Are promoter-led businesses better bets?

Companies analysed by CSRI that delivered superior share-price returns are Bajaj Finserv, Britannia Industries, TVS Motors, Natco Pharma and Eicher Motors

Promoter-driven companies tend to outperform professionally-managed companies, as they have superior growth rate, profitability and long-term focus, Credit Suisse Research Institute (CSRI) says in a study titled ‘CS Family 1,000’. 

In the study, CSRI has analysed financial and share price performance of 1,000 promoter-led companies (promoter holding more than 20 per cent and market capitalisation of over $ 1 billion) across the globe. 

Since 2006, the CS Family 1,000 has outperformed the broader equity markets by about 400 basis points (bps) annually. “We have found that family-owned companies outperformed in every region. Annual excess returns ranged from 310 bps in Asia (excluding Japan) to 510 bps in Europe,” says CSRI.

The study found the financial performance of promoter-led companies was “superior” to non-family-owned business across the globe. “Revenue and Ebitda (earnings before interest, taxes, depreciation, and amortisation) growth is stronger, Ebitda margins are higher, cash flow returns are better and momentum in gearing is more moderate,” CSRI says.

 

Another area where promoter-led businesses score, is ‘long-term focus’ and ‘conservative-growth’ approach with greater focus on organic growth. 

“The survey showed a strong preference by family-owned companies for conservative growth with new investments largely financed through organic cash flows or equity. The propensity to use long-term financial parameters as targets for management remuneration also increases with the founder shareholding,” says the study. 

On the downside, corporate governance structure and challenges around succession planning are the concern areas for promoter-led companies.  

“(Our) assessment suggests family-owned companies score slightly lower than non-family-owned companies when it comes to corporate governance standards,” says CSRI. “While a strong corporate governance structure can help identify whether a firm is correctly incentivising its management, it is not the only mechanism through which companies can generate superior cash flow returns.”

Some of the Indian family-owned companies analysed by CSRI that have delivered superior share-price returns are Bajaj Finserv, Britannia Industries, TVS Motors, Natco Pharma and Eicher Motors. Some of the domestic promoter-led businesses in the CSRI's top 50 list of companies in terms of revenue growth are Bajaj Finance, Reliance Capital and YES Bank.

“Overall, our findings indicate that our Indian family-owned businesses appear to be more optimistic with regard to future revenue growth and have a slightly more conservative approach to funding that growth. Challenges seen as most prominent in India include succession planning,” reveals the CSRI survey.