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Corporate Governance Determines Value Creation

| 3/21/2013 9:00 PM Thursday

Value creation is hampered when companies enter the wrong territories without having enough expertise, says Andrew Holland, CEO, Investment Advisory, Ambit Capital, in an interview to Shailendra Lotlikar, while also sharing his views on the Indian corporate scenario and their value creation capacities.

  • There have been many instances where companies have jumped into areas that they do not possess an expertise in. They have thus burnt their fingers. My point is to get into spaces that you are confident of.
  • Retailing is going to be huge in India. If you look at companies like HUL, and Nestle, you will notice that they are doing what they have done best. They are just replicating the model that they have followed and succeeded in Europe.
  • There are many stories that have created value, and Titan Industries is one of them. Also, Havells India is a fantastic story, as also there is TTK Prestige.

Andrew Holland,
CEO, Investment Advisory, Ambit Capital

How do you feel the Indian companies have been able to create value?

I think companies became increasingly over-confident in 2006-07. This is not the case with India alone, but with all the countries that I have studied. In that span, companies claimed of building on a piece of land that they were holding. My point is that if you do not have the experience of building then why you better sell the land than building something. Why are you trying to become a builder when you are not one? There are many instances like this where the companies have jumped into areas that they do not possess any expertise in. They have thus burnt their fingers and what we are seeing now is their existence in non-core areas. Everyone thought that the party would not end, not just in India but also across the globe. I think that is where the value creation story in India has paused; with the over confidence of the Indian corporates.

If you look at the older companies or groups, they have expanded in other areas. The Reliance Group is an example. Do you think this is a good thing to happen in the Indian corporate scene?

Just looking at Reliance will not suffice. You have to remember that at one point of time they had a huge cash flow. It is ok to use your cash flows to look at long-term industries like the retail business. We know that this may not be creating value now, but it is a long-term factor and will last for the next 30 years. They have, as a group, got involved in share buyback and tried to get back to investors, in the form of dividends too. It is a cause of worry when you are going into businesses without having an expertise in it. Also, if you are not using the existing cash flows and using your shareholders money.

 

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