Fairval

Notes on Indian equities, sectors and economy

VC/PE deal space continues to see slowdown

Posted by fairval on December 14, 2016

Amount of investment in Indian VC/PE (and angel) space continues to see slowdown. This is from data for Jan-Nov’16 (Source: http://www.indiabusinessreports.com)

vcdealsnov16

YTD amount is just over USD8B, down 38% over last year, while deal count is down as well.

The decline is sharpest in internet based businesses, where investment is this year is just about a third of last year.

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Are Ruias India’s most selfless & misunderstood entrepreneurs?

Posted by fairval on October 22, 2016

A seminal deal happened this week: one of the largest ever acquisitions of an Indian company, and as the full page ads mentioned – India’s largest ever FDI. The Ruias sold Essar Oil to a consortium led by Russian oil major Rosneft, at an enterprise value of USD 10.9B (there was separate money involved for associated group companies like Vadinar Port).

With this deal, the group expects debt burden to reduce by 50%. Overall debt at group level could be as high as USD20B. This suggests most of the sale value would go towards debt servicing.

The impact of the deal was instantly felt on the banking system. ICICI Bank, India’s largest private sector bank, which had a large exposure to the Essar group, jumped 7% on the day this deal was announced, and has risen since. At the time of writing, the stock is up 13% from the pre-deal close. In market cap terms, this is a USD 2.8B gain.

All this is good for the banking system, the rupee and the Indian economy. It becomes even better when you consider that the promoters Ruias have pretty much made no money whatsoever in setting up and running Essar Oil.

You read it right. For a company spanning around 2 decades, it appears the Ruias may have made zilch for all their family effort, plus the risk they had taken in terms of corporate, and maybe personal guarantees against bank loans.

Since we don’t have full information, this is what we are assuming – almost entire proceeds will go towards reducing debt. This means the only money Ruias may have made would be from dividend income, and salaries for family personnel.

On this count, the situation appears to be like this: in terms of data since FY02, Essar Oil hadn’t paid any dividend (as per equity database Ace Analyzer). The database does not show data before this. As per FY15 annual report, the only family member directly involved with Essar Oil was Prashant Ruia, who was chairman of the company. His remuneration for FY15 was Rs 43 lakh (Rs 4.3million). This is negligible for a company with a revenue of almost USD15B.

In other words, since the last 15 years or so, Ruias may have earned nothing directly out of Essar Oil. Assuming other than the principal amount of their investment in Essar Oil, they use the rest of the deal money to pay bankers, that’s 15 years of no return for an incredible effort of setting up India’s 2nd largest refinery, and one which pretty complex configuration. It wasn’t just a refinery; Essar Oil has 2500 retail outlets, India’s largest oil retail network in the private sector.

Contrast this with what the other big private sector player in India in oil refining – Mukesh Ambani – makes from his company Reliance Industries. Mr Ambani earned dividend of Rs 1400+ crore in FY16. In the last 5 years, he has earned dividend income of almost USD1B. He also draws a salary, which he has capped at Rs 15 crore per year for the last 8 years. This is besides his wealth from shares of RIL, which is about USD24B.

That is more like it. Unless you are making huge amounts of money, why would you create such a large business?

Unless some of the data above is wrong, this leads to a natural question – just why did the Ruais do it? Take such a huge financial risk, and then make no money.

Group chairman Shashi Ruia said in the press release “It is a historic day for Essar. The transaction demonstrates our unique ability to build world-class assets”. Note the stress on creating history, and doing something world class. Prashant Ruia’s quote also emphasized the group’s ability to create benchmarks. He said “The deals we have done have led to an FDI infusion of more than $30 billion into India”

I guess all this is not easy for a simple mind like mine to understand. Can the urge to create national or global benchmarks be so strong, that one can labour for decades for no financial reward? I don’t have it, many of us middle class Indians, who can’t look beyond their next salary cheque may not have it either.

And on top of it, the paradox is: we, who want to work for money, are poor or middle class; and those who are working for no visible money are not. Maybe this is one of those god’s mysterious ways of dispensing justice and allocating wealth.

In sum, I think it is time the media and analysts revised their opinion about Essar group, and recognize their selfless deeds for what they are worth.

