Pointers to excellence

Starting last week, this newspaper has been running a series of stories under the banner "Corporate Shootout" to showcase the financials of some of the best companies in each industry.

The reasons for their success may be different, not least because they operate in very different industries. The qualities needed for being successful in the utilities business, for instance, are different from those required to beat the competition in the fast-moving consumer goods industry.

Nevertheless, it is possible to identify some common characteristics of businesses that are at the very top of their respective industries. The most common factor is that all of them have strong balance sheets and cash flows.

But that is more the result of their success than a reason for it ""years of strong profit growth should result in robust balance sheets, providing a cushion for any company to ride out the storms that come sometime or the other.

Success, in short, builds success. It isn't a good balance sheet that builds a strong business, but a good business that builds a strong balance sheet. So what are the qualities that enabled the winners in "Corporate Shootout" to post high profits and growth year after year? One factor that doesn't help is public ownership.

In fact, it is often a handicap to be in the public sector. Whether one considers the country's largest bank, the State Bank of India, or the largest steel company, SAIL, or Nalco, or the Shipping Corporation of India, the common thread running through their stories is that public sector ownership imposes costs, especially in terms of the speed of decision-making. This is apparent from the lower discounting the market gives to their stocks.

A lower discounting means these companies will find it tougher to raise capital cheaply in future""if called upon to do so. And sometimes it is government policy that determines who wins or who loses.

The government's refusal to give full pricing freedom is hurting companies like BPCL, which have a higher proportion of retail sales. Of course, it is certainly not the case that all these excellent companies have not done well. But one cannot escape the feeling that they have done well in spite of their public sector character, and have had to overcome that handicap.

Another lesson is that managements that learn from their mistakes can win again. Exhibit one is the story of Bajaj Auto catching up with Hero Honda in terms of market capitalisation after losing market leadership in two-wheelers.

It is trite to say that global reach is what distinguishes the winners in the IT sector from the second-rung players, but it is, nevertheless, true. Transparency and good corporate governance are other qualities that come readily to mind when talking of the leaders in the IT business.

Global reach is a factor in the pharmaceutical industry, too, but the competition between Ranbaxy and Dr Reddy's shows that markets prefer a less risky, more steady and diversified model of growth than a high-risk, high-reward one.

Size is important, as seen when we compare Tata Motors with Ashok Leyland, but not all-important, as illustrated by a comparison between HDFC Bank and the State Bank of India, or when we put Tata Steel next to SAIL.

In short, while there is no one reason for excellence, perhaps the critical distinguishing feature lies in that intangible: managerial excellence.