Fairval

Notes on Indian equities, sectors and economy

2018 Award for India’s Most Pusillanimous Company Board: Yes Bank could certainly earn a nomination

Posted by fairval on September 28, 2018

While winning the award for India’s most pusillanimous Corporate Board would be an extremely tough fight – almost 90% of Corporate India would be in fray – for 2018, Yes Bank’s Board would certainly earn a nomination.

In an act of extreme deference to the company founder, the Yes Bank Board sought an extension for co-founder Rana Kapoor till Sep’19, as against RBI’s deadline of end of Jan’19.

What was all the more remarkable (or downright brazen / stupid, take your choice of words) was the reason proffered: “the board has requested the Reserve Bank of India (RBI) to grant an extension to Mr Kapoor up to September 2019 “for finalisation of audited financial statements for fiscal year ending March 2019 and in order for the statutory AGM process to be completed.”
Seriously?

  1. One key reason RBI wanted to change was that it was not comfortable with the reported financials of Yes Bank. A story by The Economic Times says RBI cited 3 reasons to want to out Mr Kapoor: “”Weak compliance culture in Yes Bank”, “Weak Governance In Yes Bank” and “Wrong asset Qualification”. And then the Board actually has the temerity to say – “We really can’t finalise FY19 results without Mr Kapoor?” Bizarre to say the least
  2. It needs one full year to find a replacement? Axis Bank took less than 6 months in announcing a new CEO after Shikha Sharma’s tenure was cut short in Apr’18. Axis is a bigger bank. RBI has given an equal time to the Yes Bank board. The real reason for asking one year could be to buy time for the co-founder, and maybe for the Board members too. A lot can happen till Sep’19, for example, there could be a new government at the centre.

The terms ‘Weak Compliance, Weak Governance’, if used by RBI as reported, actually squarely implicate the Board, which is the real custodian of Governance in any company. So far there one hasn’t heard any response from the Board on this.

The Board’s pusillanimity is taking an enormous toll on Yes Bank’s investors and likely on its employees too. While the fall on the first day of trading after Rana Kapoor was asked to go was understandable (a new person would obviously clean up the numbers, the market was pricing that in),  the fall after that is almost entirely the Board’s doing. The letter asking for extension has been the final nail in the coffin. Any external investor would be spooked by such an act. This is how an investor would view the letter: The Board seems to be saying ‘We are too scared to present the real picture. Let Mr Kapoor do it one more time, it also gives us enough time to find reasons and occasions to quit the board’. Clearly, Yes Bank does not just need a new CEO, it needs an entirely new set of directors too.

 

PS: ICICI Bank may yet give a good fight to Yes Bank on the nomination list, the Chanda Kocchar saga is not yet over. Axis has lost out in the race for the Award, the Board meekly accepted RBI dictat.

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PE investing has moved up a gear

Posted by fairval on June 4, 2018

Private equity / venture capital investing continued its robust trend in May’18. The month saw deal commitment of USD2.3B, if we count the platform BPO deal backed by Warburg.

The first 5 months of 2018 have seen more than USD1B committed each month.

PEdataMay18

Between 2008 and 2016, annual PE deal amounts used to hover around USD10B, plus or minus a bit on either side. The average annual amount over this phase is just over USD 9B. 2017 saw a break from this, with annual deal amount crossing USD17B.

2018 is set to push this up further. In first 5 months, we are already at almost USD10B of deal commitments. The rolling 12 month total is at an all time high, crossing USD20B.

This could well be a secular trend. India is now pretty much the world’s 5th largest economy, set to nose ahead of UK and France this year or next (and already much bigger if we count our substantial informal economy). Such things do have a signalling affect. Maybe that explains this heightened deal fervor.

We should also note, in a global context, these amounts are not large. It is just that India is coming up the curve. Annual PE investment in US. for example, is upwards of USD600B, or 20-25x more than India.

(our numbers are a bit less than other firms quoting PE investments. If the recipient company is not incorporated in India, we do not count deals in such companies, even if substantial work force may reside in India).

