What is the hallmark of a great CEO? While the checklist, in this day and age, can be an exhaustive one, the one attribute that will rank among the top three is being a good capital allocator.

Yet, as Warren Buffett observed, very few CEOs make the cut when it comes to efficient deployment of capital. In his annual letter to Berkshire Hathaway shareholders in 1987, the Sage of Omaha wrote: “The heads of many companies are not skilled in capital allocation. Their inadequacy is not surprising. Most bosses rise to the top because they have excelled in an area such as marketing, production, engineering, administration, or sometimes, institutional politics. Once they become CEOs, they must make capital allocation decisions, a critical job that they may have never tackled and that is not easily mastered…”

The barometer to gauge efficient capital allocation is return on capital employed (ROCE) — the profit earned by a company on its capital. Hence, the Fortune India Best CEOs 2022 ranking has 1/4th weightage towards ROCE. The three-year CAGR for revenue and PAT and total shareholder return make up the remaining 3/4th.

Deliberating on the rankings that covered 13 sectors and four revenue categories — Super-large, Large, Mid-size and Emerging — the eight-member jury concurred that management strategy can be a subjective exercise, measuring financial returns is not.

The final list of Fortune India Best CEOs 2022 from 13 sectors — FMCG, Chemicals, IT, Pharma, Oil & Gas, PSU, Automobiles, Consumer Durables & Ancillaries, Auto Ancillaries, Steel, Infrastructure, Capital Goods and Banking — comprises both owner CEOs and professionals. But despite the diversity and scale of their businesses, all of them have done well on returns. For instance, multinational FMCG major Nestle tops the pack with a three-year average ROCE of 54.15%. Stocks of companies that sweat their existing capital base to churn out higher profits tend to be disproportionately valued. For instance, despite the market correction, the stock of Nestle continues to be the most expensive FMCG pick at 78x trailing 12-month PE. But the premium that the market is willing to pay is also a reflection of how the management has been able to deliver growth — profitably.

Suresh Narayanan, the 62-year-old CEO of the Maggi noodles maker, navigated his company through the worst crisis when Maggi had to go off the shelves and now by steering his company through a high inflationary phase. “My strategy is to grow to win. You can’t win in the marketplace unless you grow. In the last couple of years, 100 new products were launched. Some of them are very successful, some of them modestly successful. But we are able to innovate three times faster than what we have done before,” Narayanan tells Fortune India. Making the trade-off between growth and profitability is not easy, especially when Nestlé is a market leader in eight out of the 10 categories that it is present in. This long-term focus has resulted in a three-year revenue CAGR of 9.21% and even better PAT three-year CAGR of 10.1%.

Similarly, the Big Daddy of FMCG, Hindustan Unilever (HUL), too, is keeping pace with a three-year average ROCE of 49.58%. CEO Sanjiv Mehta is also investing in growth. “Despite hyper-inflation, we have still ensured that together with growth we have a decent earning machine,” Mehta tells Fortune India. His value creation model is based on a matrix comprising growth led by premiumisation, a tight control on costs and capital velocity. “Earlier, cost saving was just 3-4% of our turnover, during Covid we were able to take it to 9-10%,” says Mehta. The focus on managing costs ensured that despite flat growth in FY22, HUL’s profit grew 6%. The playbook ensured the three-year PAT growth of 13.47% trumps three-year revenue growth of 10.23%.

While FMCG players had to battle inflation, for commodity players, inflation was a tailwind. In the Super-large category, the performance of Tata Steel proves that the super cycle in commodities saw the steel major’s three-year profit CAGR at 46.34% even as revenues grew at 22.25%. The company has been able to deliver higher profit growth owing to halving of debt to ₹54,504 crore and operational efficiencies that CEO T.V. Narendran, has been able to usher in. With a three-year average ROCE nearing 19%, Tata Steel’s return is better than the metals and mining industry’s average of 17%. In fact, the ROCE stood at 34.6% in FY22 against 15.1% in FY21.

