Originally posted by manishwithted
Though we try from our side to judge the management as there is limited info available esp for small caps, risk is always high, so only investors with high risk apetite should go for it.
Rightly said by Hitesh that it is difficult to check the management integrity of small caps. |
Management quality is talked about very often but is not a straightforward matter to understand for most investors. For limited purpose of stock markets, I would broadly say Indian management into 3 types - (i) credible (ii) crook and (iii) fuzzy.
On Type (i), there is no debate with people like tatas, murthy, premji etc.
Type (ii) again not in dispute with so many of them competing for the honours - rajus, a.., b…,c…(don’t want to name). Type (i) and (ii) may roughly constitute 10% and 20% respectively.
That leaves majority 70% in Type (iii) as fuzzy which is difficult to assess since same management action can be viewed on either side of grey.
I give few recent examples (not necessarily small caps) so that new investors can correlate with:
a) Orchid chemicals – in 2009 market crash promoter's shares were pledged and margin calls triggered. It is rumoured they were on verge of losing management control. Given his (rao) background appears management intention was not bad but if the damage had actually happened, company’s course could have changed irreversibly, with shareholders possibly losing their shirt and history judging management quality as poor. Heard again 70% of promoter shares are pledged.
b) Patni computers – perpetual special situations play with news of promoters “trying for” stake sale since ages. Gave a large special dividend in 2010 – can be viewed as rewarding the shareholders point-in-time. Now look at it other way - they sucked out good amount of cash from the company benefiting mainly the promoters when that could fuel business growth and aid long term wealth creation.
c) Piramal healthcare – star businesses sold (formulations, diagnostics), large cash on books/expected, buy-back at lukewarm price of 600, no recent growth engine added or seen after these moves – looks hazy – management intentions may be right, we don’t know if they can deliver value for long term shareholders, but not done anything great as of now.
Point-in-Time vs Through-the-Cycle debate is complex depending on investor’s entry point & time horizon. Insufficient info about small cap management team is another constraint. Further, management challenges in family run businesses are very different from those in first generation entrepreneurs.
In my view, assessment of management quality for Type (iii) is extremely difficult call and generally not small investors’ cup of tea. May be sometime I will touch more details on this subject, if time permits.
Disclaimer – I have no interest in any of the 3 companies mentioned above, their names are illustrative, from memory, and info may be incorrect.
Edited by master - 10/Dec/2010 at 6:44pm
Active Topics
Memberlist
Calendar
Search
Help
Register
Login
IP Logged