 

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Motilal India’s largest retail PMS, Old Bridge in Top 10

Posted by fairval on March 25, 2018

Posting after a long time, thanks to my colleagues at http://www.indiabusinessreports.com, who painstakingly dug out data on SEBI registered Portfolio Management Services (PMS) companies. This data is not available in public domain.

I am sharing top 10 rankings of PMSs based on retail assets managed by them. We are ignoring here money from corporates or FIIs.  The data is for Dec’17.

By AUM

In terms of Assets under Management (AUM) from individual retail investors, Motilal Oswal AMC is the largest PMS.  There are 3 other PMSs attached to large fund management houses – Birla, Kotak and ICICI – in the top 10.

 

PMS1

An interesting nugget is that Old Bridge, the PMS floated by Kenneth Andrade, the ex-CIO of IDFC MF, is already in the top 10 by AUM, in less than 2 years of start. Among lesser known names (to general public) are Unifi and Equity Intelligence. Alchemy is ahead of the more famous Enam, which lies in 3rd place.

The PMS where I am a customer, Banyantree Advisors, lies at the 11th rank by AUM. This was started by couple of my classmates, they have done quite well over the years.

By Number of Retail Investors

The rankings are slightly different when one looks at number of investors, whose assets are with the PMS. The top 4 are all PMSs attached to fund houses, perhaps a testimony of their superior distribution skills. Sundaram and Unifi, both of which have very strong distribution capabilities, make it to top 10.

PMS2

By Assets/Investor

The names are almost entirely different when one looks at Asset/Investor. Some of these could figure here by virtue of having large anchor customers, or perhaps their own prop money makes a significant portion of their AUM. Others like Credit Suisse or IIFL could simply be setting a large minimum bar to the kind of investor whose money they take for investing (ultra HNIs for example).

PMS3

Florintree, that figures at number 3 above, is also co-founded by an ex-classmate. The other founder of Florintree is Blackstone’s ex-India head Mathew Cyriac who joined this recently. Its AUM was Rs 142 crore for Dec’17, from only 11 investors.

 

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Apollo group well on its way to creating a pharma distribution behemoth

Posted by fairval on January 21, 2018

Keimed Private Limited, the pharma distribution business aligned to Apollo Hospital group, ended FY17 with revenues of Rs 35B (~USD 540m). This makes it by far the largest distributor, in the totally fragmented pharma distribution market in India. No other distributor is even close to Rs 10B. Among the top distributor names in many cities, you will find subsidiaries of Keimed, gained through acquisitions.

The pharma distribution space in India is badly fragmented. In a domestic market size of around USD19B (Rs 1200B), Keimed’s market share is barely 3%. There are believed to be over 40,000 distributors in India, catering to 800,000 chemists (the retail market is fragmented too). If you look at these numbers, the average appears to be 20 chemists per distributor! In general, a distributor doing say USD 2m per annum is considered a reasonably successful distributor.

A fragmented distribution, fragmented retail and relative fragmented formulation side of the pharma business is an obvious recipe for chaotic state of affairs. The scenario is further complicated by that fact that, unlike in FMCG, where a company will have a dedicated distributor for a certain region, it is free-for-all in the pharma market. Any distributor can sell to any chemist (albeit within restrictions imposed by AIOCD, but that’s another story altogether). Also, a distributor will stock for multiple companies.

A chemist deals with anywhere between 30-50 distributors, maybe more. He will try to stock as little as possible, often just 2-3 days of stock. Order of say 2 strips are common (meaning, a distributor has to break open a case, and sell strip wise – complicating logistics and track and trace).

This fragmented and chaotic state of affairs has several negative side effects. Very few distributors or retails have any respectable IT. Too much time and effort is lost in inefficiencies. More pernicious are things like serious disregard for cold chain. Most distributors switch off their freezers when they go home. In several states, there is no electricity for half the day in any case. They can’t afford generators or other forms of power backup. This probably renders a large bunch of vaccines ineffective. Then, there is the temptation to sell spurious drugs. Around 30% of all drugs sold at retail pharma counters are believed to be spurious.