 

PS: I guess this transaction and the 2 decade history of Essar Oil deserves a case study by Harvard Business School – what say?

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Is it a real business, or is it a Po*#x*

Posted by fairval on October 13, 2016

As part of our transaction advisory work, we do considerable work in pharma / healthcare space. We also have our own angel platform which invests solely in pharma / heatlhcare startups. In this, we have several HNIs who are business owners from the same space – pharma / healthcare.

In other words, we regularly meet and talk to people operating in this space. Often these meetings come about when we are representing a client from healthcare industry, and on its behalf are talking to either a fund or HNI for funding.

In the last one month, in 3 separate meetings, we got asked roughly the same thing (about our clients) – is it a real business, or is it a P*#$@+?  No reflection on the clients, but is there something not quite right with this company they want to compare it with? From being the toast of the startup world, why are several people seemingly bad mouthing it?

We have no idea of whats going on with this company, but lets see if this becomes one of these standard questions one must ask a startup – are you a real business, or a P*#$@+?

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Article in The HinduBusinessline – Unit Economics explained

Posted by fairval on September 23, 2016

Lately, have been writing a monthly piece for The Hindu Business Like. The latest article was on key metrics an investor should check when evaluating an ecommerce startup.

6 questions for e-com start-ups

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How to value angel investments

Posted by fairval on July 13, 2016

My column in Hindu Businessline this Monday focussed on the issue of – how to value an angel deal.

In short – there is no method really to value angel deals. Most investors use absolute numbers within a certain range to invest, without necessarily linking them to business numbers.

For example, Silicon valley entity Y Combinator, which is more of a accelerator than an angel, has a specific, one size fits all formula. It invests $120K for 7% stake, which means it values the startup at $1.71m post money. This is roughly about Rs 10 crore pre money.

Some Indian startup funds seem to follow this also. India Quotient invested Rs 2 crore in one company I know at Rs 10 crore pre-money. Don’t know whether it is their standard formula.

Most HNIs though tend to be stingy. They like to stay in single digits in pre money valuations.

Instead of a flat valuation, it is possible to do a bit of structuring, like discount to Series A. Or take a metric like orders processed, and link valuation levels to few pre-defined ranges of orders processed. These kind of investments will need a cap/floor ideally. Some investors don’t like to keep such metrics for valuations, since it can skew management focus.

 

 

 

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Deals slowdown strikes again in May’16

Posted by fairval on June 8, 2016

2016 so for continues to see less VC/PE activity compared to 2016. Reported investments fell again in May. YTD amount is down 22%

 

PEdeals

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What’s a basic angel portfolio?

Posted by fairval on May 30, 2016

While writing on this blog has been suffering due to various issues, have just started a small series on Angel Investing in Hindu Businessline.

The first one deals with – what should be a min folio an angel investor must aim for.

Angel investors must aim for at least 8-10 deals

 

Angel investing has taken off in India in a big way in recent months. In early 2014, on an average, around 10 angel deals would be reported a month. From the second half of 2014, the angel space has seen a rising trend. The monthly deal count crossed 30 in August 2015, and has remained in the 30-40 range since then; an increase of about three times in a year.

The spurt in news flows on start-up investing seems to have caught the attention of the average high networth individual (HNI). For every HNI who is already an angel investor, there may be five new investors actively considering this asset class…..(click link above for full article)

 

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‘Delivery food tech’ is not happening, but other food tech may work

Posted by fairval on February 25, 2016

The Economic Times carries an article today carrying an article referring to Mahesh Murthy’s (a seed investor) where he talks about how food tech companies will never make money.

First, one needs to clarify this word ‘Food Tech’ – which has become a much abused one. This word is getting applied indiscriminately to a lot of businesses. We can see a few distinct slivers within this segment:

  1. Delivery logistics businesses – these are companies like Food Panda, Tiny Owl, Swiggy etc. This is largely a logistics business, though they also generate demand. The consumer says ‘I want to order food, lets go to foodpanda site, order etc..’. These sites list restaurants from where they will deliver food, within a certain radius. They have offered freebies to consumers to attract demand. Zomato is slightly different, since it started largely as a advertising platform, not really food delivery business, though. When Zomato entered food delivery in Mar’15, it may have been an afterthought, though it has structured the business differently. It does not deliver on its own. It seems to simply take order for a local restaurant (choices based on the customer’s address) and the local restaurant delivers. Will it be big for Zomato? Don’t think so. Zomato is largely about fine dining listings, not your average neighbourhood place. People are not going to order home delivery from fine dining.

