The Curious case of Rcom: Part-1- Journey of Rcom : from Zenith to Nadir

From being the company which was dreamed by Dhirubhai for bringing digital revolution in India to becoming company which is facing strategic debt restructuring & default on International debt – Reliance communication Ltd. (formerly Reliance Infocomm) has come a long way. I have been following for last six months the twists and turns in the story of  Rcom, which makes me (any many others) wonder, how come Rcom which was considered to be flagship company of one of the biggest business houses in India with supposedly good leadership & strong financial muscle ended up in such a bad mess! Let’s dig deeper & investigate how Rcom has reached this stage;

This blog is divided into two parts: 1) Journey of Rcom : from Zenith to Nadir 2) Handling of Rcom’s bankruptcy & Strategic debt restructuring(SDR)

1.   Journey of  Rcom : from Zenith to Nadir

I. Problem of telecom sector, capex requirement & weird govt. auction structure: Telecom sector has always been capital expenditure heavy. Any company in telecom sector is required to have strong financial muscle & ability to keep on raising additional capital (Equity or debt) to fund constantly growing network/towers expansion, bidding of auctions of spectrum and upgradation of changing technology. The sector which has grown 20 times in terms of subscribers over last ten years, has also seen rapid increase in no. of competitors. I believe the biggest threat the telecom sector has faced is the macro issues such as inconsistent telecom policy, extremely high cost of acquiring spectrum, impact of 2G scam etc. As per Sanjay kapoor(industry expert) , COAI and other players we have probably highest spectrum cost in the world & lowest prices for customer, this leads to the very unsustainable business model. Extremely high reserve price for spectrum auction is making entire industry debt-laden. If I try to fit Porter’s five forces model for telecom industry at cursory level after factoring recent years’ macro level changes it may look like as below;

II.What numbers say: As per this article, Industry‘s debt level has risen 6 times in last 8 years, currently total debt for the industry is around 4.5 trillion (INR).  Rcom’s interest service coverage ratio has gone negative. In last 10 years if we see financials of Rcom the total debt has doubled in which long term debt has risen by around 46% and short term debt has gone up by whopping 158%, the total revenue has decreased by 26%. While EBITDA,PAT and share price has gone down by 90%, 174% (current PAT is negative) and 98% respectively. Simple observation from the below table can be made that, on debt front actually Rcom is not the most leveraged firm. Airtel & Idea are far ahead in having more debt but real blow to Rcom’s survival has come from Revenue, EBITDA & PAT front. Airtel & Idea has done quite a good in terms of revenue generation & EBITDA growth which is very important for any firm to cover at least variable cost. 

	Airtel	Idea	Rcom
Total debt	447%	1011%	96%
Total revenue	247%	707%	-26%
EBITDA	28%	872%	-90%
PAT	-346%	-269%	-174%
Share price	-0.40	-32%	-98%
Data Source: Money control- last 10 year % change standalone

Many companies including Rcom go for short term debt more than long term for various reasons (either by force or by willingness). But as short term debt has lower maturity if company has improper liquidity mgt. which may lead to failure of payment or delay in payment, it rings the bell immediately. Again habit of borrowing more to repay previous borrowed capital has always brought death spell. If we look at the company-wise market share in the figure below we realize that Jio is sending tremors to big players and it is already killing small Players like Telenor (just barely surviving), Tata ( already gone), Aircel ( fighting to retain), Rcom ( many services are closed).

III. Self-inflicted wounds of Rcom: Back in 2002 under unified brand of RIL in the age when incoming was not free, Rcom is credited with introduction of incoming free services (called monsoon hungama plan). When in 2006 Reliance got split, Rcom came under the leadership of Anil Ambani, during that time the key strategy adopted by Rcom was to flood the market with dirt cheap CDMA phones to capture the higher market share. It worked initially but this has contributed to the ever increasing mountain of debt for Rcom. To hold on to the market share gained, Rcom introduced predatory pricing by making call rates at 50 paisa per minute in 2009. In 2014 Rcom realized & divided its’ CDMA & GSM business in order to safeguard its’ growing business which was GSM and planning to sell CDMA to reduce some debt. As per this data, Rcom’s market share which was 13.71% in Jan-2013 has halved to 6.51% in Aug-2017. In this same time period Rcom’s cost has gone up and so as borrowing (to take care of rising cost if revenue source is not sufficient firm has to raise extra capital) while revenue, EBITDA, PAT & share price has significantly come down. Rcom’s strategy of extreme low pricing & selling CDMA phone at very low price has contributed along with high auction prices for spectrum to its’ mountain of debt, this strategy gave Rcom initially big chunk of subscriber base but Its’ failure to retain this subscribers & eventually convert this low-revenue generating subscribers to high revenue generating subscribers has led to big down fall. At the end I would say, the strategy of predatory pricing (extreme low pricing) to acquire bigger market share & generate higher revenue generally leads to unsustainable business model (I can recall Flipkart, Snapdeal, Amazon’s e-platform biz to name a few).