There is huge need for scale players in pharma distribution. Keimed started more than a decade ago, and has grown via a series of quietly made several acquisitions. For ex, it owns Meher Distributor, Mumbai’s largest distributor. Similarly, it owns Vardhman Pharma Distributor, Bangalore’s largest distributor. Its model is not to take 100%, many of its acquisitions are owned 51%, the original owners continue to run the show. In fact, within the pharma market also, most people don’t know about that these distributors are owned by Keimed. Keimed’s financials are quite good. ROCE/ROE are more than 20%. Given its size and growth trajectory, this is a company which could list in another 2-3 years.

Part of Keimed’s success could also be the ability to supply to hospital and pharmacies by the listed company – Apollo Health Enterprise Limited (AHEL). Apollo Group has a successful pharma retail business as well – Apollo Pharmacies. That is a part of the listed company Apollo Health Enterprise Limited (AHEL), it is division of AHEL. This business reported revenue of Rs 28B in FY17.

In FY17, Keimed reported Rs 15B of sales to AHEL, in its ‘related party’ disclosure. So around 43% of its revenues came from AHEL as a customer. That is a huge advantage for Keimed.

Keimed is not owned by AHEL however. The ownership is in personal names, of which Shobhana Kamineni (vice chairperson of AHEL) appears to own the larger share. Japanese company Mitsui now owns 20% of common equity, having invested in 2015.

 

Posted in Pharma and Lifesciences | Tagged: , , , , , , , , , , , | 1 Comment »

12 year lock-in? Is IRDA really this weird?

Posted by fairval on November 6, 2017

IRDA seems to live in its own world. It seems it is considering putting a 12 year lockin for PE investments in insurance space.

Irda may ask PE companies for 12-year lock-in

Some of the statements in this article (it quotes an unnamed IRDA official) are truly bizarre.
Check this —

  • Private equity is one of the most unstable form of capital looking for appreciation and exit, so a lock-in period is required. I thought it was one of the most stable.
  • This is to ensure that their capital is invested for a longer tenure to support the long-term growth of insurance companies and safeguard policyholders’ interest as these funds are known to look for quick appreciation and exit. And how does one exit: There has to be a buyer, right? If the buyer is willing to pay a certain price, is IRDA saying the next buyer is a fool? IRDA needs to protect the next buyer from getting duped by the PE fund? 

One can understand say a 5 year lockin. 12 year pre-determined lockin – IRDA is living in another world.

The stated reason is of course to protect the ‘policyholder’. Wish they would show more concern about reducing commissions and insidious sales practices.

 

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Size of Indian Dentistry

Posted by fairval on November 5, 2017

India Business Reports released a report on Indian dental market. This pegs the size of Indian dental clinic revenues at around Rs 20,000 crore, or USD 3.1B. This is higher than other estimates floating around, which IBR believes have under-estimated the size of the market.

 

It has been consistently reported that there is a massive oversupply of dentists in India. While this is certainly true at this time, IBR believes these concerns are overdone; this is a temporary phase. India can add almost 25,000 dentists per year till 2050 without reaching levels of penetration of dentistry in already seen in developed countries.

 

Dental health in India has a long way to go. However, no effort is being made either by the government or by dental associations to promote awareness. A concerted program of dental awareness would help promote healthy growth of dentistry.

More info on http://www.indiabusinessreports.com

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Spurious RTI data – 40% vacancy in Mum-Ahd trains

Posted by fairval on November 1, 2017

Today one amazing bit of data has come out, it seems out of an RTI query. Says a news item –

Modi government obviously did not do its homework on the Rs 1 lakh crore project.

According to an RTI query filed by Mumbai activist Anil Galgali on seat occupancy, in the past one quarter alone, the Western Railway is facing staggering losses worth Rs 30 crore in the Mumbai-Ahmedabad sector – this translates to a loss of around Rs 10 crore per month. The WR revealed that in the past three months, 40 percent seats have been vacant on the Mumbai-Ahmedabad route while 44 per cent seats were left unoccupied in the Ahmedabad-Mumbai route.

This was widely reported in all papers, and was today being debated on NDTV. As can be expected, the slant was – So how can a bullet train come on this route?

Amazed at the stupidity of it all – this data is SO OBVIOUSLY incorrect. It appears no one in the media or their expert commentators travel in Indian trains anymore. 40% vacancy? What are they smoking?

