Looking Beyond The Numbers

Value creation is central to, in fact the raison d'être, of corporates and the most obvious inviting proposition for investors. But can stock price be the only gauge of value? Shailendra Lotlikar tells us otherwise.

(With inputs from Shashikant and Prasanna Bidkar)

There are innumerable thoughts that have been presented on what value creation means. The moment one speaks of value, it is automatically connoted as the stock returns generated over a period of time. But if stock returns were a means of measuring corporate excellence, imagine the kind of companies that would have taken the top slot. Do you remember Hindustan Futuristic Communications (HFCL) or Global Telesystems? Do DSQ Software or Aftek ring a bell? All these stocks were the darlings of the market at one point of time.

Those were my early days as an analyst. “Sell your house and buy HFCL” was the rhetoric on the streets then. A close friend of mine associated with the broking industry as a trader was in his element while recommending these to us, and there were reasons to believe him too. The stock was galloping at an unbelievable pace. Having placed a large bet on this counter, he was counting his profits. The thought of having let such a wealth creating opportunity pass made me feel rather sick for some time. But the feeling didn’t last too long. We all know what happened to HFCL down the line. I still own my house but my friend, though still in the business, lost his.

The point that I am trying to make is that corporate excellence is not just about rising share prices. In fact, it is a rather holistic concept encompassing the whole lifecycle of a company. From earning reasonable profits to building assets, and from rewarding shareholders with dividends to giving back to society, there is a gamut of activities around which real excellence revolves.

Stock prices may languish for long periods of time, but that doesn’t mean that the companies have necessarily failed to create value. There are numerous other measures which will put certain companies higher as compared to those who see a good share price movement. Take, for instance, ITC. This group is among the oldest business houses in India, but the stock price of the company hasn’t really delivered superlative returns, so to say. But while it is true that ITC has been a rather slow-moving stock, it is important to note that it has moved up gradually over the years.

Now, consider the overall value creation in terms of excellence that this group has achieved. Trying to shun its image as a tobacco-centric company depending solely on cigarettes to derive profits, it changed course in the late 90s and early 2000s. Since then, it has added Hotels and FMCG to its business interests. At the beginning, pundits feared that the group was over-diversifying and would fail in the process. But, this has eventually turned out to be a new leaf for the group. This is what real corporate excellence is all about.

On the other hand, have a look at some over-ambitious failures. The real estate sector has innumerable examples of this. HDIL, DB Realty and BL Kashyap are some names which you should look at when considering share prices as an indicator of value creation. Over-leveraging themselves to expand business has rather taken these countries downhill on the fundamentals side. This is where professional management and business foresight step in. There are many more names to name in this category. Whether it was the foolish idea of Koutons Retail to sell at throwaway prices to generate volumes or Pyramid Saimira’s acquisition of thousands of single-screen theaters to create a global footprint, all seem to have been mass destroyers of value and wealth, which makes them rank low on the corporate excellence front.

‘Create’, ‘expand’ and ‘sustain’ are three words which help build not just companies, but conglomerates of excellence. The Indian business scene has seen it all. The most important feature which distinguishes corporate excellence from mediocrity or plain bad business acumen is a good management which has an ability to recognise the right opportunities and cash in on them. As Edward De Bono said, “Companies that solely focus on competition will ultimately die. Those that focus on value creation will thrive”.