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The Promoters Hell Bent on Multiplying Your Wealth

Oct 21, 2016

In this issue:
» India overexposed to Chinese imports
» Are insurance companies doing the right thing?
» ...and more!
00:00
Bhavita Nagrani, Research analyst

It's annual general meeting (AGM) season. You may have even attended a few as a shareholder. A common point on the agenda at these AGMs is C-suite compensation. The pay of some top-level managements is jaw dropping. And at times has been in huge contrast with actual performance of the company.

Disproportionate management salaries is a sensitive issue for many listed companies in India. And we have shown our concern about this.

But then there are promoters who draw their salary just for appellation.

Let's take an example of none other than the legendary investor Warren Buffet.

He's been drawing an annual salary of just US$100,000 from Berkshire-Hathaway for the last 25 years. A mere pittance for one of the world's richest individuals. His partner, Charlier Munger, also draws just US$100,000 per annum.

In fact, Mr Buffet has a message for the person who would replace him as chief executive officer of Berkshire Hathaway Inc -

  • It's important that neither ego nor avarice motivate him to reach for pay matching his most lavishly compensated peers, even if his achievements far exceed theirs.

Steve Jobs, another legend, drew US$ 1 per annum as salary for 14 years till he retired from Apple.

How do these promoters manage with such low compensation?

Well, great managers create long-term wealth by executing the best long-term business decisions. And then let the share price do its thing. As significant shareholders in the business, they do get rich over time but the wealth thus created gets shared with minority shareholders and other stakeholders as well.

I don't need to tell you the wealth you could have built if you'd invested in such managements.

Do we have managements in India that come even close?

Some time back, Professor Sanjay Bakshi highlighted a very generous action taken by the promoter of a small company who forwent his 2% commission on profits. The promoter reasoned that, as a shareholder of the company, his reward should be dividends. It's one reason the Hidden Treasure team recommended the stock of this company.

Of course management compensation would not be our overriding criteria to select a stock. But we would certainly rate promoters, who cannot justify their pay with adequate shareholder returns, quite poorly.

Indeed, competence and integrity are key qualities the Hidden Treasure team seeks in the management of the companies it meets. And it's largely because of their stringent research that the Hidden Treasure service has beaten the small-cap index 3x.

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02:60 Chart of the day

Boycotting goods that are made in China has been a topic of heated debate of late. The data in today's chart makes it amply clear that goods produced in China have had ample demand in India over the past decade. As we have written earlier, even things like Ganesha idols and rakhis are imported from this country. As is to be expected, imports from China made up for over 80% of India's total imports from other BRICS countries in 2015. Between 2006 and 2015, China's share of total BRICS imports by India increased from 74.4% to over 80%.

The key reason is India's lack of focus on manufacturing. Simply because manufacturing builds the lower economic class in a society. And if you give up manufacturing, there is huge income inequality to contend with which then gives rise to the total extinction of the lower middle class. So what remains is extreme polarisation.

Well, with the quality and the quantity of population that we have, India should already have been a manufacturing powerhouse. The Make in India campaign hardly gathered steam. And so far, we have totally squandered away the population edge that we have. Things have come to such a pass that items like Ganesha idols and rakhis can't be manufactured competitively despite the low value add involved and abundance of cheap labour. Thus, what has remained is the extreme capital intensive businesses at one end of the spectrum and a huge unorganised and a parallel economy on the other. To be able to reduce dependence on Chinese imports, India would first need to increase its manufacturing competitiveness.

Overexposed to Chinese Imports


03:25

The recent listing of an insurance business is expected to bring in some degree of transparency in their operations and financial metrics. But the industry seems to be far from meeting its true objectives. Vivek Kaul has put together a very comprehensive report on the goings on in Indian insurance industry in his latest Vivek Kaul Letter. Here is an excerpt from it.

  • The average sum assured on an insurance policy in India in 2014-2015 was Rs. 2.31 lakh. This has seen some improvement since 2012-2013, having seen a quantum jump since then. In 2005-2006, the average sum assured on an insurance policy was Rs. 80,271. If we adjust this for inflation (using inflation as measured by the consumer price index), Rs. 80,271 would be worth around Rs 2.11 lakh in 2014-2015. So the average sum assured has gone up a little over the years, but it still continues to remain very low, in the sense of being useful to a nominee in case of the death of the policyholder.

    The average premium paid per policy in 2014-2015 was around Rs. 10,000. Against this premium paid, the sum assured on offer was around Rs. 2.31 lakh.

    For a thirty-year-old male this would mean paying a mortality premium of a little over Rs. 400 during the course of the year for the sum assured. (This number is arrived at by using a mortality premium of Rs. 1.8 per thousand rupees of sum assured charged by the ICICI Prudential Smart Life Unit Linked Insurance Plan). The mortality premium in this specific case amounts to a little over 4 per cent of the total insurance premium. Mortality premium is basically the premium paid for the actual life insurance or sum assured.

    The remaining part of the premium is basically invested in stocks or bonds depending on the mandate of the plan that has been sold to the policyholder. Hence, in the strictest sense of the term, it shouldn't really be called a premium but an investment. But that is not how things are.

    The point being that a very minuscule amount of the total premium collected by the insurance company actually goes towards real life insurance. And that is not a good sign. The primary job of an insurance company should be to sell insurance. That is something that is definitely not happening in India.

I strongly recommend that you go through the full report to understand whether insurance businesses, which Buffett strongly recommends, are for you. If you have not accessed Vivek Kaul's Letter yet, sign up here.

We have also prepared a guide to help you understand the valuation of insurance businesses.

04:45

In the meanwhile, Indian share markets continue to languish in red during the post noon trading session due to weak Asian cues. Sectoral Indices are trading on a mixed note with stocks from realty & IT sector leading the gains. While metal sector & consumer durables stocks are trading in the red. At the time of writing, The BSE Sensex is trading lower by 117 points (down 0.4%) while the NSE Nifty is trading lower by 28 points (down 0.3%). The BSE Mid Cap index is trading flat while BSE Small Cap index is trading up by 0.2%.

04:50 Investing mantra

"We always look at them as businesses, whether we're buying the whole thing or 100 shares" - Warren Buffett

This edition of The 5 Minute WrapUp is authored by Bhavita Nagrani (Research Analyst) and Tanushree Banerjee (Research Analyst).

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