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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.



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

Posted by fairval on January 12, 2016


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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The streets are filled with idiots, and Volkswagen cars

Posted by fairval on December 20, 2015

Janhavi Gadkar got her license back, reported media. So potentially one more id***on the road. I have found the whole JG episode beyond comprehension. Here is a lawyer (should bloody well know the law better than others), who is 35 years old (not a juvenile), and a woman (sounds sexist, but aren’t women supposed to be more law abiding?).

So this senior corporate lawyer from Reliance gets drunk with the CFO of Reliance on a Friday night and mows down a taxi at reportedly 120 kmph and kills 2 people. The car she is driving is an Audi, so nothing happens to JG. Great endorsement for safety features on an Audi, but 2 persons died.

Volkswagen seems to be wanting to put its emission controversy behind it, given the recent spate of ads. Earlier, VW was found to have put in a system of rigging emission data on some its cars. Why? Because the goal of making fast cars isn’t quite in sync with having low emissions.

The common thread between JG and VW: Speed and fast cars. Car makers all over the world, and Germany in particular, are highly focussed on speed. German cars are the epitome of luxury car industry. And what do they stand for – speed and safety. The later though is a necessary evil – if you are making a fast monster, you have to put in features to ensure that the idiot driving it doesn’t kill herself or himself (the other party be damned).

The 2 problems with the car industry – cars kill people and cars cause pollution – are a direct result of the focus on speed. This is where regulators need to step in. Several things can be done: Put in regulation to cap the top speed of cars at 80-100kmph; or put a cap on engine sizes. Noise pollution is another big evil – that should be tackled by putting in metered horns – so say 1 min of honking costs say Rs 100. To honk, you need to ‘charge’ the horn. That should cut down noise, or atleast generate revenue for the government.

Car makers will still want to sell luxury cars – but that can be via other means. Let them innovate on other features like design, entertainment, connectivity or just bling. And they can give schemes like ‘lifetime honking free’.

PS: One issue I have missed reading in the media – is JG still employed in Reliance? The CFO certainly is.

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The LP displeasure at AVIGO – what may have caused it?

Posted by fairval on October 25, 2015

Last week several business papers like The Economic Times and Mint reported a rare kind of event – Limited Partners of a PE fund trying to chuck out the fund managers. Such events are certainly ‘extreme’ events.

An article in Mint says that LP displeasure was driven by poor performance. It seems Avigo management team or General Partners returned only 30% of the $125 million in capital raised as part of the Avigo SME II fund in 2005.

Separately, The Economic Times reported that LPs had sued Avigo for negligence and mismanagement of funds. Achal Ghai, the managing partner of the fund has been asked to leave and global investor Siguler Guff headed by Praneet Singh in India is now managing the show

According to ET, the tensions started in the second fund where almost 75 per cent of the fund was invested in Tecpro Group. The fund had invested in Tecpro Systems which got listed post investment, as well as some unlisted group companies. From ET article — “The fund managers did not sell the stake even when the stock rose five fold. Today the value is down by 60 per cent,” said a fourth person involved in the issue. The Tecpro stock had reached a high of Rs 454 per share in 2010, but is currently languishing at Rs 7.19 per share.

The articles in both Mint and ET don’t quite make it clear exactly what was the LP’s core issue. For ex, was it:

  1. So much exposure to one Group? Normally, any investment vehicle sets upper limit to the amount of investment it may make behind a single entity or management. 75% to one group, if true, is probably unheard of. However, the GP’s must have taken clearance from LPs before investing, so the extra ordinary allocation to Tecpro could not have been the main cause of distress.
  2. Or was it failure to sell in the listed company when the price was high? Is this what is meant by ‘mismanagement’ as quoted by ET.
  3. Or is there more to it? What, for instance, was ‘negligence’? Failure to sell does not sound like negligence.

I was checking out Tecpro financial’s sometime in FY12. Around that time, its revenue was around Rs 2500 crore. The company was growing strongly, at around 30% CAGR.

There was one item in its balance sheet which was rather unusual. At that time, its receivables figure was quite high, almost equal to 12 month of sales. If I remember correctly, one reason why this was bloated was that the company was carrying around Rs 800crore plus of ‘retention money’ within receivables.

This needs a bit of explanation. Tecpro was in the EPC business. In this, the customer pays in stages, partly at start, and then at milestones. When you commission the project, the total customer payment will typically be around 90%. Customers tend to retain around 10% for a year – to see of the project is delivering as per specs. This suggests retention money in sundry debtors should be around 1 year of retention ideally.

Rs 800 crore kind of retention money should equate to a revenue delivered of around Rs 8000 crore. But that was equal to almost 5 years of revenue. Or to put it differently, the company’s retention money ideally should have been around Rs 250-300 crore.

