By Manish Jain
Over the last few years, several “accidents” have occurred in the Indian equity markets and these have been fairly widespread (as opposed to the popular perception) and across sectors. Several of the companies which have reported Corporate Governance (CG) issues were marquee names in their respective sectors, something that was unimaginable to the retail investors. While fund managers always keep talking about investing in quality business, what no one ever says is how to go about it. What are the things to look out for? What exactly are these red flags that one should be aware of? How does one identify a “Good & Clean” company?
The first point is: it’s not as simple as some people make it out to be. Looking at the most obvious things helps, but is rarely enough. Looking at recent history, market perception and related party transactions are all good, but as a long-term investor looking to multiply his wealth, the depth of due diligence needed is more than that. Here is a checklist of things for all quality-conscious investors.
Look at the depth of management: Starting at the Mid-management level and up, how good is the management, their pedigree, experience. Rarely retail investors look at this aspect.
Question to be asked is: How deep is the management depth, are multiple layers of succession planning in place? Is the business running a key man risk? Multiple years of annual reports have to be read – look at things like: who is the auditor and how much money is being paid out to him? Too much or too little, both are red flags. Receivables is again fairly important to check, this is where over or under reporting to sales tends to happen. Inter corporate deposits, related party transactions etc. all are fairly important to be checked with a fine tooth comb.
Look at the other listed and unlisted businesses of the group. Often the trouble is brewing somewhere else when we are looking elsewhere. Talk to industry experts and competitors. They will often have several insights which can help you gain a view on the quality of the promoters. Look at the long-term history of the company/group. Any stray incident long back should also merit a long hard look. History has a funny way of repeating itself. Last but not the least, do some ground research. It’s fairly simple but will throw up great insights. Is the product as widely available for a company that claims to be a market leader?
The final frontier is to not be swayed away by market buzz. Often the flavour of the season is a fad rather than a long tasteful fashion trend. These things are easier said than done and often we are too busy to be able to devote enough time. However, for great returns, great work is needed to be done. Happy investing!
(Manish Jain, Fund Manager, Coffee Can PMS, Ambit Asset Management. The views expressed in the article are of the author and do not reflect the official position or policy of FinancialExpress.com.)