How to Analyse Management Quality: #AskGyani with Avinash Gorakshakar

How to Analyse Management Quality: #AskGyani with Avinash Gorakshakar
Corporate governance is different from management. Management runs the enterprise. The board or governing body ensures that it is being run well and in the right direction.

In this session, Avinash Gorakshkar highlights the key steps/tools that investors should use to find out a good management and avoid bad management. 

An investor should listen to him carefully and inculcate the ideas in her stock analysis process so that they may avoid falling into the trap of unscrupulous managements that try to benefit at the cost of minority shareholders.  

"If management is about running the business, governance is about seeing that it is run properly"
Bob Tricker
Corporate Governance Expert

Webinar Presentation

Webinar Q&A Transcript

Question:

MGL is up by 8% in a month , do you think , it has more upside ?

Answer:

This question seems to be co-relating to the short term profile of the investor. I would like to mention that MGL is one of those companies which has monopoly for pipeline business for the gas in the state of Maharashtra. And, typically caters is to both the industrial as well as retail customers. They have a B2C model as well as B2B model. 

They make CNG as well as obviously make PNG for residential purpose as well as for other industrial customers like hotels, malls. So, I would Believe in that if your horizon is going to be longer so this can be a company where possibly earning are going to grow and significantly good pace. 


They have a very strong balance sheet virtually more date on the balance sheet as very large cash component on the balance sheet and extremely very good capital site. So, my suggestion is that if you are looking for a very big upside then you can buy the stock and remain invested. Typically I would believe that give a 2 years of horizon because gas is the eatput which is the more and more support from government considering that it’s a clean resource. And, sense is that hold it for next 2 years, you could make a lot of money rather than looking at short term kind.

Question:

Can i buy HDFCBANK for 6 month , how much upside is expected ?

Answer:

I would like to mention very clearly, HDFCBANK is well establish blue chip. We all know the kind of wealth creation HDFCBANK has generated in last period of 15 years. In fact there are many market names which actually bought this bank at Rs. 40-50 and today we have seen the kind of upside which are coming. So,  my suggestion is that whenever you are investing in such companies madam, please do not take a short term goal. 

A 6 month view on HDFCBank may be a trading bounce. But, are you going to be happy with 5% upside or 10% upside. So, it all depends on risk appetite and risk reward which you are expectations which you have. So clearly it’s not HDFC Bank will not do well but keep a timeline for at least 18-24 months. This bank is going to grow in future also but looking at the time horizon which you have mentioned I would be surprised if you will be possibly get a very big upside because the base value has also gone up significantly.

Question:

What do you think, which is better options or direct equity?

Answer:

I think this gentleman seems to be a trader or an investor so my suggestion is that in options for future you play on underline and in equity you actually buy share of a company. So, it’s yours call just like a doctor can not recommend same medicine to everybody. Obviously recommend different medicine for everybody. You have to see your risk appetite, risk return expectations and then take a call. 

My suggestion is that is you possibly have split between investment and trading that could be an ideal combination because the fact of matter is that trading in the volatile business. You obviously do not know when you can make a profit or take a loss but investing is more safer option to follow proper investing strategies so, my suggestion is to stick to equity may be to smaller extent but don’t ignore equity come first.

Question:

What should i do on SBILIFE , holding this stock from IPO

Answer:

As far as insurance market is concerned, both life and general insurance side, insurance business has now started looking up quite rapidly in fact, talk about SBILife, new premium growth has exceeded almost 35-40%. And, our sense is that the kind of network it enjoys along with State Bank of India, it’s gone to be definitely be poised every strong player for over next 3 years. 

So, please do not look at SBILife or any insurance company for a 6 months view. These businesses are long term and typically you will not be able to get significant return if your timeline is less than 2-3 years. So, keep holding on and I would believe that for next 2-3 years we are definitely going to see not only the market growth exploding, more and more customers getting sort to API is the highly under penetrated market. My suggestion is please hold on for next 2-3 years, you should definitely be rewarded.

Question:

Please let me know about IDEA?

Answer:

My sense is that within the telecom market, if you look at the structure of the market and the competition intensity now, it is very clear that almost all the telecom firms are going to face further turbulent time considering that Reliance jio has now created a very pears competitive scenario in the market. In fact are to you weaken in the market. further more importantly once the fibre to home network actually starts commissioning, that is something going to eat into market share of all the other telecom pairs. 

No, Idea may not be a great idea in fact, now it’s called Vodafone India and recently the company announced the dividend making an around of 25000 crores. Now, one major aspect which an investor should know as  have been mentioning in my checklist, this value destruction use case. 