IV.Last nail to the coffin by Reliance Jio: Entry of Reliance Jio has made sure that weaker & small players are out of the business and bigger players bleed significantly. Since Reliance jio’s entry in 2015, Rcom is going through the worst time period. But I disagree with Anil Ambani’s statement that Reliance Jio has to be blamed for what has happened to the company & sector at large. Rcom was already on sort of ventilator and Jio’s entry expedited the process of ‘pulling the plug’. Rcom had huge debt pile before Jio came & Jio is repeated the same strategy of low price which Rcom relied upon in its initial years. Similarly Telecom sector was already in big debt burden due to high spectrum prices & ever increasing infra requirement but it is also true that Jio has disrupted the telecom sector by impacting revenue flow of major players which has added one more issue to tackle with in the long list of issues pending in telecom sector need to be addressed.

 I believe Government has also played its part in making telecom sector very turbulent & risky due to high auctions prices for spectrum along with complexity & uncertainly of regulation of telecom. Government should certainly look at more ‘reasonable revenue generating and long term sustainable auction model’ instead of ‘extremely high revenue generating short term unsustainable auction model’. Several factors as describe above is making many banks nervous as their huge lending to telecom companies can turn into NPA. 

It is high time for telecom ministry to intervene!

Part-2: GM India’s exit: bumpy ride comes to an end! (Is it good decision?)

In my (not so humble!) opinion, I believe GM India’s decision of exiting Indian domestic market is unwise & short sighted. Below are few points of argument;

1. Ever changing expectations of key stake holders & decision makers: Mis-communication was quite apparent when GM India told dealers to be ready for new beat car in April-2017 & then in May-2017 announcement came that GM India is exiting the Indian domestic market. This indicates that internally GM may not be interested in closing down its’ Indian domestic market business but due to pressure of some key stake holders to reduce the loss, this decision is forced down. Business history of the world is replete with many famous goof-ups & ever changing expectation at board level. Case of GM may add to this history. As it is said, in the world of business no decision is permanent. In the light of this it looks plausible that some time in the future, when giant emerging countries like China & India keeps on increasingly contribute to higher sales for automobile companies and other competitors are successfully surviving in these markets in search of higher business growth key stake holders of GM may re-look at the decision of exiting in Indian market.

2. Role of emerging markets in business growth: This is the strongest reason I believe GM should not exit Indian domestic market. When among top three countries in terms of global sales number, two countries are emerging countries (1^st- China, 2^nd- USA, 3^rd- Brazil) for GM, I cannot find any reason to be strong enough to give up & accept the defeat in the Indian market which is going to be third largest automobile market in the world by 2020. China market has become the biggest market for GM that shows how well GM is doing there. Surely, GM can also find right mix of strategy to re-enter, survive & grow in Indian market. (GM cannot be foolish again in terms of replicating the successful strategies or products in China for Indian market, in China GM gets high sales from premium priced cars as no. of millionaires in China is rapidly growing. But in India so far for the car makers the success has come by producing competitively price yet features-rich small/mid size cars.)

3. Changing policy framework- The game changer:  The biggest game changer in the automobile world is coming when transportation ministry reiterates about putting in place policy for achieving 100% electric vehicles in India by 2030. Earlier, GM India has proved itself a bad player with existing rules of the game in automobile world in India, but as the rules of game is changing (or the game itself is changing!) GM India has a chance given the unpreparedness of many Indian auto players. With this back drop, I believe GM is competent & competitive enough to fight in ‘game changer’ business environment as it has strong team &high R&D expenditure for electric cars, has capacity to beat other strong competitors and has already started focusing on the biggest market (China) for hybrids & electric cars which will give important learning & traction for GM. Of course, only if these factors play out positively for GM then only it stands chance in new world of automobile (fossil fuel free world), but if GM turns out to be dumb or slow mover (or both) then this can turn upside down for it.