I travel on this route often, and I know from personal experience, it is very hard to get tickets if not booked in advance. If this data was correct, I should be able to book a ticket say 4 hours in advance.

So I checked just now. According to the RTI data, there are 32 trains (IRCTC lists 30); of which, quite a few are only for this route (as in, Ahmedabad is the last stop). Some of these –

  • Shatabdi Express
  • Ahmedabad Passenger (twice a day)
  • Suryanagari Express
  • Karnavati Express
  • ADI Double decker
  • Ahmedabad Duronto

Total seats as per RTI data are around 8000 per day

I checked availability for tomorrow. Only ONE out of 30 trains has any tickets. Many are not even accepting booking for Waiting List ticket. The only train which has tickets – 179 – is ADI Double Decker. This again I have noticed from personal experience. This does have tickets often till the last moment. Why so? I guess 2 reasons – it has lot of tickets to offer, being a double decker – one bogie has ~140 tickets, this single train must have 2000 tickets to offer; also the seats are extremely uncomfortable, so maybe people don’t like this train.

But then, 179 out of 8000; that’s 2%. And this is not season. In Diwali season, there was no tickets for atleast a 20 day period. For tomorrow (2nd November), even the twice a day Ahmedabad Passenger has no tickets. And it takes 15 hours 45 minutes, a lifetime!! In contrast, fast trains like Shatabdi or Duronto take 6 hours 20 minutes.

So where the hell does the 40% vacancy come from? And in which Indian train sector is that even possible? Let alone Mumbai Ahmedabad.

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RBI’ Revenge

Posted by fairval on October 28, 2017

India’s real interest rates are at rates rarely, if even, seen in its history. Why does RBI not lower rates? Revenge for getting screwed on Demo?

When demonetisation (DeMo) was announced by Prime Minister Narendra Modi (NaMo) in a dramatic press conference on 8th November 2016; several commentators said it was a bad move. The subsequent shoddy implementation and its inability to reveal any immediate black money – notes came back into the banking system – heightened the criticisms. Today, almost one year down the line, it is almost universally acknowledged that DeMowas a failure.

While the NDA government has faced flak for it, the central bank Reserve Bank of India (RBI) has faced even more criticism. When DeMo was announced, RBI had just passed under a new leader. The resignation was the previous governor – posterboy Raghuran Rajan (RR) – was mourned by many. Experts said NaMo had let RR go because he wanted a pliable chief. RR had crossed the line by making political observations; he was giving indications of being anti-NaMo.

When DeMo was announced, the experts immediate said ‘RR wouldn’t have done it’. The new RBI governor immediately became painted as a sinner; someone who sort of lowered the independence of the RBI. The ‘experts’ were also clear – from now on, RBI would dance to the tunes of the government.

Well, a year since DeMo, nothing of that sort has happened. RBI refuses to dance. Despite a slowing economy, and hugely comfortable inflation situation, RBI refuses to lower interest rates. The result – India’s real interest rates are at levels perhaps never seen before in Indian history.

Remember India has always been a high inflation country, and for most parts, we have operated in zone of negative real rates. But now, our real rates are above 4.5%. While one has not seen history of real rates since last few decades it is likely these levels could be all time high. When economy has clearly slowed, should they be so high? This level is also much higher than other countries (see chart below)

RBI.png

The Economic Survey (vol 2) released in Aug’17 by Ministry of Finance has a detailed section explaining the situation on real interest rates and suggesting how much should interest rates go down. Says the Survey – Cyclical conditions, then, suggest that the policy rate should actually be below—not 50-100 basis points or so above—the neutral rate. The conclusion is inescapable that the scope for monetary easing is considerable, more than that suggested by comparison with neutral interest rates.

So why is RBI not listening? Is it the RBI trying to leave no doubt in anyone’s mind about its independence? Or worse, is it trying put the government down for destroying its reputation with Demo? RBI’s revenge?

Posted in Indian Economy | Tagged: , , , , , , , , , , , , , | 2 Comments »

Ratan Tata is right – very few disruptive startups get funded

Posted by fairval on October 12, 2017

One of the few industry captains to have taken seriously to start-up investing, Ratan Tata recently rued that there are very few disruptive startups in India. “I don’t think we have as many really disruptive startups in India as we do overseas,” said Tata.

