The current article in this series provides responses related to:
- Management analysis of CCL Products (India) Ltd
Management analysis of CCL Products (India) Ltd
Dear Dr. Vijay Sir,
I could learn a lot through your post in very quick time. I have done only management analysis of CCL Products (India) Ltd and details are as below.
My observations are as below
- Promoter salary increased in FY11 even though profit was less: I feel initially when company is small promoter goes for salary hike but not high % change.
- Chairman is making 32lakh/p.a payment to his wife (also promoter) towards rent as third party transaction. I do not understand why this is necessary, promoter being HUF (Hindu undivided family). I understand this is very small amount compared to business turnover but needs to know from business perspective.
- In FY11 and FY12 there is a -ve FCF but still dividend is paid. I feel this would have avoided.
- Every year there seems to be trend in introducing new director who is either ex- bureaucrat or present bureaucrat. I do not understand why only bureaucrat as directors?
- In 2011 resolution passed saying MD pay should not exceed 5% of net profit but in 2012 FY he got
- 6.37% of his salary with further resolution stating minimum salary must be 5%.
- Promoter shareholding is 44.73% but same person name used in different combination to make count as 6 promoters. Ex. Srishant Challa has been used thrice saying C. Srishant and Chall Srishant. What was the motive behind this is not clear to me.
Kindly request you to give a feedback on my analysis and also your understanding and views on above 6 points.
Thanks a lot in advance.
Author’s Response:
Hi Suresh,
Many thanks for writing to me with your analysis! I appreciate the time and effort put in by you in the management analysis of CCL Products (India) Ltd.
1) The promoter usually compensate them by multiple sources: Salary, commission, dividends, interest on the loans provided by them to the company. Promoters of different companies use different modes to compensate them. It’s advised that the investors should take a comprehensive view about the management assessment by looking at the overall outcome of all the management assessment parameters.
Read: Why Management Assessment is the Most Critical Factor in Stock Investing?
2) Rent payment to a promoter also falls under the preview of getting benefitted from the company as mentioned in the above parameter. Initially all the companies find it easy to operate out of family/acquaintance owned premises to keep costs lower. Once the business gains traction, then the company may start paying the market rate to the property owner. An investor should check whether the rent is as per market rate prevalent in the area or above it. If the rate is above the prevalent market rate, then the investor should be cautious.
3) Ideally, companies should not pay dividend if they are not making free cash flows. However, dividend is a major source of income for the promoters who are mostly the majority shareholders.
Read: Steps to Assess Management Quality before Buying Stocks (C) (Moneylife SessionPart-4)
4) Many a times companies appoint ex-bureaucrats to help them in liasoning with different govt. departments for getting contracts etc. This practice is prevalent in companies which supply to PSUs or Govt. departments.
5) Many a times companies split the remuneration into salary and commission and stipulate the cap on any one part of this compensation structure. The regulatory cap is 10% on the total compensation given to all the directors of the company. A company needs to take central govt. approval if it wants to give higher compensation to its directors.
6) You may take direct clarification from the company whether the name mentioned repeatedly pertains to the same person or different individuals or the same person holding shares in different capacities.
Hope it clarifies your queries!
All the best for your investing journey!
Regards
Vijay
Further Query:
Dear Dr. Vijay,
Thank you for spending valuable time for reply to my queries. I will post you back after getting clarification on point 2.
Regarding Point 3: It looks attitude towards benefits a little suspicious because compensation also increased and amount in the form of Dividend also increase when there is no free cash flow.
Regarding Point 5. Promoter has taken compensation more than cap in FY-12 to FY-14. Now where can I find that promoter has taken central Govt approval?
Regarding Point 6: It’s the same person. Please let me know what will be consequences?
Thank you very much!
Best Regards,
Author’s Response:
Hi,
Thanks for writing to me!
It’s advised that if an investor is not comfortable with the promoter/management, then she should stay away from the company. Because at the end of the day, equity investing is nothing but a call/punt on the management of the company.
Management is the single biggest factor that would make or break the investor’s returns.
All the best for your investing journey!
Regards,
Vijay
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Disclaimer
Registration status with SEBI:
I am registered with SEBI as a research analyst.
Details of financial interest in the Subject Company:
I do not own stocks of the companies mentioned above in my portfolio at the date of writing this article.
