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It took us some time to make Bhuvnesh Joshi, a dhaaba owner in New Delhi’s Ghazipur, understand what ‘admirable’ stands for. After going back and forth in English and Hindi, Bhuvnesh quickly identified his own admirable company. Surprisingly, the company he named wasn’t from the house of Tatas, Birlas, or the much-sought-after Ambanis. It was BAG Films, an integrated media house. “Whosoever creates money, is admirable for me, it’s simple,” was Joshi’s prompt reply. He works hard for his income, and he wants his investments to work even harder. Just to answer your query, as to what’s so special about BAG Films, the stock was quoted at Rs.9 in the beginning of 2007, and is now trading at Rs.90, providing a swashbuckling 900% return on Joshi’s investment of Rs.25,000. The dhaaba owner says his portfolio is now close to Rs.3 lakhs.

Sustained wealth creation despite the crests and troughs of business cycles is a trait of a fundamentally sound company. And allowing all stakeholders to participate in the process is the hallmark of a true wealth creator. Surely, none other than Warren Buffet can make one understand what wealth creation means in the true sense. This legendary investor believes in a simple philosophy, “We eat our cooking.” Therefore, 99% of Buffet’s personal wealth is invested in his own company, Berkshire Hathaway. So, whenever he makes a profitable decision, his shareholders benefit. And whenever he does something dumb, his shareholders derive some solace from the fact that Buffet’s financial suffering is proportional to theirs.

However, Indian promoters – business families or professionals – have yet to reach those standards. Even today, several promoters make money at the expense of gullible shareholders and investors. Unlike the developed nations, Indian shareholders don’t have a voice to checkmate owners, who don’t give them adequate returns or fail to create wealth for the stakeholders. But the times are changing fast.

At a time, when Indian capital markets are turning into a modern day El Dorado for investors, Indian corporate houses do have a story to tell. “Houses like those of the Tatas, Ambanis, and Birlas have withstood the ups & downs of economic cycles and this is what makes them and their flagship brands the most admired companies,” says Mehul Tyagi, Senior Analyst, Karvy Stock Broking Research. Apart from governance issues that have plagued several business houses, the fact is that family-owned companies have dominated the Indian business turf and have been among the biggest value, and wealth creators.

Take the case of Mukesh Ambani’s Reliance Industries Ltd. (RIL). The late patriarch, Dhirubhai, made his investors rich. Remember the movie, Guru, which was based on the life and times of Dhirubhai, where a taxi driver tells Guru Kant Desai that he got his daughters married by investing in shares of Shakti Group. Many a pensioners, schoolteachers, cab drivers, and peons earned huge sums by investing in RIL in those heady 1980s and early 1990s. The same promise is reflected in RIL’s ongoing Greenfield project, Reliance Petroleum, which will be the world’s largest grassroots refinery and is expected to commence operations by mid-2008.


Like RIL, Reliance Petroleum has 16 lakh shareholders. Like in the case of several projects set up by RIL, RPL shareholders are expecting the best. The investors are expecting similar track records and, hence, similar returns. Although Reliance Petroleum is still in the set-up stage, the stock has already appreciated from Rs.60 to a high of Rs.290. The current mcap of this company is now bigger than the combined mcap of all its peers. Now, that’s what is called wealth creation.

“RIL has been by far the biggest value creator, be it in the era of Dhirubhai Ambani or after the split between brothers Anil and Mukesh. But apart from stock appreciation, has RIL done anything? I don’t think so,” says a broker with Indiabulls. The reason is that in recent times, RIL hasn’t helped investors through stocks splits, bonus & rights, or even high dividends. In the Dhirubhai era, investors gained in various forms – through rights, bonus, and the innovative conversion of debentures into shares. The same has not happened now. But how can one deny the fact RIL’s scrip price has zoomed several times in the past two years, and there was negligible impact even when the Ambani brothers were warring publicly.

“The idea is to create wealth so that small investors benefit. This attitude also shows the prospecting growth, sustainability, and the confidence of a company to take this decision. It is a good signal about the shape of things to come,” said Jigar Shah, KR Choksey, while commenting on the possibility of an announcement of a split or bonus at RIL’s AGM, which was held on October 12 this year. But there was no such announcement. However, the stock kept appreciating almost every day.

If it’s stock appreciation, then there are others like GMR, Punj Lloyd, Suzlon, Siemens, & ABB that aren’t members of the power pack, yet delivered a power-packed performance. For example, the debt-ridden and state-owned IFCI, is on the resurrection path after government’s intervention. The stock was trading at Rs.13 in January 2007. Thanks to government’s decision to sell a part of its stake in the company, and the scrip price leapfrogged to Rs.100. Investors made serious money.

There are stocks like BAG Films, Bihar Sponge, HFCL Infotel, TTML MRPL, and Gitanjali Gems, whose prices have gone up even though their financials are not exceedingly good. HFCL Infotel and Bihar Sponge, for instance, have negative Earnings per Share, yet the scrips rose by over 100% in no time. The flip side is that investors in these companies are looking at future earnings, and they realise that these firms have the potential to carve out a niche for themselves in their respective sectors.

Still, is it justified to place a Bihar Sponge and RIL on the same platter, just because they gave similar returns to their shareholders? The answer is a clear-cut ‘No’. The former category of companies have only seen the good times, as they have charted out their new growth paths in the past few years, but names like Reliance, Tata, Bajaj, and Birla have seen misses and hits, successes and failures, and yet have emerged as winners. So, have the New Economy and IT majors created better and more all-round wealth than the old economy giants? Yes, because they have driven value through several means – stock splits and higher dividends. But then the IT firms have been driven by other logic, apart from shareholders’ interests. They have been scared of any hit on their scrip prices in case they bloated their equity capital and, hence, opted for stock splits. Their margins are much higher and, hence, they can afford to give higher dividends. And if they don’t operate with an eye on their shareholders, their paper dreams can crash in no time as has happened with low-rung software companies. In the end, it’s both internal and external mindsets that decide how much wealth and value is created by a promoter. The investors have to make the right bets.

Source : IIPM Editorial, 2008

An Initiative of IIPM, Malay Chaudhuri and Arindam chaudhuri (Renowned Management Guru and Economist).

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