Equity analyst Suruchi Jain has awarded HDFC Bank with an Exemplary Rating with regards to stewardship of shareholder capital. This is the very first time an Indian company has been awarded such a rating by a Morningstar analyst.
Morningstar’s corporate Stewardship Rating represents our assessment of management’s stewardship of shareholder capital, with particular emphasis on capital allocation decisions. Stewardship is judged from an equity holder’s perspective. Companies are judged not against peers within their industry, but against ideal stewardship of shareholder capital.
To read Jain's stock analyst note, click here. Registered users can read an extensively detailed report here.
What the stewardship ratings mean
Investments support competitive advantages and occur at a favorable cost. Optimized financial leverage. Ideal dividend and share buyback policies. Praiseworthy execution. Lack of egregious compensation. No concerning related party transactions. No deceitful accounting practices. Appropriate management backgrounds. No concerning HSE practices. Ownership structure and stakeholder focus hasn’t hurt shareholders.
Most companies will receive a Standard rating, and this is the default rating in the absence of evidence that managers have made exceptionally strong or poor capital allocation decisions.
Value-destructive investments and acquisitions that don’t support the core business. Inappropriate financial leverage and dividend and share buyback policies. Troubling execution. Egregious compensation. Concerning related party transactions. Deceitful accounting practices. Inappropriate management backgrounds. Concerning HSE practices. Ownership structure or stakeholder focus that hurts shareholder value.
What considerations are taken into account
- Investment strategy and valuation
Do investments and acquisitions support the company’s competitive advantages and core businesses? What is the cost of acquisitions and major investments?
Is the company’s debt load appropriate given its cyclicality, capital intensity, and growth trajectory?
- Dividend and share buyback policies
Has the company struck the right balance between internal investment opportunities and returning cash to shareholders?
Does the company avoid accidents and problems? Does the company manage its operations well?
Is a material amount of value being directed to managers at the expense of owners?
- Related party transactions
Do related party transactions indicate a material redirection of value to managers and their friends and family at the expense of a company’s owners?
Does the company engage in deceitful accounting practices?
Do the company’s managers have the right backgrounds for their positions?
Has the ownership structure impacted capital allocation decisions?
Has a stakeholder focus led to actions for or against the interest of shareholders?
- Health, safety, and the environment
Has a company’s HSE track record had a demonstrated impact on operational performance or shareholder value?
