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Sunday, December 24, 2017

Why are intelligent people discontent with their jobs-for example CAs

Being intellectual can often become a handicap. Many CAs perceive accounting/tax as beneath them, and yearn for banking jobs, just to realize they are a (overpaid) hamster on a giant wheel, at risk of getting obsolete(for example, investment banking back office)

  1. Often, you apply just a fraction of what you have learnt unless you are in a research world
  2. You often face ostracizm from your peers who are afraid to be surrounded by those "smarter" than you. Hence, social stress may come.
  3. In real life, the standard tested measures of intelligence may not make you successful in real life where you need to use street smarts to achieve a result(eg increase market share of XYZ item by 1% in 6 months)
  4. For Big 4 also, Sr Manager and above is a sales role, and in assessment procedures, you may know the law but the other party may know the assessment officer
  5. Rules of success change in the real world and you need to be prepared. 
Credits: Large part of this post inspired by video of Anurag Singhal(https://www.youtube.com/watch?v=_1J-_binWYA)

Friday, October 27, 2017

ICSI Vision 2022-my views

The usual practice of newly elected heads of professional bodies(ICAI, ICSI, ICWAI) is to host conventions in their home cities, go globe trotting, and try to leave their imprint on the institute in the short 1 yr tenure. However, the dynamic ICSI President Dr Shyam Lal Agarwal is an exception. He has updated the Vision 2020 document to Vision 2022. Here are my views on the salient points(do read it here https://www.icsi.edu/webmodules/Vision_New_ICSI_2022.pdf

Overall a motivational read.

The Good

  • Disruption Realization: Art of reading, interpreting and understanding the law is more important than studying a large number of laws;..It is expected that the routine and procedural matters will be automated with the support of technology. Therefore, focus should be on value- added areas, like advisory, advocacy and strategic management. 
  • Asset Light: More and more emphasis should be given to create IT and digital infrastructure instead of physical infrastructure;
  • Governance starts with Self: Performance evaluation of the Council and its Committees, President, Vice-President, Council Members and Secretary may be introduced;
  • Speakers for national convention:Speakers should be invited keeping in view their expertise and exposure to the subject(and not on their PR value :D)
  • Research Repository: Maintaining a data base of various research papers carried out including published and unpublished papers, project reports submitted by members and students during the course of their training. Secrecy of info would be a challenge but manageable via black out of information
  • Specially designed Refresher Courses may be organized for members to be undertaken every five years for updating their knowledge and skills.

Business as Usual/Expected

  • India focus: Research on origin of Corporate Governance from Indian ethos should be carried out, documented and given wide publicity
  • SMAC:There should be a standard format for obtaining feedback on every professional development programme. The possibility of obtaining instant feedback through Mobile App may be explored;
  • SME: The members should be encouraged to seek employment / practice opportunities in the SMEs and small cities also

The Bad

  • undertaking sponsored research: How does this ensure autonomy? 
  • The concept of ‘Senior Company Secretary’ may be introduced, on the lines of ‘Senior Advocate’ in the legal profession, to provide distinct status and recognition to the experienced members. The Senior Advocate concept is not a desirable one for clients and is an indirect advertisement. Is this really necessary for a self regulatory body?

Sunday, October 22, 2017

Interesting stock market tactics used by companies

The stock markets are a place where Caveat Emptor(Buyer Beware) applies to its fullest. If you come across any of the below tactics, do 
  1. Issue QIP/Decisions just before a major negative event
    1. Money Matters-QIP at peak price just before MD was arrested
    2. Yes Bank-Issue QIP in Q4'17 before disclosing potential provisioning lapse
    3. Axis Bank-MD/CEO reappointment and performance bonus, just before NPA issues
  2. Declare results at a very early date after quarterly closing, to attract attention
    1. Sanwariya Consumer-Declared Jul17-Sep17 results on Oct 3rd, 2017(Remember Oct 1/2 were holidays) albeit unaudited
    2. Kitex-Releasing its audited results for Apr15-Mar16 on Apr 4, 2016!! Surpassed even Infosys. For FY167 however, they released with a month's lag
  3. Delay results/ declare results quite late with some bad news/Extend Reporting year
    1. Axis Bank-When it declared results for Q2'18 showing NPA slippage
    2. Shree Renuka Sugars-Extended financial year to 15months without a clear rationale
    3. Commission research report and upload on website
    1. CRISIL research(most companies) albeit neutral
  4. AGMs
    1.  at remote locations to minimize attendance-Inox Wind?
    2.  at quarter end/latest possible dates to minimize attendance-Many Cos
  5. Glossy annual reports
    1.  by firms like TRISYS to simplify business. metrics
    2. Focus on extraneous stuff-Temptation Food seductive photos of women.
  6. Suddenly start holding conferences presentations, analyst calls etc, but stop it when bad times happen. For example
    1. Sanwariya Consumer sudden spurt of presentations, reports
    2. Educomp ceasing to update its website after bankruptcy
  7. Announce plans with limited execution 
    1. DCB Bank retail expansion-subsequently rolled back due to resistance and ESOPs repriced to adjust for this benefits
    2. Crompton Greaves-Plans to turnaround/hiveoff units but not done

