High promoter holding cos beat peers in returns race

UNTIL recently,investment advisors were apprehensive of investing money in companies with low free-float (non-promoter holding).However,model investment portfolios of investors are changing structurally,as companies with high promoter holdings are yielding better than companies with low promoter holding and government undertakings.
In the past three years,A-group companies (with high promoter holding) like Sesa Goa,Shree Renuka Sugar,Jindal Steel,Bhushan Steel,Shriram Transport,Welspun Gujarat have returned 180-845 %.Index stocks and sector frontliners,where promoters hold equity stake between 30% and 80%,like Tata Steel,TCS,M&M,Wipro,Bharti Airtel,Hindalco,Grasim Industries,Tata Motors and ACC have averaged a 20% compunded return over the past three years.
Some market watchers say three-year returns may not be a fair benchmark,as the market was passing through a recessionary phase and also witness to index selling pressure during the considered period.But there are others who feel companies headed by entrepreneurs and family-owned businesses (FOBs) tend to do well over a longer time.Different ownership structures lead to different performances.Companies with higher promoter holding with sound management experts at the top outperform multinational companies and PSUs over a longer term,they opine.
Family firms are the fastest-growing companies in India,with profits growing at almost 30% over an eight-year period.There is potential for several FOBs to double their growth over the next few years, said Bharat Shah,CEO,ASK Investment Managers.Highlighting this conviction,ASK Wealth has also launched a Indian Entrepreneurship Portfolio (a PMS scheme starting at Rs 50 lakh) for its wealthy clients.
If one analyses market shareholding data,family firms comprise nearly 70% of Indias market capitalisation.The belief,among experts favouring high promoter shareholding companies,is that FOBs have higher operating margins than their PSU or MNC peers.The returns on equity on all the three categories PSUs,MNCs and FOBs are converging to more or less to similar levels,with MNCs showing a downtrend.FOB-backers also list sound capital efficiency and aggressive capex plans (initiated by high promoter holding companies) to strengthen their claims.The logical conclusion (among backers of family businesses) is that promoters having large shareholding will be more concerned about their business than a trust-appointed CEO.
The flip-side,however,is that FOBs could be vulnerable to nepotism and biased approach,corporate governance issues,capital allocation problems and control retention concerns.The quality of management team and corporate governance take precedence over the level of promoter holdings.While high promoter holdings may reflect their confidence in the business prospects,it also brings about liquidity issues due to relatively lower float, said Sivasubramanian KN,head-equity portfolio management,Franklin Templeton Investments.
According to Mr Sivasubramanian,performance would depend on the size of business and the specific dynamics of a sector.While MNCs have underperformed Indian companies in the pharma sector,FMCG companies like Nestle are putting up a relatively strong performance.BHEL is a good example of a PSU company doing relatively well,he added.