ASSESSING MANAGEMENT PEDIGREE
Published by Sharekhan Education | February 16, 2020
ASSESSING MANAGEMENT PEDIGREE
One of the key factors to look for while identifying fundamentally strong companies for investment is the management pedigree. Long-term seasoned investors first focus on assessing the management pedigree and their track record. Competent and ethical company managements know how to ensure that their companies thrive through ups and downs of business cycles. A visionary leadership is instrumental in driving the sales and earnings growth of a company consistently, and thereby generate long-term shareholder value.
Although an individual investor may not get much insight into a company’s day-to-day management, there are various quantitative and qualitative parameters which could be analysed to determine the quality of management.
Some of the quantitative qualities of a strong management are as follows:
- Consistent growth in sales and earnings
- High profit margins and return ratios such as ROE (Return on Equity) and ROCE (Return on Capital Employed)
- A sizable market share of the company in the given sector
- High promoter shareholding in the company
It would be very useful to compare these parameters with a company’s peers in the same industry while investing.
Some qualitative parameters to look for are as follows:
- Management’s reputation and role in success of the company
- Management’s long-term vision & strategy
- Ability to attract and retain top talent
Let us look at Marico Ltd as an example of strong management.
Before Marico came into existence, it was a part of Bombay Oil Industries. Bombay Oil Industries comprised three different businesses, namely Consumer Products, Chemicals and Spice Extraction. There was no synergy between these three businesses, which led to conflicts. The combined approach was not suiting the profit centers of the three businesses. The company was also finding it difficult to attract talent due to lack of focus on any one business. Allocation of resources among the three different businesses was also a challenge. Harsh Mariwala, chief promoter of Bombay Oil Industries, suggested de-merging Marico and concentrating only on the FMCG business.
After the de-merger, the management was able to put Marico on a high growth path, resulting in a consistent revenue growth of over 10% per annum over the past decade. The EBITDA margins have improved steadily from 12% to 18% over the past five years. The return ratios such as ROE and ROCE have been consistently above 20% over the past decade. Marico has built a strong market share across key categories of its brands as shown in the table. The promoters and the promoter group have held on to about 60% stake in Marico for the past decade.
Marico took a novel approach to focus on a narrow range of products, which helped it to survive and thrive in a highly competitive sector, and achieve leadership across the key products either through a pioneering approach or through innovation.
Being the promoter of Marico, Mr. Mariwala thought it right to step aside and allow the next line of professional managers to take the reins of the company in their hands. During the same period, the company was able to successfully avert a hostile acquisition threat from FMCG giant Hindustan Unilever (HUL). On the contrary, Marico ended up buying HUL’s ‘Nihar’ brand, which was directly competing with its core hair oil brand ‘Parachute’. The Marico management had a very clear acquisition strategy when it came to entering new markets or expanding the product line. At the same time, the company management never shied away from divesting under-performing, non-core brands.
The Marico example shows how an exemplary management has been able to drive the stock price from Rs19 to Rs250 between 2006 and 2016.
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