Now, when a company announce an equity concern were around 25000 crores. What is the first thing which comes to yours mind? it’s basically fact that your equity is going to increase and your earnings are not going to increase and what is the money going to be user for? It is going to be used for basically pushing your product in the market possibly ensuring that you fight further with Reliance Jio. So, clearly in next 2 years I would believe that Vodafone india will unlikely to give you major positive surprise despite the fact that now it has come down to bottom level of 20-25. So, please do not go on the price. 

Price may remain Rs. 20-25 for a long time but incremental value will come only when company’s operating cash flow, company’s operating profitability improve and that’s would take a long time. It could be a traders wave rate but typically from fundamental stand point of view I think it’s better to stay away.

Question:

Yesterday DCW was 20% up on upper circuit , whats your view on this stock for long term ?

Answer:

Clearly, i have been a follower that I don’t like commodity businesses and clearly DCW is it to as soda and caustic soda. For a stock which is low price stock which is low price stock of 20% circuit filter is not a big deal. And, you have been seen in company like soodloan which have mood up by 25% but one more to ask you what has been the base price. It’s almost not more than 10-12%. So, clearly these kind of percentages are not broad indicator to decide whether to buy a stock. I would suggest that you please invest in businesses which are scalable and which are big in size and as far as possible please stay away from commodities.

Question:

FRETAIL is down 18% in last 3 month shall i exit from this stock now.

Answer:

I would like to ask Manoj Is it a short term investment or long term investment?. Now, if you not able to write volatility in the market clearly, 18-20% drop down are something that an investor should be worried about because clearly we have seen that mid caps coming down almost 40-50% so some of the front line also coming down. So I think the basic story to cut it short is that this company has great opportunity ahead. 

The Indian retail market is yet a very large opportunity  and despite the fact that it’s volume driven market which I would believe that if you have 2-3 years vision then only invest in this company. And, only then the risk reward will be very favourable otherwise, in the near term I would be surprise that stock may be range bound for certain time and actually it tests for yours patience. So, keep a long term horizon and obviously if you really want to make a significant upside then you should really remain invested.

Question:

What could be drop down that an investor should be ok with that?

Answer:

Ideally, I think drop down should be about 30-40% and frankly just looking at drop down is not a main character. You have to see how the incremental earnings catch up going to happen. Is it the business where top level has improved, whether top line has improved and clearly what is the capital allocation in the business. In many companies there is very distorted capital allocation so, putting all these factors into the mind the final thing what you have to see is what price are you buying the business. Once those quality factors are improved then you go and see the price at what price are you buying. So, these are the broad parameters which an investor should thought.

In many quality mid caps have down by 30-40%. Now, blindly going to buy something which is 52 weeks low or has been 80% down. Understand one thing in mid caps that going forword also, only quality mid-caps whether is a reasonable amount of liquidity or reasonable amount of good quality investors as well, only those companies will do it. Because clearly we may not find the same scenario what happened in 2017 and 2019. So, we need to be careful and I think as I was mentioning to you  mid-cap bubble is very dangerous, once the fall happens the liquidity will not allow you to exit. So, you need to get into quality business. 

Again look at it from business point, look at parameters like what is ROE, what is return on capital employeed, whether earning are going to grow typically from core operations consistently, may be 15-20% lkind of earning growth from angular basis can be a fair amount indicator that a good amount of visibility and good at valuable kind of potential which is left to be available, that’s the value on the table after the drop.

18% loss is not big loss but if you are investing in this company for around 2 years then it is good stock.

Question:

View on RBLBANK ?

Answer:

RBLBANK is one of the new privately listed bank and ever since it went public it is one of those banks which has been growing far faster rate (loan book growth, disbursement growth) and management is very ambitious and they expect that in next 3 years this consistency in growth rate should be at least 40-50%. They are looking at very strong ROA and their statements clearly shows that in next 3 years theirs positioning on the SME side, MSCP side, retail side are going to increase. So, only  challenge for the bank would be basically the casa ratio which is currently little under 25% and as the bank increase geographically spread you possibly see casa also lower. 


So, if you have a long term view you can buy it. Just one small observation yesterday an FYI called vanguard purchased a very big quantity on RBL. So, this stock as now been favourite not only for retail investors, local funds but even FYI are also accumulating it. So any weakness should be used as an opportunity to buy the stock but again from the portfolio angle may be in near term, it may in range bound but for longer term I hope it will make money.

Question:

What should be the strategy on AARTIDRUGS ?

Answer:

AARTIDRUGS is typically a company which operates in API space. Often we have seen that most API companies are benefit significantly because obviously China has closed sown some capacity and Indian companies have benefitted there. 

We believe since this is commodity business one has to be very watchful but considering the kind of price trends as of now we believe that at least over 3-4 quarters the pricing gain for Indian companies will continue and typically one has to be clearly very watch full for news what happened in chinese frontier so somebody has near term one can look at AARTIDRUGS but again this factor remains that this factor can not be a sustainable business because like any commodity business like once prices start reacting downward you could possibly see the margins coming under pressure.