But what’s noteworthy about Tata Steel’s performance is that it is also profitably reinvesting capital to grow, even as the CEO counters the fallout of the 15% export duty. While exports constitute 10-15% of volume, Narendran changed levers to keep growth going domestically by acquiring Bhushan Steel and Usha Martin’s steel business for around ₹40,000 crore. “I expect Indian demand to be around 250 MT over the next 10 years and Tata Steel is poised with just brownfield expansions at existing facilities,” Narendran tells Fortune India.

Riding the commodity wave also is Sumit Deb of NMDC, which has a three-year average ROCE of 28.90%, aided by strong profit and sales growth of 26.5% and 28.7%, respectively, over the three-year period. Deb, who has been at the helm only for two years, is overseeing a demerger plan that will see NMDC moving up the value chain by creating two separate units for iron ore mining, and a 3 million tonne steel plant. “Our long-term plan is to go to 100 million tonne (ore capacity) by 2030. And this will come primarily from our own mines,” Deb tells Fortune India.

While the metals space has been on the upswing, the pharma and chemicals space, too, showed zest. While two pharma CEOs, Satyanarayana Chava of Laurus Labs and Murali K. Divi of Divi’s Laboratories, are among the Best CEOs in 2022, Yogesh M. Kothari of Alkyl Amines has aced the return charts in the chemicals sector.

The winners from the pharma pack, Divi’s Labs, delivered average ROCE of 30.58% over the past three years, while its smaller peer, Laurus Labs, fetched 24.56%. Laurus, which got listed in December 2016, has a strong presence in generic APIs & FDFs (formulations), custom synthesis and biotechnology. “Even though we are leaders in antiretroviral APIs, only 25% of our revenue comes from that. The products we started developing in 2017 are determining our success right now,” reveals Chava to Fortune India. One-third of Laurus’ sales are customer-driven through contract manufacturing projects, while two-thirds is guided by its own strategy. Even as Chava is making the most of the CRAMs (contract research and manufacturing services) opportunity, Divi has thus far been the poster boy of CRAMs given its strong relationships and execution track record.

The boom in the specialty chemicals has seen most companies looking to scale up capacities and so has been the case with Alkyl Amines. The company is on an expansion spree that would boost its capacity to produce aliphatic amines at the end of the current fiscal. At present, just two companies, Alkyl Amines and Balaji Amines, account for around 90% domestic market share of aliphatic amines and amine-based derivatives. While volatile commodity prices pose a challenge, the recent cooling off in input costs has helped its gross margin grow by 674 bps quarter on quarter to 50.9% in Q1FY23. “Last year, we spent about ₹204 crore on capex (acetonitrile plant) and in the next capex cycle is spending about ₹390 crore for ethylamines at Kurkumbh to create about 35,000 metric tonnes (MT) of capacity, which will be the largest in the world,” says Kothari.

Among other sectors such as banking, IT, auto, consumer durables, ancillaries and infra, the performance of CEOs remains top notch. Professionals Salil Parekh, Sandeep Bakhshi and S.N. Subrahmanyan have created a legacy of their own within Infosys, ICICI Bank and Larsen & Toubro, steering their businesses through choppy waters. Owner-managers such as Rajiv Bajaj of Bajaj Auto, Anil Rai Gupta of Havells, and Sajjan Jindal of JSW Steel are birds of a feather whose strategic capital allocation and product innovation have delivered huge alpha for investors over the years.

While some businesses such as auto and ancillaries face disruption in an EV era, what separates the men from the boys is their ability to look beyond the present and plan for the future. That’s the reason why none of the high-quality franchise companies that comprise the Best CEOs list are trading cheap. A well-recognised franchise may appear expensive, but they compound well over time. Given that a market meltdown is anticipated in the coming days, bargains are in store for those who want to ride the Best CEO gravy train.

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