• tanay60

Culture – The compounding machine

Updated: Oct 5


Wishing happy Dussehra to you and your family.


We have written a lot on risk, returns, opportunities, outlook, and various frameworks… In this letter we would like to emphasize on one of the most vital elements of investing ---- the “CULTURE” of companies. Sounds boring - let us start with a story. 😊


Have you ever wondered what makes soldiers sacrifice their lives for their regiment/country – patriotism, unconditional love for the country, valor, growth, recognition? While a combination of all the above exists, none of them can drive soldiers to sacrifice their life unconditionally. Unlike corporates, they don’t have deep pockets to shell out extraordinary monetary rewards nor promotion/perks bestowed upon top performers in the corporate world.


Then what drives a soldier’s performance within the tight disciplined army framework?


We recollect our interaction with Captain Raghu Raman a few years ago, wherein he addressed this question very simply - soldiers work for their regiment and their leaders. While love for the country is given, the more important one is their connect and unconditional trust in their leader. The connect/camaraderie soldiers share with their peers, juniors and leaders plays a crucial role in winning wars/serving the country. As stated by Captain Raghu - in an army the entire team wins or entire team losses, there is no space for individual gains/losses.


Despite the harsh, life threatening environment and regimented framework they operate in, soldiers put forth the best of themselves focusing only on the larger common goals keeping everything else at bay. Moreover, they seamlessly collaborate with others for the objective despite internal competition and conflicts.


The culture in the army is designed to imbibe all the above, at a DNA level of the entire regiment including support staff like cooks, health support etc.


Similarly, companies with superior culture leads to sustainable wealth creation whereas companies with mediocre culture generally struggle to either create or sustain wealth. Good culture helps companies to weather rough environment while companies with bad culture get sacrificed. We have seen numerous cases of failures and success in our decades of experience.


The wise words of Peter Drucker “Culture eats strategy for breakfast” emphasizes on culture over anything else. No matter how well-designed the strategic plan maybe, all will fall flat without an appropriate culture. At the end of the day, the people who implement the plan matter. Unless employees are enthusiastic about the company’s vision and their belief in top executives, they won’t put much effort into executing the strategy.

A company’s culture is created primarily by the actions of its founders and leadership team which percolates down to the entire organization. Culture starts at the TOP. An organization with a healthy culture will attract the best of talent and will have satisfied customers.


At Carnelian, we spend a considerable time in finding companies and teams having the right culture. Often, we are asked the question - which managements/companies will you bet on for the next 10 years who will create value for shareholders? For this, we have created our own little framework - “IMPRESS” encompassing numerous qualitative and quantitative checks to assess managements and culture of companies on different parameters.


Through the Carnelian Wealth Creator Series, we have been holding webinars wherein we bring forth managements who have “IMPRESS” ed us culturally and have turned out to be good wealth creators as well.


This brings us to a very important question - what do we look for in a company’s culture?


Simply put, culture is how you do what you want to do. It is the sum of your formal and informal systems, behaviors, and values, all of which create an experience for your employees and customers.


At its core, culture means how things get done in the workplace. “How” includes both the formal systems and informal behaviors. It is a collection of beliefs and behaviors that are pervasive throughout your business. Unlike a mission or vision statement, it is not something you can define in a series of meetings on a whiteboard on those comfortable couches in the meeting rooms.


We are consciously looking for evidence of some of following aspects in our interaction with companies:

  • If the Company’s mid/lower management shares the same/similar “perspective & ownership" on company’s purpose, vision, and goals

  • Culture of giving more importance to team performance than individual; how collaborative are the various teams

  • Culture of employees to constantly get better/ improve /innovate

  • Culture where customer interest is at the core of all affairs

  • Culture where employees are sufficiently empowered and held accountable

  • Culture where there is fairness in dealing with other stakeholders like vendors and customers

  • Culture where sense of risk is well understood by the wider organisation

Few examples on how we evaluate the culture via interactions with companies as given below reiterates our belief that there is no substitute to “THE GOOD CULTURE”:


ICICI Bank Ltd:


We have been truly impressed by the cultural transformation of the bank post takeover by the current CEO, Mr. Sandeep Bakhshi. We have been interacting with him and many layers of management over the last few years. We remain convinced that certain decisions taken, executed and monitored day in-day out, led to the cultural change of such a large organization in a matter of time.


One can write many long stories but for sake of brevity few are worth mentioning.


He stated “One Bank, One Team, One Goal” culture and to implement, he made no special incentive to individuals but to the entire team. Entire team wins or loses. At one level it appears very socialist, but at other level, it removed internal competition and focused on winning as entire team. It broke lots of silos and the ability of the Bank to deliver 360-degree services to customer significantly went up. Of course, merely stating it as a policy doesn’t work but one must take a series of decisions day in and day out to change people’s behavior. But if intent and resolve is clear at the Top, it will happen.