4. Stakes are high for implementing exit plan: I believe many times it is better to shutdown the loss making unit which can not cover the variable cost and if that’s going to continue for many years resulting  into constant loss, then continue to operate it . But what if cost of shutting down the operation is huge & may permanently dent the brand name if possible re-entry of such brand name happens….. then what? GM India will be facing legal trouble, trade union conflict, customer shock, trust deficit for GM brands, outburst from dealers and many more troubles which GM never expected leading to huge financial & reputational cost. The higher the stakes for implementing exit plan, the more difficult it is for the company to re-enter in that market both financially & reputationally. If GM India had designed & implemented better exit strategy from Indian market, then this cost & burden would have been far less.

 In all possibility any of below three scenarios (or more can be in real world) can be played out for GM India in long run;

Scenario-1 : GM India becoming respectable exporter of cars from India

If this happens: Here, Decision of exiting Indian domestic market will be defended & resource diversion by moving from domestic market to export market will be considered as a good strategic move.

Scenario-2 : GM India may re- enter in Indian domestic market with the hope that this time it ‘ll do it differently & achieve better performance.

If this happens: It will be proven that GM’s decision of exiting Indian market was act of idiocy and we have yet another story of high profile corporate goof-ups & key stake holders' ever changing expectations.

Scenario-3: None of the above two scenario develops, GM India slogs (remain small player) in exporter of the cars from India.

If this happens: This will be more than big tight slap on the corporate face of GM, this will be concluded as like Indian domestic market GM also failed in Export market which will be similar to committing corporate suicide in over all Indian market.

Part-1: GM India’s exit: bumpy ride comes to an end!

On 18th of May when GM India announced that it is exiting from Indian domestic market by the end of 2017, the very first thought popped up in my mind as a reaction was “how on the earth Mary Barra (The CEO of GM) & her team can come up with such a strategy which shuns you from the one of the biggest & emerging markets called India and then speak about restructuring of global operations for growth.”  My fundamental question is can you explain me how by giving up in one of the most competitively ‘growing’ market, the company plans to achieve higher growth? I intend to analyze (from two perspectives) the decision of GM India to shut down its’ car selling business to Indian customers in domestic market and focus only on production for export from India.

Part 1. What could be possible drivers behind the decision of exiting from Indian domestic market?

Part 2.  Analyzing the decision under current conditions whether it looks justified or not?

In this blog I’ll be dealing with part 1. Some of the possible drivers could be identified as under;

1. Consistent churning at the top: Constant churning at the top management never augurs well for the health of the organization and same goes with the case of GM India. Frequent changes at the top position indicate high level of uncertainty about the organization. As per this article, GM India has seen nine CEO in the span of 21 years in India. This gives average tenure of CEO around 2.5 years. Every new CEO who joins, has generally tendency to realign organization’s goals and strategies this act if done too frequently(happened in case of GM India) can keep organizations and its’ stakeholders in fragile mode. GM India never had chance to see the stable policies in terms of goals & strategies which can reap the benefits.

2. Extremely poor market share: GM India has sold around 25,823 cars in 2016-17 resulting into less than 1% market share in India. Market share break up as per SIAM is as below;

 

Source:http://auto.economictimes.indiatimes.com/news/passenger-vehicle/cars/passenger-vehicle-manufacturers-report-card-market-share-analysis/58610826

GM India is nowhere in the above chart which makes a strong case for shutting down the hugely unsuccessful venture in Indian market. Extremely small market share brings range of problems for any company but there is brighter side to this which will be discussed in part-2.

3. Inheritance of financial troubles of parent company & investors’ pressure: The Company (GM- USA) which was on verge of bankruptcy during 2008 crisis and bailed out by Government of USA by purchasing 61% equity stake worth of $50 Bil. has never come out truly  from financial troubles since then. Eventually government sold the stake from GM-USA with decent loss. When parent company does not have strong financial muscle, one can imagine how competitive the negotiations can be in the meeting rooms with Parent company when various country heads demanding higher budgetary allocation for their subsidiary. Indian subsidiary which has generated very low RoI (Returns on Investment) despite being present in such emerging market for more than two decades. This must have put future of GM India on radar of parent company. Lesser financial resource allocation to under-performing subsidiaries is logical decision, this financial crunch has also contributed towards decision of exiting Indian domestic market. Investors’ pressure has also generated enough heat as stock performance of GM has remained subdue. Two years back CEO Mary Barra has said that India is strategic market and will invest further & now GM India is exiting from Indian market this shows how much of investor pressure for better financial performance can lead to harsh and unwanted decisions.