So, my sense says to look at this factor when you invest and look at the time horizon may be for next 12 months if you do get an opportunity of stock collects it could be a good opportunity but for longer term I think it is better to be away from such kind of commodity stocks.

Question:

MUTHOOTFIN has shown good upside in recently , do you see any chance to buy this stock?

Answer:

I would advise that MUTHOOTFIN is one of the largest gold financing in India. I think gold financing in India has very significant growth and despite de-monetization and despite lot of macro level issues which has impacted to business earlier the company has been posting very good numbers. Our sense says that if the investor would like timer of at least 18 months then, this could be a good opportunity because our sense says that gold financing a something which is very unique business, it’s not a business where many companies get in and typically the relationship, asset quality, risk maintenance are something which MUTHOOTFIN is doing since near 2 decades. I think you can buy this provided your timeline.


MUTHOOTFIN is one of the larger gold finance in India. Gold financing is a unique business. Typically, relationships, asset quality, risk maintenance are the factors in which MUTHOOTFIN has done good so you can buy these and by providing your timeline it can do well.

Question:

UNITECH and 3IINFOTECH , holding these from very long time , shall i exit now?

Answer:

Yes, please exit as of now even if it has been big capital loss till now because this is the most common investing thing that an investor usually do. They buy penny stock with the hope that these could become multi bagger. Frankly there are many good companies available please put your money in some good quality businesses which can add value to your money.

Question:

I recently got married , How can i start investing ? What should be the strategy to start ?

Answer:

Here I would lie to make a clear statement that, mostly financial planner do, is that they deduct their age from 100 and then say that is the amount you should allocate to the equity. So, I would believe that if you are young, just got a job, you have started early. It is always better to put your money on direct equity and mutual funds. 

Infact, the priority would be equity and then mutual funds. Since, I do not know your risk profile, I would believe that if you are reasonably risk averse and you can take reasonable amount of risk then i think that equity should be a large component followed by mutual funds and may be a small percentage in simple fixed category.

just to give you an idea may be 80% in equity and mutual funds and rest 20% in fixed income because the way equity market is going to grow and the way risk rewards are gong to come, I think if you miss on equity in next 3-5 years. You will be missing a very good opportunity for wealth creation and I think wealth creation require little amount of discipline and little amount of sustained efforts. 

So, if you are not comfortable with direct equity you can go in SIP but, that would be much better than fixed income kind of category.

Question:

COX&KINGS has given downside a lot , what’s you opinion for this stock , does it has any chance of recovery or shall i exit from this now ?

Answer:

Now, one thing is very clear that COX&KINGS is going 737 issue. What has happened is that most of the airline companies and travel related companies they have got an extremely mad beating on stock prices because market are offensive and now going with 737 issue coming up, you could be finding lot of cancellation coming in tourist specially for both inbound as well as outbound travelling.


Our sense is that it is not a local phenomenon, it’s global phenomenon. As, everyone is aware that 77 air crafts has been taken off for approx 25-30 countries. And, this problem is not going to be sorted out in near term, it can sort out in next 6-12 months but it is going to be a slow process. 


So, I would believe that as of now there is no hurry to get into these stocks but if somebody has 2-3 year view, any weakness may be lower level later could be used to enter into these companies because fundamentally these companies are solid but the global head cues is now negative which will take some time to recover.

Question:

View on TCS for long term ?

Answer:

TCS should definitely do well although the fact remains that it’s not the cheap stock it’s fairy valued stock. But looking at the fact that IT business are now changing. I think TCS is one of the those companies which is now going fast into digital space or getting into artificial intelligence, machine learning space.

I would believe that if you have 2-3 years kind of investment strategy, TCS can definitely could do well. In near term it could possibly give you good dividends but frankly if you want growth then you should give it 2-3 years and any decline should be used as an opportunity to buy.

Question:

Please let me know about VENKYS ?

Answer:

Venkys india is poultry business. It is in to packet segment which directly goes to B2C player which also supplies to bulk customers on the industrial side. I would suggest that if somebody want to make investment call , one should be patient with this company because stock is actually very volatile. 


Once the price movement of the stock has actually becomes traders favourite because its on extremely high volatility on that counter but coming to the business side we believe that over the next 2-3 years as daily business picks up and poultry business supports India, going to see lots of expansion here and Venkys has been front run of the market leader and they have very strong brand presence also. 


So, I think that all standard done you have a good deal for you. One should definitely look at the stock but could be for long term kind. 

Question:

There were some news about BAJFINANCE branch closure , is there some real issue going on with this company management ?

