Evaluating management becomes increasingly crucial in the ever-changing realm of mid and small-cap enterprises, where leadership frequently stands as the primary catalyst for growth. Tibrewal firmly asserted how P/E signifies not only “Price/Earnings” but also “Promoter+ Ethics”.
Historically, Indian enterprises have been predominantly family-owned and operated. Nevertheless, in recent times, there has been a transition towards companies that are professionally managed. This shift can be attributed to several factors, including the heightened intricacy of businesses, the requirement for specialised skills and knowledge, and the mounting expectations of shareholders. Although these patterns cannot be universally applied, they do shed light on some noteworthy changes:
Skillful allocation of capital
Pankaj Tibrewal: More management teams and promoters are now well-versed in the intricacies of capital allocation and the associated costs of equity. They understand that skillful capital allocation is both an art and a fundamental driver of value creation. Concepts like Return on Capital Employed (ROCE) and Return on Equity (ROE) have gained broader acceptance.
Interpretation: An increasing number of management teams and promoters in India are becoming proficient in the nuances of capital allocation and related equity costs. They recognise that adept capital allocation is not only a skill but also a critical factor in generating value. Concepts such as Return on Capital Employed (ROCE) and Return on Equity (ROE) have garnered greater recognition.
This marks a favourable progression, indicating that Indian businesses are evolving to be more sophisticated and mindful of value. Additionally, it implies that Indian businesses are increasingly well-prepared to compete in the global arena.
Several factors contribute to this shift. One of the reasons is the growing accessibility of information and educational resources on capital allocation. Today, there is a wealth of books, articles, and courses available to educate businesses about the significance of capital allocation.
Another factor is the expanding impact of global investors. Global investors are increasingly seeking out businesses with strong track records in capital allocation. They recognise that adept capital allocation is a pivotal factor in determining long-term profitability and returns for shareholders.
Lastly, the growing competitiveness within the Indian economy is a driving force behind businesses’ efforts to enhance their efficiency in capital allocation. Companies that can allocate their capital with greater skill find themselves in a stronger position to compete and thrive.
Focus on governance and integrity
Pankaj Tibrewal: As the torch passes to the next generation in leadership roles, we have observed a significant pivot towards enhanced governance and integrity. The bygone era of ‘Jugaad’ and a relaxed approach to regulatory compliance is giving way to a contemporary landscape that places a premium on adherence to regulations and a prudent approach to taxation. In the coming decade, we envisage the rise of fresh wealth creators, even as some of the established ones may wane due to a lack of passion within the next generation.
Interpretation: The upcoming generation of Indian entrepreneurs is giving increased importance to improved governance and integrity. This represents a positive shift, as it is vital for establishing sustainable businesses and generating enduring value for shareholders.
Several factors contribute to this transformation. One key factor is the heightened recognition of the significance of governance and integrity among the emerging generation of entrepreneurs. Many of them have been educated internationally or exposed to global best practices. Furthermore, they are more susceptible to the influence of social media and other platforms that endorse ethical business standards.
Another contributing factor is the growing scrutiny of businesses by both regulatory bodies and investors. Regulators have intensified their focus on corporate governance and regulatory adherence. Likewise, investors are increasingly inclined to invest in companies with commendable governance track records.
Lastly, the emerging cohort of entrepreneurs is often motivated by a desire to create a positive societal impact. They recognise that good governance and integrity are integral to constructing businesses that are both sustainable and contribute positively to society.
The move towards bolstered governance and integrity is poised to yield several advantageous outcomes for the Indian economy. It is expected to result in more streamlined and productive businesses, while also attracting increased foreign investment and stimulating economic growth.
Receptivity to feedback and delegating responsibilities
Pankaj Tibrewal: With the new generation at the helm, there exists a greater receptiveness to feedback from investors and other stakeholders, provided it contributes to improvement. Furthermore, this cohort is more inclined to delegate responsibilities and endorse the owner-professional model, sharing the wealth created with employees through Employee Stock Ownership Plans (ESOPs).
Interpretation: The emerging generation of Indian entrepreneurs is increasingly open to feedback from investors and various stakeholders. They are also more prone to delegate responsibilities and embrace the owner-professional model, which involves sharing the wealth generated with employees through Employee Stock Ownership Plans (ESOPs).
This signifies a favourable progression, indicating that the new generation of entrepreneurs is characterised by greater openness and collaboration. It also implies their increased emphasis on nurturing enduring relationships with investors and stakeholders.
Several factors contribute to this transformation. One reason is the evolving landscape of the Indian economy, which is becoming increasingly competitive and globalised. Consequently, businesses need to exhibit greater agility and responsiveness to change, necessitating a more collaborative approach to management and decision-making.