4. Failure to understand Indian market & cut throat competition: Many experts have noted and highlighted the failure of certain automobile MNCs including GM India due to not being able to adopt the Indian culture and inability to understand unique requirement of Indian customers. In India many factors such as price, fuel efficiency, cost of ownership etc. play an important role unlike some of the developed markets. Interesting to observe that in such a huge Indian market Maruti Suzuki has near 50% market share while all other big MNC names such as Toyota, GM, Ford, Volkswagen etc. have managed very small fraction of the market share. One of the reasons is lack of small car portfolio (Most of the MNCs never had much of small cars in their portfolio as in other developed markets big cars are demanded more) which is most successful auto segment in Indian consumer market. Lack of consistent product and brand strategy has also played its’ role in denting the position of GM India. It started with Opel brands with Astra & Corsa, then around 2003 it introduced Chevrolet brand and later it has moved to Chinese models. Frequent launches and withdrawals of cars have led to shallow brand loyalty and very challenging new customer acquisition. 

LIC’s investment in ITC: Are we trying to cure small symptom by ignoring bigger disease?

Court’s acceptance of PIL filed by group of citizens against GoI and Govt. backed insurance companies has created the ripples much like when stone is thrown in the water. But this stone (Filing PIL) may be bigger than one thinks, resulting into bigger, far fetching and unsettling ripples in India.  The PIL filed in Bombay high court raises issue regarding significant investment into ITC company which has major source of profit from cigarettes which causes various types of cancers & eventually casualties in India. It makes a point that it looks unethical & against the law that GoI & its insurance companies are invested heavily in tobacco product company which leads to health issues in massive scale.

The turmoil I face: I confess honestly that the great amount of turmoil was created in my mind ever since I started reading about this. The biggest question in my mind is why the entire India (Media, activists, investors’ lobby, Companies, GoI etc.) is so narrowly focused on this single issue of govt. investment in tobacco product company.

I seek to address below two arguably more fundamental questions in the backdrop of above issue;

1. What is exactly an issue here? 

2. Are there no other larger dimensions we can think of deriving from this particular issue?

1.   What is exactly an issue here? :  Is government’s investment in tobacco product company an issue here? Or is government‘s investment in tobacco product company look unethical & against the law in the eye of broader society, that is an issue here? Or Are insurance companies which protect life investing in tobacco product company which destroys life that is an issue?......We have been made to believe (With the help of media & the cause of PIL) that, the issue is GoI should not fund (invest) in the tobacco product company which may lead to the cancer and untimely death of many as Govt.’s job is to protect the citizens & provide better healthcare to them. With narrow focused mind we can say this is the real issue but I feel none of the above is real issue. We all (not only the govt.) as a nation have failed to stop tobacco consumption which may lead to various types of cancers and consequently huge casualties. This failure in spite of having extensive planning & strategies to reduce tobacco consumption is the real issue in the above context.  The anger of not succeeding into the mission of tobacco consumption reduction has led to file PIL from various parties involved. While the anger is true & justified in some sense but that PIL is not going to put the break on tobacco consumption in India which is the real issue.

Just think from perspective of below line of questions;

•   Let’s say govt. sold all govt. backed investments (around 32%) in ITC in secondary market (Stock exchange) which is bought by other non-govt. entities…..will this change of ownership lead to reduce consumption of tobacco & deaths caused by it in India?  Will this change the current scenario? 
• What is causing cancer? How much different Tobacco products-Cigarettes V/S chewing tobacco products have impact on causing the cancer? Is nicotine a most prominent chemical agent causing the cancer?(In that case we have to be worried about all those non- tobacco products which has nicotine in it). Various medical researches & articles throw light on this aspect but many are still not conclusive. 

