Leading Tanla Solutions Limited (NSE:TANLA) as the CEO, Dasari Uday Reddy took the company to a valuation of ₹4.22b. 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 Reddy’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.
What has been the trend in TANLA’s earnings?TANLA can create value to shareholders by increasing its profitability, which in turn is reflected into the share price and the investor’s ability to sell their shares at higher capital gains. In the past year, TANLA delivered a profit of ₹191.08m , which is a rather significant decline from its prior year’s profit (excluding extraordinary items) of ₹409.13m. Given that TANLA has been loss-making in the past, hopefully a wane in profits isn’t a signal of a reverting trend. In the situation of declining earnings, the company may be facing a period of reinvestment and growth, or it can be an indication of some headwind. Regardless, CEO compensation should mirror the current state of the business. In the most recent financial statments, Reddy’s total compensation remained stable at ₹13.27m since the previous year.
Is TANLA overpaying the CEO?Though there is no cookie-cutter approach, since compensation should be tailored to the specific company and market, we can determine a high-level base line to see if TANLA is an outlier. This outcome can help shareholders ask the right question about Reddy’s incentive alignment. Generally, a BSE or NSEI small-cap has a value of ₹9.88b, produces earnings of ₹430m, and remunerates its CEO circa ₹7.3m per year. Accounting for TANLA’s size and performance, in terms of market cap and earnings, it seems that Reddy is compensated above other BSE and NSEI CEOs of profitable small-caps. Although this is merely a high-level estimate, investors should be cognizant of this expense.
What this means for you:
My analysis shows that Reddy may be paid above the appropriate level, based on the size of TANLA and its recent year’s earnings performance. The question to answer now is whether this level of pay is justified. There are most likely other factors I have not account for, but in any case, this outcome should provide a basis for you as shareholders, to question the board’s decision to increase CEO pay in the future. If you have not done so already, I highly recommend you to complete your research by taking a look at the following:
- Governance: To find out more about TANLA’s governance, look through our infographic report of the company’s board and management.
- 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.
- Other High-Growth Alternatives: Are there other high-growth stocks you could be holding instead of TANLA? Explore our interactive list of stocks with large growth potential to get an idea of what else is out there you may be missing!
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at firstname.lastname@example.org.