Would you invest in such managements? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Would you invest in such managements? 

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In this issue:
» 2014 to see the slowest salary hike in many years.
» 57% of subsidized food grains do not reach intended beneficiaries.
» IMFs views on income inequality.
» Modi: Renewable energy is the way to go
» and more....

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We know you may have more questions on the Dynamic Portfolio. We have addressed the most frequent questions here...

Are executives overpaid in India? This topic is definitely a debatable one. But when one views pay packages of executives (and their family members) in absolute terms, the numbers are simply mind boggling. Especially considering that companies that they manage are nowhere close to being the largest in size.

It was only at the start of the year when market watchdog the Securities Exchange Board of India (SEBI) had proposed to rewrite the rules of compensation in India. And that was of bringing in the clause of receiving majority votes of minority shareholders for approval of pay packages of executives. If implemented, this move is expected to bring about some reality checks in pay packages of senior managements and promoters of a handful of listed entities.

We write this story today on a news article that we came across a few days ago. That of the country's largest wind turbine manufacturer's management seeking approval of pay hike to Rs 3 crores as compared to last year's total compensation of Rs 2 crores.

When ones compares this figure to the salary levels of the highest paid executives in India, this is not very high for sure. But, seeking such a high hike in salary, especially at a time when the company he is managing is likely to report its fifth annual consecutive loss (and a quite massive one, if we may add) is something that we cannot wrap our heads around.

Let's jump into the numbers for a minute. In FY13, revenues clocked by the company stood at a massive Rs 189 bn. However, losses during the year came in at Rs 47 bn. In the nine month period ended December 2013, the company's revenues stood at Rs 136 bn, while losses came in at about Rs 29 bn. The losses have been consistent for the past five years i.e. since FY10.

Looking at the company's balance sheet numbers, the picture is all the more scary. In the four year period ending FY12, the company's average debt to equity stood at over 1.9 times. In 2013, the same stood at over 15 times; the company was eventually inducted into the corporate debt restructuring program to recast loans worth Rs 95 bn.

We would, however, like to point out here that the company's management had refunded its remuneration in FY11. This was done because shareholders demanded so, given the increasing losses reported by the company. This was a positive step in our view. But, we wonder why the same managements' view has changed this time around; especially given the much deteriorated financial condition of the company.

Given such developments, we believe the proposal made by SEBI will definitely help shareholders get their views across to managements. Maybe... just maybe... their stiff resistance to such moves would make them re-think their decisions. At the end of the day, minority shareholders must have a certain say given they also own a part of the company. Such a mechanism would help them put their views across.

What should investors do in such cases? Well... as we have said time and again, management quality is something that must not be compromised on, especially for long term investors, who trust such managements' integrity and capital allocation skills. Investors would do best to stay away from companies with dubious managements, irrespective of how attractive the stocks may appear.

Do you make it a point to check the managements' compensation packages in the companies you invest in? share your views in the in the Equitymaster Club. Or post your comments below.

01:20  Chart of the day
Slower economic growth has not only dented corporate profitability but also the earning prospects of employees. As per a survey by consulting firm, Aon Hewitt salary increases in 2014 for private employees are likely to be in the region of 10%. This is expected to be the lowest ever figure in the last 5 years. Roughly 565 companies were surveyed in this exercise. And out of that roughly 69% of the respondents reduced their salary projections in 2014 as compared to those paid out in 2013. Sectors like consumer goods, retail and automobiles are likely to witness a decline in salary levels indicating a slowdown in consumer spending.

2014 to have slowest salary hikes in many years

Nonetheless, the top performing workers are likely to get higher salary increases than the projected rate of 10%. But on an overall basis, declining salary levels over the last 4 years as seen in today's chart of the day is an area of concern. This indicates the plight of most sectors in the economy. Discretionary consumption is hurt due to higher inflation. On the other hand, manufacturing sector is struggling due to higher interest rates. Unless we see an all round growth in the economy, higher double digit salary increases as witnessed in the last decade may take some more time to attain.

Former Prime Minister Rajiv Gandhi once gave a very grim account of the leakages in the system. He opined that for every rupee that goes out of Government coffers, only 16 paise ends up in the hands of the intended beneficiaries. That was 1985; today we are in the year 2014. And nothing has changed it seems! There are still huge leakages in the system and the situation if anything has only become worse. Take this recent finding of an independent evaluator appointed by the Government. The evaluator is of the view that the Government spends around Rs 3.65 to deliver Re 1 of food. If this isn't shocking enough, 57% of subsidized food grains do not reach the intended beneficiaries. Well, to be fair, this isn't news to us anymore. Or for that matter to even the ordinary man out there. What is appalling though is precious little is being done to change the situation. Every Re 1 lost in such an activity is a rupee that is being taken away from the taxpayer and not being invested in the long term development of the country. And come to think of it, the Government has actually gone ahead and allocated more money towards this endeavour. At this rate, we are not sure whether we'll ever reach our goal of going back to growth rates in the region of 7% to 8%.