2.     Are there no other larger dimensions we can think of deriving from this particular issue? Based on above issue some of the dimensions I would like to touch upon are;

Ø Role of Tobacco production

Ø Extreme narrow focus on tobacco products only

Ø Regulations & socially responsible investments

Role of tobacco production: Are activists against cigarettes only which are generally more hazardous & cause cancer or tobacco which is generally considered to be key contributor to many types of cancer? Logically we should be after tobacco. If we are against tobacco which is major ingredient for cigarettes and other tobacco chewing products, then the concern is not about govt.’s investment in ITC & other cigarette making companies but how(and why) we are silent about existence of ‘Tobacco Board’ which is under Ministry of Comm. & industry, Dept. of Commence, GoI. When India is 3^rd largest producer of Tobacco and nearly earns $ 1 Bil. in the export revenue placing our anger only on cigarette makers, don’t you think is completely unjust & misplaced. When board & ministry are actively promoting tobacco production & because of higher demand more & more farmers are opting for tobacco production how does any policy or any healthcare initiative or protesting outside the HQ of cigarette makers, justify anything in this country! If we are truly concern about growing no. of casualties (around 1 Mil. people die due to tobacco consumption) then why can’t we completely ban tobacco production or cigarette selling in India like Bhutan and Turkmenistan( the practical brain will say there are more than 200 industries which are surviving due to tobacco related business, India will lose ton of revenue & many more reasons to not ban). Then why we keep on blaming cigarette & Gutka makers only, they are not forcing consumers with the gun on their head to buy their products. Consumers with full knowledge of the potential causes and in their right sense buy these products.

Extreme narrow focus on tobacco products only: Though bit older data but many causes of deaths come before cancer caused by specifically tobacco consumption. What have we done to stop top 10 causes of death in India. There are no answers to the questions like why so much of media frenzy about the above issue only? Why are we only after tobacco( Cigarettes & gutka)? Because these are the soft targets. Preventive & curative healthcare & safety system should be designed by keeping in mind top 10 causes of deaths in India.

Regulations & socially responsible investments: Simplest tool in financial economics to control or demotivate the set of activities or businesses, is by reducing money supply to it. Strengthening of existing regulations at state level, country level and international level to make these businesses commercially difficult or unviable will go a long way in reducing tobacco product & consumption both. As India is signatory to World Health Organization’s Framework Convention on Tobacco Control (FCTC) which restricts India from investing in tobacco business this investment may look like breach of this treaty. Recent step by Health ministry asking finance ministry to divert govt. investment from tobacco product company is welcome but very late step.

Socially responsible investments: In the world of investment & funding, socially responsible investment is still a recent phenomena especially for the country like India. Under socially responsible investments, investment companies and even lending companies take pledge to invest or lend to those entities which are high on their social responsibilities like more environment friendly, less carbon emitting, pro-healthcare products, processes etc. Entities which are negatively impacting the environment and contributing directly or indirectly to health hazards of the workers, consumers etc. do not receive any investment under socially responsible investment objectives. I feel time is ripe to boost socially responsible investments as an ideology & objective especially in emerging countries.  If investment & lending community starts critically raising these issues, it can send very strong single.

My brain says when company like ITC which has such a stellar return on investment & decent dividend record and has been darling of institutional investors (Domestic & Foreign) for a long time, govt.’s stake sale from ITC is not going to change the scenario drastically. But my heart says that subsequent debate which is generated due to act of filing PIL may lead to creation of tightened regulatory and socially responsible investment environment in India for taming tobacco production & consumption eventually.

Mutual funds are subject to corporate governance risk!!!

“Mutual fund investments are subject to market risk….” we all hear, read and see this time & again which is statutory requirement for mutual funds as per SEBI guidelines.(SEBI has reviewed advertisement guidelines for mutual funds in India) Apart from above disclaimer for investors one more disclaimer should be there stating that AMCs managing mutual funds are also subject to corporate governance risk! Because against the popular belief that mutual funds act and behave in the best interest of their investors, (by acting on clearly pre-defined investment objective and policy) quite often mutual funds behave with vested interest. In this blog, I am focusing on mutual funds that play foul on followings fronts; 

1. Not voting against the management of the investee companies

2. More than cozy relationship between mutual funds & companies

3. Unequal treatment towards various types of investors by mutual funds

1. Not voting against the management of the investee companies:

Current Scenario: Shareholder activism is very fancy word for the country like India and rarely practiced in India even by so called big institutional investors. As per SEBI guidelines,every AMC has to disclose their voting records to investors. Since first set of SEBI guidelines came in 2010 not much has happened on this front. Special Report on Mutual Fund Voting Pattern 2013 Analysis by ingovern (corporate governance research & vote advisory firm) shared some interesting facts like only 1.5 % of total resolutions put forth in 2012-13 were voted against by mutual funds. Back to year 2016-17, as per this article scenario remains more or less disheartening. Indian mutual funds giants like ICICI Prudential mutual fund, HDFC mutual fund, Birla Sunlife Mutual fund, Reliance mutual fund etc. also has dismal number to show.