Coattails customer-examples of listed companies with dependence on one customer

Customer concentration is good and bad. Good because it indicates there are some loyal users of your product, bad because they have pricing power. Some examples below:

  1. Nile Limited (manufacturer of lead acid batteries) supplies 80% of its output to Amara Raja(another unrelated listed player). This exposes it to risks of revenue loss
  2. Vakrangee (a last mile B2C/B2G/G2B kiosk) has run up due to its tieup with the global 800 pound ecommerce gorilla Amazon, where the tieup allows Amazon orders to be placed via(and delivered to) the Vakaranjee Kendra. Not yet key person risk, but still significant. 
  3. Future Consumer products(FMCG asset light play of Kishore Biyani) gets ~70% of its revenues via the Future Retail and other related(not owned by it but by promoters) entities. This makes it akin to contract manufacturer
  4. Solar Explosives gets ~30% of its revenues from Coal India. Of course, to put this in perspective, 90% of the explosives use in India is industrial, and coal mining is a great chank. So this is understandable. 
  5. Manpasand Beverages(listed beverages player) gets 25% of its revenue from Indian Railways via the mango/apple flavour drinks sold on the trains/railway stations
  6. This list excludes franchises/exclusive players which have different risks such as 
    1. Page India(For Jockey)
    2. Jubilant Foods(for Dominas)
    3. Westlife(for McD)
    4. Varun Beverages(for Pepsi)
In all these companies, there is always a disruption risk apparent and/or risk of dispute etc. Hence, one should take care while seeing the financials-whether this is a contract manufacturer or branded player in reality-one indicator is margin volatility etc. Also, IND-AS has some guidance on take or pay contracts, so thats useful too

Sunday, October 1, 2017

Why should you go for a tax opinion/ruling?

Recently, I have had the experience of reviewing direct/indirect tax rulings for my employer. While the process is useful, I was left wondering that with so many caveats/disclaimers, why should we go to the whole pain of getting one? After all, for other subjects such as valuation, accounting etc, opinions are rarely sought. Why make an exception for tax and law? After some search, I found out the following reasons. The primary reason in the Indian context is statutory reasons(financial statement or tax penalty protection).

  1. Comfort opinion/Vet the transaction: Provides the taxpayer with comfort that a transaction the taxpayer is considering entering into will have the expected tax consequences. This involves steps like making sure all issues are properly thought out and documented, confronting any shortcuts or sloppy thinking, and due diligence via fact collection. From an internal standpoint, it is also useful as to assure proper implementation and continued compliance, and memorializes analysis for future reference
  2. Contractual condition opinion:  Other parties seek assurance/closing condition as receipt of the opinion that the transaction will have the tax consequences specified in the contract.
  3. Disclosure opinion: This opinion gives comfort regarding a person’s duty to disclose.
  4. Penalty protection opinion: This opinion is intended to permit clients to rely on to avoid possible civil penalties.Can deter IRS  from challenging or asserting penalties.
  5. Financial Statement Recognition: This opinion provides advice regarding the tax treatment of items for purposes of financial statements.  The “more likely than not” standard is required in order to recognize, for financial statement purposes, a tax benefit with respect to which there is some legal or factual uncertainty. This would be acceptable to the financial statement auditor. 
  6. Reporting opinion:  This opinion provides advice regarding the proper tax reporting of a completed transaction.


Sunday, September 24, 2017

Business Law-some finer points-Part 2

  1. Reasons to apply for patents outside India would be due to 
    1. software patents issue in India, and friendly jurisdictions such as USA, Australia, Japan; and if technical problem related EU too
    2. Pre grant opposition very easy in India(no need to be interested party also)
    3. Ease of enforcement abroad easier, and thus valuation better
  2. Non economic considerations(beyond market potential) is to increase startup valuation via patent applications :D and quantify sweat equity brought in by promoters. Further, cross border patents allow for potential total addressable markets(TAM) in valuations.
  3. Ways to speed up arbitration
    1. Allow arbitrator the power to impose fines for delaying tactics(such as non filing reply)
    2. Time limit for counter claims/setoff, to include in statement of defence, ensures endless pleading won't  happen. 
    3. CPC provision for max 3 adjournments and reasons recorded in writing/show cause
  4. Dispute resolution is a skill not just a subject. Further, clients classified as as follows
    1. Startups just hate lawyers who complicate thing
    2. Seek same advice from multiple lawyers/too many cooks
    3. those who come after problem arises and facts usually compex/verbal/not in place.
    4. Those who seek advice from the very inception. 
  5. Exclusive jurisdiction clause helpful to allow anti-suit injunction later