So the amount on the books appeared way too high. Why was that so? Now Avigo representatives were on the board. I suppose they would be aware of this issue as well. What was their stance about this? Wonder if this was also among the issues LPs had with the GP team? Was this one of the issues around the ‘negligence’ concern reported in ET.

PS: The papers have subsequently reported an out of court settlement between GPs and LPs

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The thuggery of AIOCD needs to be stopped

Posted by fairval on October 14, 2015

Chemists in several large cities today shut their shops in a ‘strike’ called by their powerful industry body – All India Organisation of Chemists and Druggists (AIOCD). The strike was to protest against online pharmacies, a few of which have been springing up in recent years.

Online pharmacies have been around in India since the last 2-3 years. But so far, most of them (bar one, which managed to raise PE funding) were tiny, under-funded players, who carried out their business in a modest way. These players have also attempted their business in amateurish fashion, not making adequate effort to confirm to the law of the land. Some of them were selling medicines without prescription, while many openly promote substitution. Both of these are illegal activities.

AIOCD could muzzle the early entrants quite successfully. Its modus operandi with these players was quite simple – find a legal violation in their procedures, and approach legal authorities and get them to shut down (or seriously scare) the online pharmacy. Even marketplace Snapdeal got caught out by AIOCD, when it was found allowing sale of medicines without prescription. That was a stupid error by Snapdeal, but it wasn’t the first online player to make it (which makes it even more stupid).

As a result, so far there has been no significant online pharmacy player. Existing incumbents have mostly been too scared of AIOCD to advertise. They think the moment they try to grow big, AIOCD will find a way to shut them down.

In the last couple of months, though there has been a change. Finally, couple of serious players have entered the market. These are Netmeds, an outfit from Chennai, and more importantly, PM Health and Life Care, an outfit promoted by experienced IT veteran – Phaneesh Murthy. Both of these know are openly advertising on mass media, something which no earlier entrant had either the guts, or the resources to do.

It does appear AIOCD has realised that the serious players are now in the business. Both Netmeds, and PM Health have reasonable understanding of the pharma retail business. They have made sure their business model is quite robust. Which means AIOCD could not try their earlier tactic – find the online player violating a legal guideline, and pin them down on it.

AIOCD knows there is no legal way to can shut down law abiding online pharmacies – namely PM Heatlh and Netmeds. Hence the strike.

But it is time the government takes action against AIOCD. There are several grounds to do this:

  1. This a strike for a flimsy reason. The law of the land does not prohibit online pharmacies. So what business does AIOCD have to call a strike?
  2. The neighbourhood chemist does all kinds of violations of the Drugs and Cosmetics Act (the applicable law). Shouldn’t AIOCD be prosecuted for it?
  3. India has a very high percentage of spurios drugs in the markets. By some estimates as much as 15-20%. That is one in five. This is scary, and many lives are regularly lost because of this. As the industry body, AIOCD certainly bears some culpability

Professional online players can seriously help the consumer – by giving assurance of quality drugs.

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What is SEBI doing about Elder Pharma?

Posted by fairval on October 11, 2015

This blog has written earlier about what appears to be a rather large scam afoot at Elder. In Jan’15 we wrote

What is cooking at Elder Pharma?

The basic premise was – Elder got over Rs 1700 crore post tax from slump sale of certain assets to Torrent. But it wrote off Rs 1100 crore of that. WTF? Just before that came out, independent directors started resigning. The CFO resigned soon.

And it is common knowledge that the company has been in a financial mess and has been defaulting.

Now, Mumbai Mirror reports that The Bombay High Court has cleared the prosecution of top Elder Pharmaceuticals Ltd bosses, including TV actor and chief operating officer Anuj Saxena and his brother and chief executive officer Alok Saxena, for the company’s failure to honour fixed deposits worth Rs 155 crore. Full story here —

Elder Pharma bosses face prosecution for not repaying deposits

This is good news. Finally, someone is going after the promoters. But, there are bigger issues ere:

  1. Just who is following up to check if large amounts of money were siphoned off? That is a separate criminal act
  2. What is SEBI doing?
  3. Should auditors etc, who signed the Rs 1000 crore+ write off, be prosecuted as well
  4. Several independent directors resigned. But did they report any of their suspicions to SEBI? Clearly, there was a reason why so many of them resign within a few days of each other

No major paper has followed up this story. So much for quality of journalism here.

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Is Sun Pharma losing the plot?

Posted by fairval on September 11, 2015

A one-off event can be called an exception; twice, maybe a co-incidence; but when something happens 3-4 times in a row – then it is hard to wish it off. At Sun Pharma, materially significant write-offs seem to be becoming a feature of the business.

Since FY13, Sun Pharma has written off Rs 4025 crore (Rs 40.25 billion or ~USD 700m). To get a sense of how big this is, consider this: it is almost equal to the 2 year net profit (FY14 and FY15) of India’s second most valuable pharma company – Lupin. In the 3 year period, FY13-15, the amount is equivalent to almost 30% of Sun’s reported net profit.


