How can companies create wealth? Experts discuss

Motilal Oswal organised a special panel discussion on role of competitive strategy in wealth creation. The panel included Raamdeo Agrawal, co-founder and joint managing director, Motilal Oswal, Amit Chandra, managing director head -Indian operations, Bain Capital and Anil Singhvi, chairman, Ican Investments Advisors.

Also read: Wealth creation tips for short-term goals Below is the edited transcript of the discussion. Q: What are your thoughts on capital allocation and its role in wealth creation, given that you have a company, which has all these characteristics? How important is it or are we agnostic to that as well? Agrawal: The entire study is the basic foundation. The testing has happened only on the capital efficiency. Q: Let’s say you are very profitable, you make heaps of money, now you got to use that heaps of money. Indian companies used to say we are doing a wonderful thing. We are using retained earnings to pay down debt. That is the closest thing to absurd, using money, which costs you 16 percent to pay off money, which costs you 6 percent. But they all love to say we have become debt free because we have paid off our debt using retained earnings. That is capital allocation at its worst, you can’t beat that. Agrawal: We have seen real bad wealth capital allocation in the last seven-eight years. I think it has started with LN Mittal becoming world’s third largest richest man. And I think somewhere some of the Indian counterparts wanted to bridge the gap very quickly. There were some problems in growing in India also. That was the context in which a lot of large acquisitions happened. The way the global and local economy was growing between 2003 and 2007, it was very rapid growth in the economy. So, at that point of time, the entrepreneurs, who had not seen this kind of a cycle, got engulfed in the cycle. The market cap of their own company got into their head. They started acquiring companies keeping the market cap in the mind rather than looking at the balance sheet. When you buy USD 10-14 billion of company, the banker has the job, he comes and very smartly pitches it, he is very successful in collecting his half a billion dollar fees.

Q: What are your views on wealth creation? What has your experience been? Chandra: My personal experience in the first innings of my career was with DSP Merrill Lynch which interestingly did land up being a great story of wealth creation for the Kothari family and that too in an industry which is today notorious for not having created wealth. My simple take away, when I reflect back on what drove wealth creation at DSP, was just getting the basics right. Hemendra was an incredible leader who was very clear that financial services was essentially a business about people and so he focused on making sure that he got what he truly believed were the best possible people in the business. He focused on creating the right incentive structure around them, ensuring that greed did not get the better of them in an industry where greed often creates great value over short cycles, but can destroy institutions as we have seen it happen in the West over longer cycles. Then, another theme which was unique, which comes through a lot in some of the companies, was thinking hard about building strategic differentiation, being very clear on what it takes to be ahead of the market and reinvesting some of the gains that you get from that in being ahead of the curve. There was an incredible focus of that at DSP as opposed to just short-term profit maximisation. It was about just making sure that money kept going in, on making people invest, on doing things which were atypical in the market at that point of time. The third takeaway is very interesting and it is a good takeaway from the wealth creation survey. It is essentially for businesses with high return on capital employed- the tailwind is behind you and the odds are generally in your favour. Avoiding making investments in really capital intensive stocks, was something that I think DSP was great at. That enormously helped again create wealth on a sustainable basis. I think to put it in context, Hemendra started with a less than a couple of lakh of rupees and when we finally sold the company to Merill, it was worth a billion dollars. Bhattacharya: When I was young I started my career in a credit rating agency and I used to be amazed, that the companies which had the best credit quality were the ones who did not need to raise debt. It is similar to that or on those lines? Q: Amit taking long view and the ability to do business, grow the business without putting large incremental sums of money to achieve growth. These were to your mind? Chandra: These were the unique factors. Bhattacharya: You created some outstanding organizations and as a banker in your second innings you have also been associated with some of the best names in this country
Can you share with us what is called value or wealth; which differentiates really top gear companies from less than rewarding companies? Singhvi: When I joined Ambuja, at that time the company came out with an IPO for total market cap of USD 5 million and in 2006 the company was sold to Holcim for a total valuation close to USD 6 billion. So, I saw a journey from USD 5 million to USD 6 billion, 1200 times in just about 22 years. In 1989, there was a right issue of Ambuja Cement and I offered some shares to Raamdeo and he refused to buy those shares. He said " I don't think cement can ever create wealth' So, coming back to that and taking that as a clue that Raamdeo did not believed in and still proved that there can be some value creation be there.