The definition of a mid-cap and a large-cap company has changed over the past decade. Scores of companies have graduated to the large-cap segment and there are many more joining them. From an investing perspective, the best strategy would be to ?catch them young and watch them grow?. But then this is easier said than done. Along with the rewards are risks and the corporate India highway is littered with remnants of promising mid-cap companies.
Near euphoric situations, where everything looks promising and any venture would grow simply on the momentum provided by the economy and the opportunity, causes many companies to misjudge their potential and get carried away. Investors too are blinded by the optimism and join the bandwagon. And when normalcy steps in, the tide goes out and many get left on the shore.
Old norms
The test therefore for picking up tomorrow?s winners starts from the top?the leadership and the team that will make things happen. An investment banker, not wanting to be named, says that the first lesson he learnt in his career is that good leaders can make a horrible project win, and an ordinary one can kill a smart project.
?The promoter and the leader are the biggest risk that a company has,? he adds. He points out to leaders like Aditya Birla, NR Narayana Murthy, as people who could weather testing times and also quickly re-work projects to get them on stream.
And here as well, experts are quick to point out that leadership needs to be tested. After all, it is during testing times that the character and the skills of a leader are demonstrated. The basic parameter for the test here is the management?s ability to stick to their guns and generate profitability to serve their shareholders.
Companies making the crossover need to understand that merely getting strong media attention and making promises might win them a battle, but the war is perennial and heads are counted?numbers matter. NR Narayana Murthy, probably the best iconic example of a person who catalysed Infosys to make that crossover, states succinctly, ?In God we trust, everybody else bring data to the table.?
?What would happen if Dhirubhai was no more? Reliance would come crashing down.? These were words that one could often hear amongst stock market denizen. Years after the great man has passed away, the siblings, though not the way Dhirubhai would have wanted to, have grown their businesses.
But then thoughts are a fall-out of many a personality-driven enterprise not living up to the promise, because the new leadership could not carry out the vision with the passion of the original promoter. And some of the fault lies with promoters who cling to their organisations and do not create strong succession plans and have the fear of sharing leadership. Usually, such enterprises crumble when they are not around.
A human resource consultant shares, ?While working with a medium-sized reputed company, I heard some of the managers stressing on the need of top leadership to share powers.? On further examination, the consultant discovered that the leadership did indeed hold a lot many powers close to their chest and did not have a succession plan in place.
?Just imagine, a small accident could change the fate of several million investors,? the consultant added. You would find an increasing number of shareholders (especially institutional) asking questions related to succession and other human relations related areas.
Focussed execution
The excitement of growth is heady and often, enough companies, even the larger ones, spread out into unrelated areas under the guise of diversification or integration. Quite frequently, consumer durable companies speak about plans to make steel sheets. Now we have real estate companies wanting to enter the tremendously competitive telecom area. Early in the nineties when the licence Raj was done away with, there was a mad rush to build capacities. Just about everybody wanted to make steel and cement and monies were raised from an euphoric market place. Now, around 80% of these projects are moribund. And not that their intentions were misplaced, some were simply awed by the enormity of the task on hand.
To dream big is a required parameter to make the cross over, but it is strong and focussed execution that separates the men from the boys. ?Sometimes, even good companies fail with catastrophic results, despite stellar qualities. The problem is usually not the strategy or the person in charge; it is between the strategy and the execution,? say Larry Bossidy and Ram Charan in their best selling book Execution.
Isolating winners in the small- and mid-cap space is fraught with risk. Hence this should be managed well. Shreekant Javalgekar, director finance, Financial Technologies says, ?One must look at how the company looks at risk itself and its business model.? ?Multi-baggers are not available on spreadsheets,? he says.
Values
Paradoxical as it may sound, along with the need to be focussed, experts also point out the need to be flexible. To quickly steer away from danger, when one comes in the face of it. Here, thinking like a large-cap is critical. ?With the passion comes the ability to execute these plans and keep on learning from mistakes. Future mid-cap winners will think like large-cap companies and behave like them,? says Krishnakumar Natarajan, president and CEO IT Services, Mindtree Consulting. And this attitude stems from having articulated strong values and acting on them. The stock market notices this and such companies tend to get a higher valuation. Ananda Mukerji, MD and CEO, Firstsource Solutions says, ?Communicating the risk of the business model clearly to the investor works.?
Narayana Murthy takes it further. He once mentioned, ?Investors understand that the business will have good times and bad times. What they want you to do is to level with them at all times. They want you to disclose bad news on a proactive basis. At Infosys, our philosophy has always been – when in doubt, disclose.?
For picking future large-cap heroes, Charles Handy the management guru and philosopher?s views put things in perspective. He says, ?The companies that survive longest are the ones that work out what they uniquely can give to the world, not just growth or money but their excellence, their respect for others, or their ability to make people happy. Some call those things a soul.?
In the current perspective, the phase of euphoric growth could well be behind us. What lies ahead is an extremely exciting and yet real opportunity, one that will test the mettle of entrepreneurs. Tomorrow?s winners will have factored in the eventuality that tough times don?t last, tough people do, and have taken steps in that direction.