Drivers behind current scenario:

1. Conflict of interest: If you observe, giant mutual fund houses in India have sponsor & trustees as banks or financial institutions. Certainly mutual funds would not like to take substantial business risk by voting against the management decision of the companies in which it has bought equity shares, as these companies might be bringing business in terms of borrowing from sponsor bank or investing surplus capital with sponsor bank or with other schemes of same mutual fund or bringing advisory, broking, fee- based work etc. kind of businesses to the parent company.

Example: Case of Maruti Suzuki’s related party transaction vote was quite contentious for the inventors. Let’s say XYZ mutual fund (which has sponsor as bank) has bought equity shares of Maruti Suzuki. Now in this case voting against the management may trigger unwillingness of Maruti Suzuki for future borrowing from the bank also if Maruti Suzuki has invested its’ surplus money with same XYZ mutual fund’s liquid scheme it may also loose a business & if in future Maruti Suzuki may come up for any financial activity plan like bond issuance, M&A, FPO etc. it may not prefer to give some part to this bank or related entity. On a similar line you can think of voting on Vedanta-Cairn merger issue, removal of Cyrus Mistry from board of Tata group of companies and so on.

Interesting to observe, foreign mutual fund houses like Franklin Templeton Mutual Fund etc. which do not have any other business in India besides running mutual fund has been quite vocal about taking stance against management decision by voting against them many times.

2. Further tightening of SEBI Regulation:  Currently SEBI guidelines allow mutual fund to abstain from vote on any management decision in the investee company. Many mutual funds are taking unfair advantage of this by abstaining from the vote instead of voting in favor or against, so they stay clear of any controversy or question from unit holders (actual investors in mutual fund).

2. More than cozy relationship between mutual funds & companies:

Current Scenario: Unfortunately many cozy (read favorable) relationships between mutual funds & investee companies are nicely swept under the carpet in such a way that many times not only small retail investors in such mutual funds but also regulatory bodies are also unable to smell it. Many mutual funds’ various debt schemes indulge in such “mutually beneficial” relationship where mutual funds lend via different routes & forms to highly risky companies. Case like Amtek auto and others points towards mutual funds’ deliberate inactions at initial stage. Many times behind the curtains the nexus of promoters, operators (brokers) and mutual funds with vested interest is the only (but very strong!) reason for buying shares of some really spurious companies. I have sensed many of these, based on my professional work experience in Indian financial markets. The investors who are completely unaware and face huge but hidden risk out of these kinds of mal-practices, are investors like you & me (the retail investors).

Drivers behind current scenario:

1. Lack of stronger disclosure norms for mutual funds: Since the inception of mutual funds in India till date, SEBI has done commendable job of tightening the norms & regulations of mutual funds. But history suggests that as the norms increase, the ingenious ways of flouting such norms has also increased. More stringent disclosure norms with more frequent time interval disclosure can give tough time to ethically weak fund managers.

2. Lack of knowledge & interest from unit holders: For any mutual fund, their unit holders are primary clients. These unit holders are many times incognizant of basic rights that they have. Also knowledgeable investors don’t demand the important information from the mutual funds they are invested into. This kind of unquestioning & trusting attitude from retail investors (and many times by bigger investors also) leads to many ethically and sometime legally questionable practices by mutual funds.

3. Unequal treatment towards various types of investors by mutual funds:

Current Scenario: This third dimension is most unknown to many retail investors. Many mutual funds unethically put the interest of one class of clients above another class of clients. For example for equity & debt funds cut off time to get same day NAV (Net Asset Value) for the investment is 3:00PM. If you as an investor applies before 3:00PM on any given day & money is deposited/transferred in mutual fund account before cut-off your investment is made at the close NAV of that day but if your transaction happen after 3:00PM then your investment will be considered on next day’s NAV & not on same day NAV. Here bending of the rules happens in favor of bigger clients (like corporates , institutional investors etc.) I have eye-witnessed, in many schemes (especially in liquid schemes) it happens mostly that even if big clients place buying application after the cut-off time, they are given favorable NAV rather than next day’s NAV which is applicable. Favorable clients (read bigger clients) are given chance for ‘Late trading’. Similarly, at the time of redemption of investment from mutual fund favorable treatment to bigger clients is given especially in case of unusual circumstances. The rumor did rounds at the time of rating downgrade of Amtek auto, that specific mutual fund allowed some set of institutional investors to redeem their investment before officially imposing redemption limit to all the investors in those schemes.

