the dotted line. Sectoral indices are trading on a mixed note, with stocks in the PSU sector and the realty sector witnessing maximum selling pressure. Stocks in the IT sector and the metal sector are trading in the green.

The BSE Sensex is trading down by 88 points (down 0.3%) and the NSE Nifty is trading down by 31 points (down 0.4%). Meanwhile, the BSE Mid Cap index is trading down by 0.9%, while the BSE Small Cap index is trading down by 1%. The rupee is trading at 66.93 to the US$.

04:55 Investing Mantra

"It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you'll do things differently." - Warren Buffett

This edition of The 5 Minute WrapUp is authored by Richa Agarwal (Research Analyst).

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2 Responses to "How this Unknown Company Scores Over the Tatas and Infosys"

Dhir Bhateja

Feb 14, 2017

Vivek as usual writes brilliantly who won't like a debt free professionally managed gem but Vivek ji have a heart for small investors who may not be able to subscribe to all ur premium services or it's case of no free lunches thx



Feb 13, 2017

it is time for vivek to stop disbursing his half knowledge on how a country of our size and color is run! politics and country does not run on pure economic theories, For that matter even economics has not fully matured as a science. various proponents dish out theories now and then, some work many fail

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