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Top fund manager Saurabh Mukherjee, who believes that taking a call on a smallcap company is like taking a call on a promoter, says that small companies, by and large, are family-owned and family-run businesses, usually with a single promoter or a single promoter. is involved. Some promoter family members who are at the helm of affairs.
“For such companies, the promoter or set of skills (technical, sales and/or managerial) of the promoter becomes the defining competitive advantage of the company. Furthermore, the strategic and capital allocation decisions of the promoter shape the fortunes of the company,” Mukherjee said.
PMS fund managers, who handle assets worth over Rs 11,000 crore, have listed four parameters to evaluate promoter’s participation in small companies.
1. Shareholding
In a note to investors of Marcellus Investment ManagerMukherjee said the higher the promoter’s stake in the company, the more likely the promoter would think and act in the best interest of the minority shareholders of the company. In addition, how the promoter’s stake in the company is developing can provide important clues about his outlook on the company’s prospects.
2. Remuneration
Another criterion to measure the promoter’s skin in sports is to find the ratio of their remuneration which is variable (ie dependent on profitability) rather than fixed. “The higher the share of the variable (versus fixed), the greater the promoter’s incentive to focus on profits, the greater the alignment with the interests of minority shareholders,” said Team Mukherjee.
3. Dividend vs. Reinvestment
Promoters have the option to either withdraw the profits of the company through dividends or to reinvest the same in the business for growth. “Preferring reinvestment over dividends is a sign that promoters are not driven by short-term satisfaction, but by long-term value creation through fully exploring business potential. The only caveat here is that the reinvestment should not be of return less than or less than the opportunity cost of capital for the shareholders,” it said.
4. Business interests outside the listed company
Significant business interests of promoters outside the listed company, the latter raise question marks over the time and focus that can be allocated to the business of the company, despite the high shareholding. “This is particularly relevant where the promoters are involved in the business of the listed company in an executive role as is the case with most small companies,” it said.
(Disclaimer: Recommendations, suggestions, views and opinions given by experts are their own. They do not represent the views of The Economic Times)
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