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The management that rode a Ferrari! - Views on News from Equitymaster

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The management that rode a Ferrari!
Nov 1, 2011

Those deep into reading spiritual books, the title mentioned above would have certainly struck a chord or two. After all, it borrows pretty heavily from a well known book about a monk and his Ferrari. Of course, the relationship is shown to be more symbolic than real in the book.

But we are certainly not tackling spirituality here. We believe that our core competence is stock market investing and we are pretty much content sticking with it.

So, what is the connection between a management of a company and a Ferrari you would ask? You see, we went to visit this firm in one of India's top cities yesterday. And we happened to like most things about the company and its management. It has been a profitably growing enterprise and may well continue to add to the shareholder wealth over the long term.

However, there is one thing that put us off a bit. Parked right outside the company office were a couple of spanking new automobiles. Not exactly Ferraris but the Jaguars and the Porsches of the world. Upon enquiring, we came to know that these were proud possessions of the top management of the company.

So what, we could hear a lot of people say in their minds? As long as the management is creating wealth for shareholders one should be least concerned about the type of cars it owns. May be there is a grain of truth in this. But the type of cars or may be other luxuries that the management of the company owns also gives us a peek into money spending habits of the management and hence, should not be dismissed outright.

Please bear in mind that we are not saying that those management owning luxury cars should be avoided lock, stock and barrel. But it would not be a bad idea to rank it lower than that of a firm which is not only as profitable but has a management that uses or buys things for their utility value rather than showcase splendour.

We are not the only one toeing this line of thought. The legendary Peter Lynch is believed to have once said that the extravagance of any corporate office is directly proportional to management's reluctance to reward shareholders. Indeed, Lynch has put this issue across better than we could.

And how can we miss out on Warren Buffett. A book has it that Buffett fell so much in love with a management after he learnt that in order to save cost, it had painted only the front visible portion of the building where it had its corporate headquarters. The other sides were all left unpainted. Now that's how cost conscious a management should be, isn't it?

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2 Responses to "The management that rode a Ferrari!"

Harit Shah

Nov 3, 2011

Hi, while no doubt an interesting perspective, I would suggest a much better known example of such extravagance - Crompton Greaves, which bought, of all things, a HELICOPTER worth a whopping RS 270 CRORES with COMPANY MONEY!! It is truly an extraordinary example of blatant misuse of the company's funds that completely destroys any notions of "shareholder value"!! And to top it all, the company actually recorded this Rs 270 crores as capex and hid it in the fixed assets column of the balance sheet! Only when alert shareholders were able to detect this blatant fraud did the company backtrack and agree to sell the helicopter. In comparison, the Ferrari (or Jaguar or whatever car the management owns) example is a "David" compared with the Crompton Greaves "Goliath"! At least the management you have mentioned might have bought the cars with their personal money and not used company funds for the same!


Pradeep Kumar Nair

Nov 2, 2011

You just have to relate Vijay Mallya's known lifestyle and the state of UB businesses especially Kingfisher Airlines and the tens of subsidiary companies that tend to hide more than reveal.

Please don't tell me that USL and UB are profitable businesses hence run well, fortunately for those companies it is despite the management and the tipple habits of brethren like me. Don't know how long that brand loyalty is going to last

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