Drivers behind current scenario: Retail investor is the biggest victim in this as by no means he can come to know about favorable treatment given by mutual funds to bigger clients.

1. Lack of strong penalty & disclosure norms: Imposing strong penalty to those who are directly responsible (many times fund managers do not know but relationship managers & sales teams in order to get corporate business silently do this) & also penalty to the mutual fund should come into force.

It is high time that regulator be more proactive rather than reactive to many mal-practices prevailing in the mutual fund industry. This paper brings interesting insight as to how corporate governance at mutual fund might need different treatment than other corporate bodies. Retail investors can no longer live under the mercy of regulator. Being more vigilant & knowledgeable with the dose of client activism is what needed for Indian retail investors to remove the tag of ‘victim’!

The Flipkart saga: VC in driver’s seat part-2

In the last blog, I touched upon what it means for Flipkart when its founders are not at driver’s seat. It would be interesting to see how this change of leadership at Flipkart may shake-up other start-ups & the larger start-up ecosystem in India.

Impact on other start-up companies: 

The CEO level changes are not happening only at Flipkart but many other young companies are witnessing the same. The impact can come in following ways;

I. Wake-up call for founders: The message loud & clear for the founders of the VC-backed start-ups in India is to show the results than promises. Founders may increasingly face pressure from investors to rework on their break-even estimation, to generate better revenues, reducing the cost, put more stress on cost cutting & control, rework on scale-up or expansion strategies etc. VCs may become more vigilant about their investment in Indian start-ups and may take a look at current valuation figure for their start-ups. If founders don’t want to see the Flipkart story getting repeated at their own start-up, then they may have to bring more professionalism, more focused approach towards achieving profitability & maintaining it with decent rate of revenue growth.

II. More professional hiring at top level:  Since founders may lack required experience to handle some of the business operations and rising pressure from VCs after Flipkart incident, it may lead to more hiring of professionals for top management positions to convince investors that founders are ready to give up on some control for betterment of the firm.

III. No easy availability of new capital: This may put a break on easy rounds of fund raising, which was frenzy earlier. In the light of changes at Flipkart and sudden heightened vigilance from VCs, many start-ups may find reluctant investors to invest further equity and even if Investors are ready to invest in next round it might be at marked down (lower) valuation. Due to this adverse scenario playing out where suddenly investors are skeptical about further investment in the start-ups unless the good results are shown, many small start-ups (which has similar business model) who are surviving on the investors’ money may get suffocated & eventually chocked to death.

Impact on the start-up ecosystem in India: 

Indian start-up ecosystem may feel some shake-ups and jolts after changes at the market leader in e-commerce business. The impact may be visible in following ways;

I. loosing sheen in the Job markets: Push for cost cutting may lead for lower recruitment requirement from start-ups. Subsequently, the job market in India which has witnessed huge demand from start-ups for last couple of years may dim significantly. Contribution from start-ups towards new job creations may get hit due to pressure on cost reduction. Also many start-ups are already slashing existing jobs which may add some trouble to the job market.

II. Prolonged wait for start-ups to enter Indian IPO market: IPO market in USA is going hysterical on announcement of Snap Inc.’s (maker of Snap chat App) IPO which is start-up. Initial figures are showing it is valued between $19 Bil to $22 Bil. Indian IPO market & investors can just be envy of this. Indian IPO market may not see in near future entry of any big Indian start-ups heading for IPO route.  Many stake holders in Indian IPO market like merchant bankers, I-bankers, Legal advisors, distributors, Brokerage houses, Retail & institutional investors etc. who are expecting their business to zoom up due to start-ups entering into IPO market, may have to pray for better financial health of Indian start-ups to reach a stage where they can go for IPO. For many big Indian start-ups which are daydreaming for IPO, the increased vigilance & tough demands from investors (VCs) due to invisibility on sustainable profitability coupled with scalable venture, the dream looks distant.  

