Promoters as jockeys

The late Aditya Birla started his career with Indian Rayon.After he took it over, the workers went on strike,a fire broke out and losses spiraled.

The great GD Birla whose favorite grandson was Aditya Birla incessantly grumbled:”You have mounted Aditya on a decrepit steed”

The late Aditya Birla was of course able to turn Indian Rayon into a success. (source:Gita Piramal’s Business Maharajas)

GD Birla’s comments however hold lot of wisdom.Promoters can be compared to horse jockeys.Sometimes the horse (business) is so fast and swift that they gallop all the way to success.Sometimes even the best jockey can’t do much with an old nag.

This resounds with WB’s famous saw ““When a management team with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact.”

But there are some jockeys (promoters) who are capable of changing horses(businesses) mid-stream and achieving greater success.This is a true hallmark of an outstanding businessman.

For instance,WB started with the textile business and then later moved on to insurance which propelled Berkshire Hathaway to great success.

In the Indian context, Dhirubhai Ambani started with trading,moved to textiles, then to petrochemicals and then finally oil &gas.

Are there any current businessmen who are outstanding jockeys capable of changing horses midstream?

Such an extraordinary businessman is Deepak Parekh.He started with HDFC, launched a bank,life insurance, general insurance and other wealth creating companies.If one had bought HDFC shares when Deepak Parekh started his career, one would have had a very comfortable retirement indeed.

On the  other hand, there are jockeys who will run their horse into the ground.But that’s a story for another day !!

A good bearish sign

In the Stock Market Wizards, Dana Galante mentions that high management turnover  is a good red flag that things are not hunky dory in the company.

This certainly holds true in the Indian context as well.

Consider for instance the aviation sector in India.Numerous CEOs have come and gone in Jet Airways,Kingfisher Airlines and Air India.This should have served as a good warning sign to investors to stay clear of the sector.

The resignation of the CFO/Compliance officer often indicates bearish times ahead for the stock.This is true for midcap and smallcap companies and not so much for A Group companies.

These officials are usually professionals (non promoters) and have no qualms in deserting a sinking ship !

Consider the following three examples:

CFO of MPS Ltd resigned on 15th Feb,2012.Since then, the stock is down 16%

CFO of Electrotherm resigned on 4th Feb, 2011.Since then, the stock is down 70%

Company Secretary of Clutch Auto resigned on 15th Nov, 2010.Since then, the stock is down 60%

No doubt market conditions had a role to play in the decline of the market caps of these companies.But the fact is these companies fell harder than the rest of the market as they were weaker fundamentally.

This is illustrated by the following example:

CFO of AshapurMin resigned on Dec 1, 2011.Despite Jan 2012 & Feb 2012 being very bullish months, this stock hit a 52 week low on 26 March, 2012-a fall of around 18%