Know this before buying family-run co stocks | Economic Times

The ownership structure of a company plays an important role during stock selection, or at least it should. “I prefer companies with high promoter stake because it shows that the promoter has skin in the game,” says Tarun Birani, Founder & CEO, TBNG Capital Advisers. Does that mean investors should insist only upon companies in which the management has skin in the game or would it be fine if hired professional managers are running the show? “There is no clear yes or no answer to this question. We have seen several instances of wealth creation and destruction in the past in both family managed businesses and professionally managed businesses. Investors should take a holistic view and consider several sub-parameters,” adds Birani.The decision-making can be fairly uncomplicated for companies like Motilal Oswal Financial Services and Biocon, among others. These are managed by first generation promoters and what you need to check is their managerial ability and commitment to the business. “Investors should make sure that the promoters are committed to the business and demonstrate this by maintaining their holding in the company,” says A. Balasubrahmanian, CEO, Birla Sunlife AMC. Recent promoter activities, in the form of increasing or decreasing their stake, can be one factor worth monitoring. “Promoters of some fundamentally strong companies, like Bajaj Auto, have increased their stake during the recent stock market fall in March and this shows their conviction in the business,” says Ankur Kapur, Managing Partner, Plutus Capital. 78073864However, complication may arise when these first generation promoters become old. For example, Infosys faced a vacuum at the top management level after S.D. Shibulal, one of the last founders, completed his term as CEO. Its first non-founder CEO, Vishal Sikka, could not complete his term due to differences with the founders. A similar situation can arise in several well managed companies with first generation promoters.Is ushering in the next generation an automatic solution to this succession issue? No, because family-run businesses are not immune to failure. Investors have to make sure that the next generation is taking over because it has the ability and not just because they are next in line in the family. For example, Mukesh Ambani could take the businesses he inherited to higher levels, but Anil Ambani could not. Investors should also make sure that the passion of new family members are in the existing line of business and not elsewhere. “Eicher Motors is a good example of what the passion of the management can do. The new CEO, who came in at a young age, was very passionate about bikes,” says Kapur of Plutus Capital. 78073901Ideally, the promoters should bring in professional management if they feel that the next generation is not capable of taking the business forward.This is fairly common now. Names like Dabur and Wipro are prime examples. Investors should not assume that all family-owned companies are family managed. “Investors should check whether the promoters of family-owned businesses are bringing outside professional expertise,” says Balasubrahmanian. For example, the individual businesses of big groups like Tata and Birla, among others, are run by hired professionals. 78073911While professional managements are more focussed on short-term vision—till they remain at the helm of affairs—the main advantage of family-owned businesses is their long term vision. However, there are several professionally-managed companies in India, which focus on management stability. For example, we have several professional CEOs at the helm for decades like Deepak Parekh of HDFC and A.M. Naik in L&T.Once a professionally-managed company grows into a group, for example L&T Group and HDFC Group, they would be able to pass on the professional management culture to their subsidiaries. In other words, they will have long-term strategic vision and will also carry out succession planning well in advance. 78073918Despite high promoter holding, multinational companies (MNCs) can be clubbed with professionally managed companies because their Indian operations are usually managed by professionals. Indian investors also like MNCs for valid reasons. “In addition to high promoter holding, most MNCs have high management bandwidth, zero debt, high return on equity (RoE) and good dividend history and therefore, we recommend them for investors with low risk profile,” says Birani. However, most of them are quoting at high valuations. Investors need to time their entry.Due to constant political interference, PSUs don’t have the advantages of either promoter-driven companies or professionally managed companies. While family owned managements last long, most professional managements also tnd to be around for a reasonable time. However, PSU CEOs change every few years. The high promoter holding also may not mean much for PSUs. For example, high promoter stake in several PSU banks now is because of additional capital put in by the government to meet capital requirements. So, should you totally avoid this space now? “No need to avoid PSUs because they are now attractive from other parameters,” says Birani. Reasonable valuations, high dividend yield, etc are their main attractions in this space.(Graphics by Abdul Shafiq/ET Prime)