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Perception vs Valuation: Directly proportionate? - Views on News from Equitymaster
 
 
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  • Feb 22, 2001

    Perception vs Valuation: Directly proportionate?

    Revered investment analysts the world over have constantly drilled into our minds that it pays to be invested in companies whose managements are perceived to be focused and proactive. A good management always commands premium valuations for the stock. The logic is justified given the fact that the management’s attitude towards the company determines the growth curve it takes. Let’s test this reasoning and see whether the logic really holds good for Indian companies.

    For the study we took some companies known for their reputed managements. The sample includes the likes of Infosys, HDFC, HDFC Bank, HLL, Hero Honda, Punjab Tractors and Dr. Reddy's.

    HLL vs contemporaries
    FMCG major, Hindustan Lever (HLL) is a prime example of what management perception can do to the valuations of the stock. HLL has always commanded premium valuations not only because of its size, but its consistent good performance. Though another FMCG company, Nirma, too has put in good performance year after year, it still lags behind when it comes to valuations.

    Though Nirma’s management is considered to be very focused on its business, it is HLL’s management that is considered to be more pro-active between the two. HLL’s management has continually expanded its topline by adding more products and businesses, either organically or inorganically. It spreads the company’s risk.

      Mkt. Cap. (Rs m) ROE (%) P/e (X)
    HLL 445,727 50.9 41.7
    Nirma 21,687 27.3 9.3
    Godrej Soaps 4,260 20.2 7.0

    If you look at the valuation table, it looks as if Godrej Soaps is back with a bang. But this revival in fortunes of Godrej Soaps can also be attributed to a large extent on the right moves the company’s management has been making in the last one year. The management has broken the company into two, to lend more focus to its FMCG business. The company has been repaying its debts in a bid to improve its profitability. All this has not gone unnoticed by the bourses. The valuations of the company have started to improve in the past couple of months, as the markets perceive the management to be on the right track.

    HDFC vs contemporaries
    India’s leading housing finance company, Housing Development Finance Corporation Limited (HDFC) is another fine example. HDFC is a pioneer in housing finance in India. The company controls 70% of this market. Its consistent performance, both financial as well as in customer satisfaction has helped it retain its market share in this business. Despite new entrants in the business in the recent years, it continues to be the leader.

    Because of its carefully laid out huge branch network it is able to service its consumers efficiently. HDFC’s management is rated very highly for its focused approach to its business. In contrast aggressive entrants like ICICI have historically taken on more NPAs.

      Mkt. Cap. (Rs m) ROE (%) P/e (X)
    HDFC 66,702 19.2 16.6
    LICHF 2,586 19.3 2.4
    ICICI 76,332 15.7 6.3

    While the competition plays catch up with HDFC, the company has branched out into banking, insurance, mutual funds and retail loans. Its subsidiary, HDFC Bank, is already the fastest growing private bank in India. Even this subsidiary, is valued highly because of the management ‘feel good’ factor.

      Mkt. Cap. (Rs m) ROE (%) P/e (X)
    HDFC Bank 61,331 16 51.1
    ICICI Bank 33,656 9.2 31.8
    SBI 124,733 16.9 6.1
    UTI Bank 5,447 21.3 10.7

    Infosys vs contemporaries
    Let’s take a look at one company, which has now become synonymous with the Indian software revolution, Infosys. The company not only has been turning in good performances quarter on quarter, but is also at the forefront of management reporting. Infact, Infosys’ annual report was one of the first in its kind in India that gave complete disclosure on the company’s operations to its investors.

    This small act must have added tons of goodwill to its valuations. Since then, disclosures by companies in their annual reports and measures to improve relations with investors have touched new levels in Corporate India. This proactivity and foresight has helped Infosys become one of the most valuable companies in the country, adding to shareholder wealth year after year.

      Mkt. Cap. (Rs m) ROE (%) P/e (X)
    Infosys 428,255 34.3 149.8
    Satyam 107,682 38.5 79.8
    Visualsoft 15,720 31.9 55.9
    Silverline 15,738 15.3 22.3

    Hero Honda vs contemporaries
    In the two-wheeler segment, it is not for nothing that the Munjal family is revered. The family’s motorcycle joint venture with Honda Inc, Japan, Hero Honda, redefined the shape of the two-wheeler industry in India. At a time when Bajaj Auto was the uncrowned king of this segment (read scooters), the Munjals had foresight to gauge a shift in consumer preferences towards motorcycles. For this, they were amply rewarded. Not only the company, Hero Honda, became the undisputed king of the two-wheeler segment but in the process created a lot of wealth for its investors. Till today, the company’s distribution muscle coupled with its top of the line bikes, command the consumers as well the investors’ loyalty.

      Mkt. Cap. (Rs m) ROE (%) P/e (X)
    Hero Honda 33,749 43.3 17.6
    Bajaj Auto 22,386 19.1 3.7
    TVS Suzuki 4,331 27.4 5.0

    Punjab Tractors vs contemporaries
    The management of Punjab Tractors, part of the Swaraj Group, is not as high profile as some of the leading business houses in India. But the company’s silence is more than made up by the consistent performance of the company. The company is focused on the tractor segment, unlike market leader Mahindra & Mahindra. It is this focus that has paid it rich dividends in terms of shareholder value. Whenever, the agriculture sector in India is on an upturn, Punjab Tractors is the first one to reap the dividends. On the other hand, whenever a bad crop comes by, Punjab Tractors focus helps it tide through the difficult situations smoothly as compared to its rivals. The company’s prudent financing policies and working capital management has kept it at the forefront of providing the maximum return to investors.

      Mkt. Cap. (Rs m) ROE (%) P/e (X)
    Punjab Tractors 12,663 35.8 9.5
    M&M 18,782 14.7 6.8
    Escorts 8,841 11.9 7.9

    Dr. Reddy’s vs contemporaries
    In the last few years, the domestic Indian companies have seen a big re-rating in their valuations. This has come in the wake of the advances made in the field of Research and Development (R&D). The company that spearheaded the Indian R&D effort was Hyderabad-based Dr. Reddy’s Laboratories. The company’s pioneering efforts to discover new molecules, ahead of the much dreaded product patent regime post 2005, tilted the balance in favour of homegrown pharmaceutical companies. This encouraged many other domestic companies to have faith in their R&D effort and increased investments in this area. It’s no wonder then that Dr. Reddy’s sits at the top of heap in terms of valuations, even ahead of the MNC pharmaceutical companies in India.

      Mkt. Cap. (Rs m) ROE (%) P/e (X)
    Dr. Reddy's 34,516 15.8 57.2
    Ranbaxy 79,223 13.8 40.7
    Sun Pharma 9,311 28.7 10.3
    Cipla 70,165 23.1 52.7

    These are just a few examples, but are enough to conclude that the goodwill the management generates reflects on the valuations of the companies. Whether the goodwill comes due to management focus, foresight or proactivity, it adds to the shareholder wealth.

    But it must be added here, that a good perception of the management is borne by years of solid performance and doesn’t build overnight. No short cuts to this.

     

     

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