Learnings from an Ex-India Letter Candidate, Discussion with the MD of Bajaj Corp... - Views on News from Equitymaster

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The Equitymaster Research Digest

Learnings from an Ex-India Letter Candidate, Discussion with the MD of Bajaj Corp, and More...
Mar 9, 2016

Last week, Ankit Shah wrote about a recent interaction he had with a management.

Reading his write up, I recollected a meeting I had about three quarters ago. A colleague and I travelled to New Delhi to meet with a few prospective India Letter candidates.

One company popped onto our radar during our screening process, mainly because of its strong revenue and profit growth. There were also sharp improvements in other financial parameters. Debt levels came down. Return ratios went up. Plus, this company was (and still is) the market leader in a niche segment.

While I cannot reveal the company's name here, some important learnings came out of that interaction.

These include:

  • Why getting a sense of management intention helps...

    I'd spent a good amount of time prepping for the meeting. During my research process, I came across some unusual developments. One being management compensation.

    I did not like the remuneration policy changes from a few years ago. The promoter (who was earlier a non-executive director) was now getting paid as much as the CEO - who in any case gets a sizeable chunk of the profits - by designating himself executive management personnel.

    We learned in our meeting that the promoter is not based in India. He only visits the country to attend meetings once a quarter. And yet...gets paid as much.

    We also learned that the promoter has many other businesses worldwide. And this particular company was a very small business for him. Thus, lack of focus became the broader concern here.

  • A development that became the game changer for the company

    Prior to the improved financials, the performance of the company was not much to talk about. Margins were in the low-to-mid single digits. Return ratios were way below opportunity costs.

    But a little less than a decade ago, all this changed... The company started to perform very well.

    Why the sudden change?

    Well...it had a lot to do with tax breaks. The company had set up a plant in a tax free zone, which allowed it to save on duties and taxes. And in the process...compete profitably with its peers.

    But now...

    These tax breaks have ended.

    And if the hit on margins is anywhere close to what we expect, the company's financial performance is about to go for a toss.

    We are keeping an eye on this...

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