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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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good idea with a dash of humour is a lethal combination. The Chloromint ads have made it very clear what a good laugh can do for your brand. Dubaara mat poochhna!
of us remember the good old memories of how we used to curl up in bed at night and mom used to read out amazing stories, transporting us instantly into a different magical world every night. It’s said the learning process of a child starts when he hears the world-famous words “Once upon a time...” from his grandmother/father. “Once upon a time...” is actually a simplistic way of narrating history to children and everyone knows the study of history is important. It teaches us a lot!
could have thought that devils could be used as brand ambassadors! However, it’s the green horned devil who made Onida TV a neighbour’s envy and owner’s pride. Today, the devil is back, albeit in a new avatar, but has managed to make people take notice of him and his product once again.
meeting of this man, while taking a walk in a village, with a woman who used to weave bamboo stools, changed the life of many poor Bangladeshis. Muhammad Yunus met Sufiya Khatun, a widow, in 1976. She used to make bamboo stools and earned two cents a day. The reason for such low profits was that the person who would lend her the money to buy the bamboo, also bought her final product. No surprise then that he gave her minimum possible. Yunus looked around and found 42 people who required a total of $26, which could change their lives forever. Within two years, he established his first “Grameen Bank” that would give credit to the poor – whom the other banks found worthless. Today Yunus’s Grameen Bank has more than 1,000 branches. He gives $40 million a month as loans. It has over two million customers; 94% of them women. What’s most commendable is the fact that 97% of its loans are repaid – a record comparable to the repayment rate at Chase Manhattan Bank!
nothing but a suitcase full of dreams and an unfinished print of an animated movie The Alice Comedies, Walt Disney reached Hollywood to start a new business. He was 21. He had nothing but ideas; and many a time, people found them ridiculous. When no one believed that there’s a market for full-length animated films, that’s when Walt Disney launched Snow White and The Seven Dwarfs. The film was a roaring success and even today is regarded as one of the greatest monuments of the motion picture industry.
you don’t accept the norm and move away from the tradition, that’s when you create miracles. It is this process of thinking differently that has given birth to new ideas and new millions to the thinkers.
airlines had been there for a long time. It was not a new concept. However, Southwest Airlines showed how to make it a successful business venture. Pacific SouthWest Airlines had been there in the United States since 1949, but it was SouthWest that proved to the world how to make an icon out of something so cheap! When Herb Kelleher started SouthWest, his vision was clear, people wanted to get to their destinations on time and at the lowest possible fares. He did just that. No wonder SouthWest is one of the few airlines that have not made any loss since 1973! Today it’s America’s largest and best-loved airlines. It’s been a major inspiration to other low-cost airlines who have tried to copy its business strategy. It’s called the SouthWest effect!
many know that McDonald’s was not started by Ray Kroc, but by the McDonald brothers: Dick and Mac. They were the ones who invented the “Speedee Service System” in 1948. They were the ones who discovered this whole concept of a “fast-food restaurant”. Not just this, they had also started franchising their restaurant. Ray Kroc’s genius lay in the fact that he realised the tremendous potential of this business model and in due time, spread it at a break neck speed all over America.
million retail establishments in the United States in 1945. However, one of them grew to become the largest discount chain of the world. The store was Wal-Mart, started by Sam Walton and his brother in 1962. By 2001, there were more than 4,500 Wal-Mart stores worldwide. He knew everybody loves low prices and that’s just what he offered them. The slogan “Everyday Low Prices” turned this small retail shop into a global giant!
no dearth of cosmetic companies, but this one, which was started in a kitchen, gave a tough competition to many big established names. Estée Lauder began selling creams made by her uncle who was a chemist. She did just one thing different from other makers of cosmetics. She started giving free samples and free demos of her products to people, and most of them became her customers. Very soon, her company grew into a giant organisation owning many big brands like Clinic, M.A.C., Aramis etc.
blindness is a disease that had infected over a million people. Now, that’s a large market for any pharmaceutical company. Merck thought too, and the company soon developed a drug called Mectizan. However, when there were no buyers for its product, the company gave it for free to all who needed it. Merck had done the same thing in Japan when it brought streptomycin to help eliminate tuberculosis. It was the long term vision of this company which helped it grow. No points for guessing then, which is the largest American pharmaceutical company in Japan. Yes, it is Merck!
man or one company’s vision and commitment can change a lot.
