Notes on Indian equities, sectors and economy

Posts Tagged ‘Wisdomsmith Advisors’

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*#$@+?


Posted in Angel Investing, PE/VC, Uncategorized, What was that Again? | Tagged: , | Leave a Comment »

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.




Posted in Angel Investing, The Science of Investing, Valuation | Tagged: , , , , | Leave a Comment »

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.



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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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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.

Posted in Corporate Governance, Pharma and Lifesciences | Tagged: , , , , , | Leave a Comment »

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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