Yesterday Godrej Consumer stock jumped 22%! Yes, it's not a typo, it did jump 22%. But why? No doubt they reported a good set of Q4 FY21 numbers but the main reason the market was giving a thumbs-up was - Sudhir Sitapati. Yes the ex- HUL maestro is now taking over the reins of Godrej Consumer as the CEO. While I agree the market did exaggerate with that huge move, but if you looked at history, especially when it comes to FMCG companies, a management change has mostly triggered the cash coffers! Over time we will see whether Sudhir replicates the same with Godrej Consumer also.

Of the zillion factors impacting a stock's performance, if there is ONE factor that's a no-brainer and every analyst tracks it, it is this - 'Management'. There is an old saying, you can have a nice car ( Company), an amazing road ( industry positives) but if the Driver ( Management) is rogue, you will end up in an accident ( Permanent loss of capital).

In my humble understanding of this world, whenever I start to analyze a company, this is one factor - that has to be checked. I can recall umpteen cases, where I avoided investing in some specific stock because I wasn't sure about the management, despite it reporting amazing numbers, and operating in a hot sector. But how does one evaluate whether the management is good or bad? I use this simple model called ICE, and I can say it's been doing a fairly good job for me to date.

What is ICE?

Acronym for INTEGRITY, COMPETENCE & ENERGY.

1.     INTEGRITY:

This goes first in the acronym, as this one can either make or break a company. India has around 5000+ listed companies, but 3000+ of them are not worth looking at, because the promoters are unethical. There are only a handful of companies, that one can spend time analyzing once you are sure about the integrity of the promoters/management. I learned it the hard way. Back in 2017, I invested in Manpasand Beverages, looking at their stellar numbers, completely ignoring the due diligence factor of the management. Probably I was influenced, as Deloitte was their Auditor. In 2019, Deloitte resigned as their auditor and within days the CFO & MD was arrested for GST fraud. I lost the entire money I had invested in ( thankfully a very minute allocation). But since then, only when I am convinced that the management is clean, I spend any further time analyzing it. There are special accounting techniques to check the reported financial numbers, if you are interested, read up on 'Forensic Accounting'.

 2.     COMPETENCE:

 This is another critical element. The company can have very ethical management, but, it will never grow faster than the industry if it's not competent. My favorite example here is V Vaidhyanathan of IDFC First Bank. This HARVARD alumnus is on a mission and changing the way retail banking happens in India. He was the Head of Retail Banking for ICICI and literally changed the face of the bank during his 9 years stint there. When the merger happened of IDFC & First Capital in 2018, the CASA ( Current & Savings A/C) for the bank was around 8%, today in just 2.5 years it's at 51%. It recently launched a credit card, which charges an annual rate of 9%/ annum. ( Where most of the banks charge 3%/ month i.e. 36%/ annum). There are many other data points that go on to prove the competence of this amazing leader. No wonder some of the world's best investors / PE funds - Warburg Pincus, Vanguard, etc. have a stake in this bank.

3.     ENERGY:

The last one, but by no means the least important one. Imagine a leader who is ethical and competent but has lost his drive to perform. The subordinates run the company, he is basically the rubber stamp CEO. What a terrible state of affairs it will be. I stay a mile away from these companies, instead, I look for companies that are run by a dynamic Founder/ CEO. To share an example - Apurva Purohit of Music Broadcast Limited ( Radiocity). She has transformed this company through her dynamic leadership abilities. She joined Advertising straight out of IIM B, bringing down the average salary of her batch. But she remembers with a smile, had she been worried about that, she wouldn't have been the youngest CEO from her batch! MBL today is one of the biggest radio companies in India, with a presence in 39 cities. No doubt the company is going through a rough phase presently because of uncertainties around COVID, however, it has performed way better than the industry during these troubled times. If you study her capital allocation decisions & growth track record of MBL, it's nothing less than spectacular.

 All the 3 comings together: ICE:

The example is not for a company CEO but a group-level Chairman - N Chandrasekaran of TATA Sons. The list is long - be it Tata Motors, Tata Consumers, Tata Advanced Systems, or IHCL. He has been a force to reckon with for the TATA group ever since he took over and has transformed many of the group companies. I clearly remember back in 2009, when he took over as the CEO of TCS, there was a buzz around the company. I have had the pleasure of meeting him once, and it's an experience I will never forget. He also happens to be a marathon runner and has high energy levels.

The integrity of the TATA's, the competence developed out of years of knowing the group, and energy levels par excellence, he is an embodiment of the ICE Factor. I fondly recall, as campus lead for TCS Hyderabad in 2010, my favorite point that I used to pitch on campuses: Join TCS, one of our campus hires just became the CEO! None of the other Indian IT companies back then had any response to that :) Over the last few years, ever since Chandra taking over TATA Sons, I have invested in a couple of TATA group companies and have to admit, they all are doing exceedingly well!

"The ICE factor" is a mix of subjective & objective elements. And over time you will be able to assess them better through a plethora of data points - TV interviews, listening to them on investor calls, seeing their capital allocation decisions, their academic pedigree, their past successes, etc. Hope this ICE model helps you in shortlisting few companies that you would love to invest in. Would be happy to hear feedback from you all.