Does Garden Silk Mills Limited’s (NSE:GARDENSILK) CEO Pay Compare Well With Peers?

Praful Shah took the reins as CEO of Garden Silk Mills Limited’s (NSEI:GARDENSILK) and grew market cap to ₹1.45B recently. Recognizing whether CEO incentives are aligned with shareholders is a crucial part of investing. Incentives can be in the form of compensation, which should always be structured in a way that promotes value-creation to shareholders. I will break down Shah’s pay and compare this to the company’s performance over the same period, as well as measure it against other Indian CEOs leading companies of similar size and profitability. See our latest analysis for Garden Silk Mills

What has been the trend in GARDENSILK’s earnings?

Earnings is a powerful indication of GARDENSILK’s ability to invest shareholders’ funds and generate returns. Therefore I will use earnings as a proxy of Shah’s performance in the past year. Recently, GARDENSILK released negative earnings of -₹878.55M , which is a further decline from prior year’s loss of -₹709.27M. Furthermore, on average, GARDENSILK has been loss-making in the past, with a 5-year average EPS of -₹26.04. In the situation of negative earnings, the company may be going through a period of reinvestment and growth, or it can be a sign of some headwind. In any case, CEO compensation should mirror the current state of the business. From the latest financial statments, Shah’s total remuneration rose by 31.46% to ₹18.89M. Although I couldn’t find information on the composition of Shah’s pay, if some portion were non-cash items such as stocks and options, then variabilities in GARDENSILK’s share price can move the true level of what the CEO actually collects at the end of the year.
NSEI:GARDENSILK Income Statement May 1st 18
NSEI:GARDENSILK Income Statement May 1st 18

Is GARDENSILK’s CEO overpaid relative to the market?

Despite the fact that no standard benchmark exists, as remuneration should account for specific factors of the company and market, we can determine a high-level yardstick to see if GARDENSILK is an outlier. This exercise can help shareholders ask the right question about Shah’s incentive alignment. Normally, a BSE or NSEI small-cap is worth around ₹9.88 Arab, produces earnings of ₹43 Crore, and pays its CEO circa ₹73 Lakh annually. Normally I’d use market cap and profit as factors determining performance, however, GARDENSILK’s negative earnings reduces the effectiveness of this method. Looking at the range of compensation for small-cap executives, it seems like Shah’s pay is above other similar companies.

What this means for you:

In order to determine whether or not you should invest in GARDENSILK, your thesis should be built on fundamentals. Even though CEO pay isn’t technically a key concern, it could serve as an indication as to how board members align incentives and how they think about setting policies. These issues directly impacts how GARDENSILK makes money, and factors impacting your return on investment. If you have not done so already, I highly recommend you to complete your research by taking a look at the following:

  1. Governance: To find out more about GARDENSILK’s governance, look through our infographic report of the company’s board and management.
  2. Financial Health: Does it have a healthy balance sheet? Take a look at our free balance sheet analysis with six simple checks on key factors like leverage and risk.
  3. Other High-Growth Alternatives: Are there other high-growth stocks you could be holding instead of GARDENSILK? Explore our interactive list of stocks with large growth potential to get an idea of what else is out there you may be missing!