III. Some rejig of Indian start-up ecosystem:

1.Shying away from VCs & other tough investors: Having seen how Flipkart & other stories are playing out at this juncture, founders of many new start-ups may shy away from going to VCs for raising capital. But I believe this phenomenon is temporary in nature, eventually if start-ups are lacking capital to fund their expansion needs and if it has capabilities to convince VCs then it might go ahead and take VC or other investors’ funding as we know in true sense there are not much of venues (though theoretically there are many venues) where star-ups can go and actually raise the capital.

2.Focus may shift towards being differentiators rather than being ‘me too’ start-ups: For upcoming entrepreneurs who are smart & observant will take a note of what is going around with Indian start-ups. After witnessing the struggles of many existing start-ups to cross break even after years, psychological shift may come to start a start-up which is focused on differentiators (through innovation or by doing things differently) which may have higher chances of break even than focusing on yet another similar product/service –oriented start-up. Also pragmatic founders may focus more on working out sustainable & profitable business model instead of focusing on singular pieces of their business.

Apart from these aspects, many more interesting and important aspects are there in the context with Indian start-ups & ecosystem which are not covered here.

Note: VC/PE taking the control of the firm is not necessary bad signal always. If it can create win-win scenario for all important stakeholders of the firm then sometimes it might be desirable!

The Flipkart saga: VC in driver’s seat part-1

Who thought that there will be a day when a relatively young company (started in 2007) called Flipkart could dwarf big companies like Nestle India, Dabur India, Godrej Consumer etc. in terms of company valuation based on market cap. As per many media news in 2015, Flipkart was valued at around $15.2 Bil. However, current reality is strikingly different. Investors like Morgan Stanley and other have done consistent mark down on the valuation of the Flipkart during the year of 2016.The latest valuation of Flipkart may be around $5.54Bil, which is around third of what it was valued in year 2015.Though this kind of gyration in the valuation figures for start-ups/young companies is nothing unusual but after such drastic mark down on valuation when announcement came that Tiger Global the largest investor (owns around 35% in Flipkart) appointed Mr. Kalyan Krishnamurthy as CEO of Flipkart, it has sent some strong signals.

Let me try to do quick analysis of this announcement in two parts;

Part-1: its’ impact on the Flipkart.

Part-2: Its’ impact on other start-up companies and on start-up ecosystem in India.

Impact on Flipkart :

Move over from founder to the professional:  

Flipkart the e-commerce market leader in India is going to witness for the first time the change which comes from the professional (Mr. Krishnamurthy) managing company as compared to the co-founders ( Bansals) managing the company. This may lead to for sure some organizational cultural and hierarchical rejig. Instead of focusing on vision, mission, higher level strategies and some larger than life goals (which are generally propagated by founders to all the stake holders) the focus may shift to growth drivers, sales, cost control, loss reduction, efficiency, execution etc. Companies are reflectors of their leader’s personality, attitude, approach etc. and Flipkart is no exception to this. Many key positions roles may face restructuring, some may be shown the door and new recruitments may find the way in. I think the key slogan at the Flipkart after the change of leadership is going to be “we mean business”.

More focus on sustainable turn around:

I think the job of Mr. Krishnamurthy as new CEO of Flipkart, will be cut out to maintain market leader position in the India along with sustainable turn around where focus will be on sales and bringing firm into profit. In this case, it seems sustainable turn around and scaling up of business is going to be two very important ingredients for future higher valuation. Lee Fixel who is Tiger Global head of PE & VC operations would eventually be interested in selling his stake in Flipkart at some eye-popping valuation figure and pocketing the exorbitant profit. In order to fulfill Lee Fixel’s dream Flipkart first has to reach such a high valuation figure. To reach high valuation number Flipkart has to allure and attract equity investors to invest in the company at higher marked-up valuation which will be cyclical and lead to further higher valuation of the firm. But to convince new equity investors to invest in Flipkart is going to be anything but easy from now on. Assuming new equity investors will be more critical evaluators of Flipkart after it has gone through rough patches before making further investment, Flipkart has to prove under new CEO that it is sustainable turnaround story in the largest market, where focus is not only on sales but also on profitability. This is what new CEO’s role might be at Flipkart. If this does not go right, it can spook the idea of bringing IPO at high valuation in future which generally works as exit gate for many VC investors. 

The above flow is represented diagrammatically as below;