The write-offs have been due to 3 separate causes so far:

  1. Rs 31 billion or roughly USD 550m was written off over FY13 and FY14 to settle a lawsuit related to acid-reflux drug Protonix, and was paid to Pfizer Inc. Japan’s Takeda Pharmaceutical
  2. The write-off of Rs 2.40 billion or USD 40m in FY15 was on account of Sun’s acquisition Ranbaxy; this was to settle litigation concerning its participation in Texas Medicaid
  3. In Q1 FY16, an amount of Rs 6.85 billion (~USD 110m) has been written off as part of restructuring costs involving Ranbaxy acquisition.  The company has guided there is more to come on this count.

Some of this reflects a problem of size. Sun’s revenue reached Rs 274 billion in FY15 (USD 4.4 billion). Sun has chased growth aggressively in its entire history. Its 3 year revenue CAGR for period ending FY15 was 50%,  while 5 year CAGR was 46%, by far the highest in the Indian pharma sector. The sizeable merger done with Ranbaxy in FY15 of course bumps the CAGR this up. But even without this, Sun is used to growing at 30% plus CAGR.

The increasing larger base makes hyper-growth an increasing difficult problem. Even if Sun was to grow at 20% now, it needs to create almost USD 900m of new revenue.

Pharma sector requires far greater risk taking than most other sectors. Greater risks could mean continuing stumbles, which could reflect in recurring writeoffs. So the current 4 year phase may not be an aberration, but a fact of life for Sun.

In financial terms, the implication could well be that profit CAGR will trail revenue CAGR, unless Sun goes through a phase of strong EBITDA expansion, which would again be tough to pull off at this stage and size.  This is already true. Compare the revenue CAGR posted above against net profit CAGR for the same periods. 3 year profit CAGR was 15%, and 5 year was 27% for the period ending FY15. That is way less than revenue CAGR.

Is the stock market factoring the write offs? To some extent, yes. Sun’s stock is down over 21% between April’15 and now, the biggest loser in the pharma space. Some analysts continue to have a Sell rating on the stock even at the lower price, though there continue to others who are strongly recommending the stock.

A foreign broker’s BUY report rates the stock at 28x FY17 eps. This is effectively 34x FY16 eps. A stock which has given 27% net profit CAGR for the last 5 years, should it get a forward PE of more than 30x? Difficult to justify, unless the assumption is that the write-offs will disappear, and there will no more stumbles. At India Business Reports (IBR), we think that’s tough.

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VC/PE investment in 2015 overtakes calendar 2014

Posted by fairval on September 7, 2015

Acche din are  certainly here for Angel – VC – PE space.

  • YTD 2015 investment stands at around USD 9.1b, 5% more than the figure of USD 8.7b reported in entire calendar 2014.
  • Monthly investments in private equity seem to have picked up sharply in India. After 91 reported transactions in July, another 80 transactions were reported in August’15
  • The total deal count in Jan-Aug 15 stands at 529, almost 60% higher than the same period last year.


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Government showing intent for VC fund to support pharma R&D

Posted by fairval on August 31, 2015

In a post in May’15, I had written about the abysmal environment for VC funding for pure-play pharma R&D setups in India. I had written – ‘The Government allocates say USD 250m per annum for VC investments in pure-play pharma/biotech R&D firms, gives it to say 5 funds like ICICI, Kotak etc; they invest on a purely commercial basis’.

It seems there is an outside chance that something this could actually come about. Last week, papers reported that ‘the centre is planning to launch a venture capital fund of Rs 1,000 crore under the Department of Pharmaceuticals (DoP) to support start-ups in the research and development in the pharmaceutical and biotech industry’.

A DoP taskforce which submitted a report recently on ‘Enabling Private Sector to Lead the Growth of Pharmaceutical Industry’ has a specific recommendation: Create and fund an organization to support and promote biopharmaceutical innovation, R&D and national and international academia industry partnership

However, this is not a new plan, it has been in the works for sometime now. In Oct’14, the DoP had released the Detailed Project Report (DPR) for setting up Venture Capital Fund for R&D in pharmaceuticals. At that time, the plan was for the government to provide an amount of Rs 500 crore in a fund of funds mode.

Some of the terms the government has in mind may not be so practical. Government proposed that each Pharma Fund commit to investing at least such amount in Indian companies for their Pharma R&D activities (Innovative Pharma Companies) as is, the higher of Rs.150 crore; and 4 times the amount sought as investment from the government.

This is not going to work. There is no fund which is willing at this point to put even Rs 50 crore into pharma R&D, and the 4:1 ratio does not quite sound right. Government needs to look at a lower ratio. That may prompt some private sector funds to think about setting up pharma R&D funds.

So optimism, but with a caveat: given the pace at which government’s work, it could take a while. It may not also come about if terms like 4:1 ratio do not find any takers.

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