We couldn’t agree more with Mr Tata, atleast in the lifesciences space, where we focus more compared to other areas. The funding scenario is lifesciences start-up space is truly appalling, to put it bluntly.

We had written 2 years ago, on the poor scenario in funding of R&D startups in pharma. Nothing has changed in R&D funding in pharma. USA and Isreal each see 50-70 pre-revenue R&D startups get Series A funding in pharma. In India, we are lucky to see 1-2 deals in a year.

In healthcare, the scenario is equally poor. Considerable funding has gone into so called ‘health-tech’. Most of them have zero innovation. Take e-pharmacies for example. They are all following the same cookie-cutter ecommerce formula which the Flipkarts and Amazons have created. But there are significant differences in the market in which Flipkart operates, and pharma retail. Several Flipkart categories have 30-50% gross margins (pre-discount). In Pharma, retail markets are around 20%, and governed by DPCO regulation. So if you offer a 20% discount, you are operating at zero gross margin (and actually negative, if you are delivering from the neighbourhood retailer).

But e-pharmacies are still better than some other segments which have got considerable funding. You atleast need to order medicines frequently, so there is some chance of habit formation, which is what perhaps the discounters are trying to achieve. Whether they can survive till they figure out how to make money is another matter.

Some other segments are even worse. Home healthcare for ex. This is a low margin staffing type business, with huge service quality issues. One really has to wonder how this is scalable.

How about ‘booking doctor appointments’? In real life, there is no business like this. You pay a doctor, you don’t pay someone to get an appointment with the doctor, over and above doctor fees. Therefore the doctor should be paying in return for getting appointments. Have doctors been doing that in the past, as an established business practice? Not really. So this is a business which requires behaviour change, and creation of a market which does not exist, yet. But more than one startups have bene funded here, and with big money; this is akin to funding a market size of zero. The leader may survive, but may need to augment its revenue model.

Coming back the innovation issue, we have consistently found innovative startups in healthcare find it very difficult to get funding. The poor entrepreneur will get the same response “show more traction”.

Tata further said, “The government should and could play a major role in (developing India’s startup ecosystem)”. That is perhaps the only hope for spurring innovation in healthcare / pharma space. In fact, government is doing quite a bit here. The BIRAC (Biotechnology Industry Research Assistance Council) program, run by Department of Biotechnology (DBT), now in its sixth year, is quite active, granting out maybe 50-100 grants per year. A recent release said – BIRAC has provided financial and mentoring support to more than 500 companies, and nearly 500 young entrepreneurs and startups.

The problem happens after that. There appear to be many promising startups which are struggling with the issue – what after BIRAC?

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Indian handicraft exports are booming

Posted by fairval on May 17, 2017

Our research arm India Business Reports (IBR for short) recently did a note on handicrafts and handloom exports out of India. Good to see that this segment is booming.

Handicrafts exports touched USD 3.66B in 2016-17, a growth of 11% over FY16 in USD terms. In Re terms exports grew 13.8% to Rs245B in FY17, as compared to Rs216B in FY16. These figures does not include export of carpets, which is another sizeable market by itself.

Handicrafts2

(Source: EPCH)

Over and above the handicraft exports, India exported around USD1.8B of carpets an floor coverings. A major portion of this is handmade.

Growth rates for both – handicrafts and carpets – are healthy. Over FY10-17, handicraft exports have grown at ~15% in USD terms. Over FY97-17, a 20 year period, handicraft exports have grown at 10.2% CAGR in Re terms. Growth rate of carpets is slower, but impressive nonetheless. Exports of carpets have grown at 5% in USD terms over the last 5 years, and 13% in INR terms.

In the last 1-2 years, growth rates have slowed down for all sectors, in both domestic markets and exports. In light of that, this growth in exports in handicrafts is commendable, and makes it a ‘growth sector’.

For the full report, you can write to reports@indiabusinessreports.com; also available on Slideshare at  https://www.slideshare.net/IndiaBusinessReports/handicrafts-market?qid=c91002da-202a-47a6-bce5-9592f319fa73&v=&b=&from_search=1

 

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