The politics of 'power' has gripped most political parties in India for several years now. There have been multiple layers of subsidies aimed at satisfying populist demands. So much so that despite ambitious outlay in consecutive 5-year plans, the country's power infrastructure is in a mess. Successive governments have been unwilling to deregulate the price of power. State Electricity Boards (SEBs) have been bearing the financial burden of providing cheap power. As a result, the financial health has deteriorated over the years. The banks that have lent to these entities and the power producers to whom the SEBs owe money are both suffering. This, in turn, has caused frequent conflict between power generation companies and state distribution companies. As per Economic Times, BJP's Prime Ministerial candidate Narendra Modi has called for focus on renewable energy resources to bring in energy security. Whether this will mean any change in the attitude of governments towards India's energy deficit is anybody's guess. However, what is certain is that any more laxity on this front could cost India dearly.

What is the relationship between income inequality and growth? According to a study conducted by the IMF and reported on Moneynews, it is not prudent to focus only on growth and let inequality take care of itself. Benefits of growth ultimately have to be felt by all sections of the society and not just a handful of the population. Income inequality leads to the risk of economic instability which in turn leads to lower economic growth. This issue has been a subject of debate in recent times around the world as economies struggle in the wake of the 2008 global financial crisis. What is the IMF's take on redistribution of income? The study has stated that redistribution of income does not really hurt an economy unless it is very large. But there are skeptics for this too. The reasoning is that wealth transfer actually leads to lower growth because there is less incentive to work. We agree with the view that income inequality is a serious issue that most countries in present times will have to deal with. One way of addressing this is to step up public expenditure on developmental activities. But in an era when so many of the countries are highly indebted, this has become a challenge. The rising inequality is also a product of distorted monetary policies followed by central banks around the world which has put more money into the hands of the rich.

Unlike good old days the corporate borrowers today would find it difficult to dodge bad loans. For RBI now has raised the red flags. And gone stringent with respect to ensuring swift repayment of such loans! The governor has tightened the rules to fight against bad loans. The promoters of the company would now be made more accountable towards the debt. They would be asked to suffer the first loss instead of the banks that extended the loan. Moreover, the promoters would have to bring in more equity into the company in the event of restructuring of the asset. The lenders can also take action against the troubled companies producing clean balance sheets. Also decisions with respect to projects to be referred to the CDR (corporate debt restructuring) cell would be expedited faster. In cases of viable businesses, banks would take an extra mile in financing such entities but with prudence. For once even auditors who audit such bad loans will not be spared too. Such provisions would apply for loans exceeding Rs 1 bn.

Well, this does not come as a surprise. That's because the stressed assets (non-performing plus restructured assets) number has surpassed 10% of total advances. Lurking bad assets has taken few banks down in the dumps. While corporates have partied hard, now it's time they bear the brunt too.

The slowdown in the Indian economy and the consequent underperformance of stock markets has severely dented the fortunes of the mutual fund industry in recent years. Mutual funds are struggling to get new equity inflows. Retail investors are wary of investing in stocks.

Against such a gloomy backdrop, we came across this interesting piece of information in Business Standard. A report from market regulator SEBI says that Bihar's hinterland has been witnessing a strong growth in mutual funds' assets under management (AUM). Between 2010-11 and 2012-13, the growth rate in AUM in Bihar (excluding state capital Patna) was 24.6%. It may come as a surprise, but this growth in AUM is higher than even that of Gujarat. During the same period, Gujarat's overall AUM growth was 8.6%. However, if you were to eliminate Ahmedabad, the growth would be a meagre 1.9%. While Bihar's hinterland growth seems promising, it must be noted that one of main reasons for the high growth rate is the low base.

Indian Stock markets remained closed today on account of Mahashivratri. Barring Japan, most of the Asian indices are trading positive led by Hong Kong and the Indonesian markets.

04:55  Today's investing mantra
"Bull markets go to people's heads. If you're a duck on a pond, and it's rising due to a downpour, you start going up in the world. But you think it's you, not the pond."- Charlie Munger
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2 Responses to "Would you invest in such managements?"

ravi shah

Mar 1, 2014

First of all where to check managements' compensation? and how to guage their integrity ?pl reply


virendra bapna

Feb 27, 2014

all indian promoters(100%) first manipulate with the help of brokers,issue shares in premium then make money,become rich ,then milk the company regularly then loot the investors.

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