 

  1. Delivery only restaurant businesses – these are companies like iTiffin, of iChef, Holachef, which make their own food, but don’t offer dine in. These are actually somewhat like Domino’s, except ordering process is via an app, not over a phone which one normally uses for Domino’s. The difference from Dominos is that these guys typically have 1 or more central kitchens, which a customer does not see. Dominos on the other hand has retail outlets, where it does not quite encourage you to eat, but they serve as local spokes from where delivery occurs. Box8 appears to be doing this to some extent. Saw 1-2 Box8 outlets in Mumbai, which don’t appear to be dine ins, more like local delivery spokes.

 

  1. Food aggregators – there is a slight difference from 1. These don’t aggregate branded restaurants, they aggregate home kitchens, or caterers at best. There seem to be several such startups in each large city, like Mumsmenu.com in Chennai, Cyberchef in Gurgaon,

Much of the discussion has been around category 1, which has also attracted the most money. We agree with Mahesh on that. It is hard to see how a Food Panda or Tiny Owl are going to create business value.

Check their economics. We believe their gross margin is about 10%. From this, they have to manage all their costs – cost of delivery and money collection, demand generation, CRM, and HO costs. When will it work? When the order size is large. Ideally Rs 2000 per order on an average. Is it happening? We don’t know, but we doubt it. Orders more than Rs 2000 or more will be rare. If per person cost is Rs 500 or more, that borders fine dining quality food. For that, people will go out. If it is everyday food – singly guys order dinner for instance, or a family that some day does not want to cook, and is not going out either – those don’t result is expensive orders. Per spend in such cases will be less than Rs 200. Think about it – if you spending more than Rs 500 per head, you would rather step out, enjoy service and let someone else clean the dishes afterwards.

From a Zomato conference call transcript: Our average ticket price is about Rs.600 per order and what I have heard, I mean what I have heard for our competitors is that it is about Rs.225 for them.

Don’t think there would be such a wide disparity, but our point holds – you are not going to get large orders in home delivery. Ergo, there is no business if you try to deliver. Maybe it can work the way Zomato is doing it – just order taking.

Categories 2 and 3, however, make a lot of sense. As we said, category 2 is like Dominos, but does require lot of spends in demand generation. Hence, it needs strongly differentiated product. For ex, we doubt ‘biryani at home’ kind of businesses (a recent deal) are really strong enough to create that differentiation. iTiffin and iChef are both highly differentiated. iChef has also done a transaction with Brand Capital, realising the need for creating demand and building a brand.

Category 3 also has promise, since the available gross margins will be more than what you get in Category 1. So the worst segment has got money, and has tarnished the word ‘food tech’.

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Jan’16 sees USD800m of VC/PE deals

Posted by fairval on February 13, 2016

Better than Dec’15, which say USD667m, but last 2 months (Dec and Jan) are slower than general trend in 2015.

Number of disclosed deals remains robust, at 85.

VCdeals_Jan16

 

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VC/PE investments for 2015 close at ~USD 14B

Posted by fairval on January 12, 2016

VC_PE

Eight years after 2007, when India Inc absorbed ~USD18B of VC/PE investment, the sector once again saw robust activity in the year gone by. Total VC/PE investment hit almost USD14B, the second best year in the history of VC/PE investments in India.

In contrast, in 2014, total reported investment was ~USD9B, from 381 deals. Total reported deals were 556, around 178 did not report amount of investment. In 2015, total deals reported were 881, of which 300 did not disclose amount invested.

These numbers may not necessarily match with figures from some other sources, we have noticed some other numbers which are larger than India Business Reports’ number. The reason could be people are counting within VC/PE  numbers, deals which aren’t exactly what we would call a VC or a PE deal. For example, we don’t see how a strategic investment qualifies as venture capital. Or an investment in a company outside India, even though the source of money could be from India.

 

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