He stated 'Fair to Customer, Fair to Bank' – He stopped many products which were not good for customers and removed all targets for the employees, reorienting the organization to focus on delivery to the customer. Employees got relieved of unwanted pressures of quarter end but pursued customer experience. To check on the same, we spoke to many people on quarter ends and surprisingly found them very relaxed. No longer does an ICICI bank customer receive any call to maintain large balances in savings account to boost the Bank’s CASA. He does not believe in window dressing anything. These kinds of decisions, even though being small, send a clear powerful message. He means to show right and sustainable number to markets, not window dressed.


We see highly energized employees, collaborative employees with huge ownership. We have experienced many instances where they are trying to deliver the entire bank to you, not only their limited products. Customer feedback continues to be positive and strong.

All these has reflected in the stock price performance of the bank; and it has been best performing bank since he took over.

Eicher Motors Ltd:


We spent 2 days with the entire leadership team of the company. Prior to the meeting we were of the view that this is a luxury bike company with product leadership, superior margins, ROE, ROCE, FCF etc.


However, all the above is outcome - as an investor one should focus on more on inputs (“The Culture”).


We were impressed to notice the way company has imbibed the culture of innovation in their DNA which has percolated down in the entire organization.


Several hours of informal interaction with their:

  • global innovation/product head revealed how he spends half of his time biking on roads and noticing potential customers/opportunities.

  • global branding head amazed us with his passion in growing the luxury bike category across the globe

  • product sales head clearly demonstrated his huge eye for detail and focus on customer/dealer experience.

We have also noticed a very well-oiled collaborative approach between their various teams including their UK team. Finally, the passion CEO Siddhartha Lal displayed explaining the new Hunter 350 features, target customers, with minute attention to details truly left us in awe. He even spent considerable time in explaining the side stand of the bike with utmost passion, which many of us may not even notice.


The combination of all the above gives us comfort in holding the stock for a long period despite current short-term blips/setbacks. The stock has delivered a CAGR of 27%, 32%, 37% over the last 3,10, 20 years respectively.


Ratnamani Metals & Tubes Ltd:


At this Company, we were intrigued to see the longevity of employees and observed that most of the employees were working there for decades, few since inception as well! During a walk on the plant floor, we learnt that promoters entrusted the employees with complete freedom along with responsibility & accountability. Treating them with utmost care as family members has created a feeling of ownership such that they don’t need to look outside. The plant HR head has been authorized to address personal issues faced by workers as well without any permission from the top management. Workers can call him or the company helpline number – 24 hours even for personal emergency and help is assured.


Their plant head also explained us a story wherein he had a different view on adoption of a new technology for hot extrusion tubes which also entailed a much higher capex whereas the promoters wanted to put a different technology with a much lower capex. After understanding his arguments, the promoters agreed with him, which turned out positively for the company.


“What is right is more important than who is right” – Ray Dalio.


Even their competition holds them in high regards and are trying to replicate their model.


The above explains reasons for superior ROE, FCF and sustainable growth in an otherwise commoditized/cyclical sector. It is the only company in the sector which has delivered a CAGR of 26%, 38%, 44% over the last 5, 10, 20 years respectively. Culture matters more than the choice of your business and external environment.


KPR Mills Ltd:


Similarly, in one of our other investee companies - a leading garment manufacturer where human capital is at the forefront requiring employment, training, and retention of a very large number of semi-skilled labor especially women. The Promoters provided free education and a hostel facility to the children of its women employees, so that the women could focus on work peacefully. During Covid time, it was the only plant which did not face any labor issues, making KPR as the most reliable partner for their customers.


There are several other examples which became evident as we met various stakeholders involved in the business, reflecting not only in satisfied customer & employees, but also the valuation market gives the company is almost 2x-3x premium to competition, resulting in the stock delivering a 100% CAGR return over the last 2 years ever since the sector tailwind started and – 29%, 44%, 27% CAGR over 5,10,15 years period respectively.


All the above stocks from the date we have added in our portfolio have all outperformed their respective best comparable index/peers as displayed below:

Some of you might be thinking: Why did we choose to write about this?? Why is culture of the company so important?


Because we believe this is the most important ingredient for wealth creation as companies which have good culture tend to do much better in the long run. This is backed by study done by Glassdoor where companies featuring in “Best Places to Work” list consistently outperformed the S&P 500. Companies featuring in the “Glassdoor Top 20 places to work” have outperformed the S&P 500 in 12 out of the last 13 years. (link)


In valuing a company, we all know, terminal value forms a large part of the company’s value, which means there is a BIG assumption of sustainability and continuity of growth for a long period of time.


We remain convinced that a healthy culture breeds productivity, group meritocracy, correct attitude, customer satisfaction, innovation, resilience and thereby sustainability and longevity of the organization and growth.

We get even more excited when we see an opportunity of cultural transformation due to change in leadership in an otherwise good business which has gone through a rough culture dis-orientation. This usually leads to a stock re-rating, what we also call a “MAGIC” stock in the Carnelian Framework.


Always in search of a company with great culture or undergoing a cultural transformation…

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