Ultimately, the emerging generation of entrepreneurs is often motivated by a desire to have a positive societal impact. They recognise that by distributing wealth among their employees, they can contribute to a fairer and more sustainable society.
Confidence in India’s potential
Pankaj Tibrewal: Many of these entrepreneurs harbour an unwavering optimism regarding India’s potential, driving them to make bold investment decisions. There is a growing inclination among management teams to play an integral role in India’s growth story, eschewing past mistakes of pursuing acquisitions abroad.
Interpretation: Numerous Indian entrepreneurs hold steadfast optimism concerning India’s potential, propelling them to take daring investment initiatives. Additionally, management teams are increasingly inclined to play a pivotal role in India’s growth narrative, learning from past errors like pursuing overseas acquisitions.
The emerging generation of entrepreneurs expresses strong confidence in India’s future and is dedicated to playing a part in its progress. This commitment also indicates their heightened emphasis on establishing businesses that are both sustainable and socially beneficial.
Undoubtedly, the Indian economy is experiencing increased competitiveness and globalisation. Consequently, businesses must foster innovation and prioritise value consciousness. This necessitates an emphasis on constructing enterprises that are both sustainable and socially beneficial.
Furthermore, the emerging generation of entrepreneurs is often motivated by a desire to create a positive impact on society. They grasp that by establishing businesses that are sustainable and contribute to the betterment of society, they can actively address India’s most pressing issues, including poverty, unemployment, and climate change.
Up-and-coming Tier-2 and Tier-3 entrepreneurs
Pankaj Tibrewal: Notably, we are witnessing a surge in passionate entrepreneurs hailing from Tier-2 and Tier-3 cities. The 2023 Hurun list of India’s wealthiest individuals illustrates the success stories emerging from cities like Coimbatore, Ludhiana, Rajkot, Nagpur, Surat, and Udaipur. This highlights the need to venture beyond metropolitan areas in the pursuit of new opportunities and identifying the next set of wealth creators.
Interpretation: There is a notable upswing in enthusiastic entrepreneurs originating from Tier-2 and Tier-3 cities. The 2023 Hurun list of India’s wealthiest individuals vividly showcases success stories emerging from cities such as Coimbatore, Ludhiana, Rajkot, Nagpur, Surat, and Udaipur. This underscores the importance of exploring opportunities beyond metropolitan areas and recognising the next generation of wealth creators.
Several factors contribute to this transformation. One key factor is the growing accessibility of information and educational resources in Tier-2 and Tier-3 cities. Today, there is a wealth of books, articles, and courses available to educate individuals about entrepreneurship.
Another contributing factor is the increasing impact of social media. Social media platforms have simplified the process of individuals from Tier-2 and Tier-3 cities connecting with entrepreneurs and mentors from around the globe. Lastly, the government is actively involved in fostering entrepreneurship in small cities and towns. It has initiated various programs and initiatives aimed at providing support to entrepreneurs in these regions.
The emergence of entrepreneurs from Tier 2 and Tier 3 cities represents a favourable development for the Indian economy. It contributes to greater inclusivity and equity within the economic landscape, while also catalysing the establishment of fresh job opportunities and enterprises in these urban centres.
Here are a few instances of successful entrepreneurs from Tier-2 and Tier-3 cities:
- Byju Raveendran (Byju’s): Byju Raveendran is the founder and CEO of Byju’s, India’s prominent edutech company. He hails from Thrissur, a Tier-2 city in Kerala.
- Deepinder Goyal (Zomato): Deepinder Goyal is the co-founder and CEO of Zomato, India’s leading food delivery platform. He originates from Ludhiana, a Tier-2 city in Punjab.
- Meena Ganesh (Portea Medical): Meena Ganesh is the co-founder and CEO of Portea Medical, India’s top home healthcare service provider. Although she was raised in a Tier-2 city in Tamil Nadu, she is currently based in Bangalore, a Tier-1 city.
These are merely a handful of instances among the numerous triumphant entrepreneurs originating from Tier-2 and Tier-3 cities. These visionary individuals serve as a wellspring of inspiration for all of us, underscoring the fact that success can be attained irrespective of one’s place of origin.
The emergence of entrepreneurs from Tier-2 and Tier-3 cities will enhance the inclusivity and fairness of the Indian economy. Additionally, it will foster the establishment of fresh job opportunities and enterprises within these urban centres.
In summary, in the Indian context, the essence of success often lies more in effective management than in the nature of the business itself. The pivotal factor for successful investments is the discernment of the right promoters and management teams.
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Updated: 25 Oct 2023, 09:45 AM IST