Answer:

Clearly, I would like to say that Bajaj Finance is one of those B2C companies which are operating in the consumer finance and our sense is that despite dial up issue and despite liquidity crunch, Bajaj Finance has very strong funding structure, a very good asset quality base. 


Therefore, I don’t think anything negative should happen for the company for over next 2-3 years. Infact I would say that it is good stock and a good opportunity to get into Bajaj Finance. 


if you don’t have then obviously you should accumulate it but opt it for long term because this is the story which is already well known to the mostly investor of the market. But, definitely will be better reward in next 2-3 years. 

Question:

View on sugar stocks , which sugar stocks you like ?

Answer:

Without giving the target price I would like to say that sugar companies are now in the line loudly because one important development has happened that is ethanol production and ethanol supply now has taken front lead in sugar companies. 


So, companies which are integrated sugar pearl adapted going to benefit because one part of sugar by product is molecule and second is ethanol and ethanol output is now going up as the government has said in 4 years in blending ratio is going to be almost 20%. It is currently about 2-3 %. 


So, our sense is that the blending ratio will easily go up around 8-10 %. and with regard to this sector I would believe that the larger player like balrampurchini, DhampurSugar are definitely to do well. 


Infact on the sugar side of business I would believe that profits may not be extremely large may be soft. But, ethanol business is going to contribute a significant part. So, you should keep on watch on these companies and obviously these companies are going to do well over next 12-18 months.

Question:

How much promoter salary is expected in any company ?

Answer:

Normally I would be comfortable with lets say out of profit earned that should not be more than 10%. Because this could vary I mean finally in a promoter run company and it’s my company and I deliver the goods, I do very well then it could happen exceed 10%. 


My basic underlying checklist is prior set that along with the salary if performance is also getting better, am I getting very good ROI of 40% and then I do not mind paying good salary to the promoter because finally at the end of the day I want to get to know what is the ROE that has been generated from here. 


And what is the dividend assuming he has paid 200% dividend out of this profit. Then, I don’t have any issues just saying that on broader level salary should be supported and justifiable by the gavier itself. 


Question:

Tell us about your view on Bandhan Bank ?

Answer:

Bandhan Bank is one of the largest micro finance player in the public and one of the key player to get a licence in recent time by RBI. They have very large spread in the western side, eastern India side. And, I think corporate development happen there.Now, they are going to takeover group finance which is the part of HDFC group. Now, when this merger was being announced what happened both bandhan bank and group finance collapsed. 


The market was not so happy with this merger because obviously the pricing with merger was slight higher. But if you look at next 2-3 years, this merger is going to give the geographical risk only on business. 


What does group finance do is basically a small subsidiary of HDFC and in housing finance segment in the tier-2, tier-3 segment. So, housing finance is going to grow phenomenally despite the fact that there have been some near term challenges like hire land, liquidity crunch. 


So, clearly if you have 2-3 years view ,then i think that this could be a very good portfolio addition. But, you need to keep 2-3 years view, value accumulation will happen but it will happen over next 2-3 years. 

Question:

What is your view on electrical vehicles ?

Answer:

As far as electrical vehicles are concerned, I would believe that we would be looking at these vehicles only after say next 5-10 years. In a country like India, electrical vehicles will take lot of time to establish because you know we don’t have EV charging centres setup in India and India is a vast country. 


So, lets assume that you go on long drive and there is no charging station clearly the customer is not going to be completely happy with these kind of situations. Electrical vehicles scenarios which most peoples have painted regular internal combustion engine will go out of business, this something is very difficult to believe. 


So I would believe that this is potentially be a good market. Maruti has said that they have tied up with Toyota launching EV vehicles. So keep a 4-5 years view and obviously beyond that we will actually see the number and volume catching up. Till that time I don’t think that a big threat for domestic automobiles. EV is going to co-exist with IC engines. 

Question:

Whats your view on Wipro ?

Answer:

Our sense is that the company has been doing well but typically if you see the kind of margin guidance and the kind of vertically creators too, I would be more apprehensive on bank and market should not be very happy on the margin guidance given by the window both the 2-3 numbers. And, despite the prank that company has announced bonus and now share will soon go ex-bonus. 


Our sense is that within IT space Tech Mahindra could be a better choice and looking at the fact that it’s going to play very large role to play in IG role orders comes out to be next 12-18 months. That could be a better opportunity. So, I would suggest investor that this is the best time to buy something like tech mahindra.


Mahindra is such type of corporate where mis-governance issues never happened. And, that gives a lot of credibility in the market. Anand Mahindra has been very vocal about this and make it a point not only for Tech Mahindra but for entire Mahindra corps. 


So, this is very well established empirical fact that corporate governance is talk to ask management bandwidth is very good. And, they have the right partners and right vertical stands. So, I would believe that yes, this is very classic example of very good management and which is giving very goo returns to the service.

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