Business Law-some finer points-Part 1

Below points basis general reading and the NUJS DEABL Course material/videos. Comments welcome
  1. Deadlock situations more common in JVs than in financial/strategic investments
  2. Strategic investor values business on a more long term basis than financial investor, and often enters at different life-cycle(angle-VC-PE-Distressed/Strategic) and pays a premium as they enter into established business
  3. For PIPE transaction, valuations usually predetermined due to pricing rules/formula, and better for foreign investors as helps them avoid issues in exchange purchase. Here however, no exit clause as listed shares already liquidity there. So enter in negotiated deals and exit on exchange, and less scope of reps/warranties as there is already greater scrutiny/compliance and lot more information enabling buyers to do their own diligence. Due diligence is an issue due to insider trading regulations and risk of triggering change of control norms(hence limited affirmative rights, and conservative view on negative rights). Also, mostly equity and no convertibles/warrants. 
  4. Picking up a block on the market is difficult since prices increase exponentially, hence it is better to purchase from the company. 
  5. However, new trend of complete buyouts of startups but this is not strategic investment per se.
  6. Commercial/Business law is complex, needs quick turnarounds(eg change agreements across multiple documents) and levels of understanding not available on Google. Long term solution is to follow a checklist approach and be through, till you develop your own framework. 
  7. NDA(Non disclosure agreement) may have non compete and non solicit provisions. So READ the agreement w/o presuming it is only NDA. Also, disclosing party usually wants broad scope , while receiving party wants narrow scope, and differ on wish to 'Mark' Documents as confidential which is usually difficult. Also, right/requirement to return/retain copies depends on form(physical/electronic) and also on need for referrals/retention rules. If really needed, then virtual cloud/data room is must with locked/monitored spreadsheets.
  8. Due diligence forms the bread and butter for transactional lawyers especially those representing the target. It is not a judgemental exercise it just brings the relevant('Material') facts to the table to draft representations and warranties, and proceed with txn in best tenable manner avoiding defects/deal killers and bad deals. Be prepared for the worst-due diligence helps you know the worst, and also confirm the business is what is appears to be.
  9. Business due diligence involves business experts(like AT Kearney/BCG), inventory physical checks, people due diligence especially key folks and change of control provisions in their contracts like gratuity, and legal/tax document review to examine present/threatened/potential risks, IPR ownership reviews(does company OWN the IPR part of deal,corporate History/Capitalization review-check for ROFR/lockups/agreements binding the shareholding, financial indebtedness review for mortgage/prior consent
  10. There are multiple procedural ways to frustrate the process(eg no consent for valuer, delay to submit bids) for mechanisms like Russian roulette, so in practice not done. However, this is having both parties submit sealed bids at which they will buy/sell stakes. Even if loan documentation/JV documentation for funding is clear, establishing default is very difficult in terms of choice of instrument, timing, valuation level etc. So to avoid bad blood, even if clause exists to buyout at discount due to failure to fund, done at negotiated deals typically. 
  11. Exit waterfall is usually IPO, strategic sale, put option to company/promoters. However, IPO cannot ever be forced upon on company and there are timing, economic and commercial factors to decide to do it, as also third party cooperation. Strategic sale needs promoter to dilute and share control, as also need for cooperation/continue at times. Drag Along rights are usually value destructive(PE/Fund need to exit at lifecycle end and may not care about IRR, also diversified, but promoter may believe value exists and would not want to take that decision) and hard to negotiate, contractually tough and unless escrow, impossible to enforce. Usually, company not doing well  hence no IPO/drag along works, so unlikely it will be able to buyback the stake
  12. The investor relies on the founder to manage the business and grow his money. Hence, clauses exist on founders such as full time, no competing business, tag along, anti dilution(unless ability to subscribe at same valuation)
  13. Usually, reserved matters consent given by nominee of investor, and meeting to vote needs the mandatory quorum of that representative. 
  14. M&A transactions usually have term sheet, due diligence, definitive agreements, signing and closing interposed by standstills/actions(operational surveillance in the meanwhile). 
  15. Inhouse counsels usually have a kickoff internal meeting, understand business thresholds and imperatives, and then take a look at the contract wrt allocation of risks, liabilities and responsibilities if it meets. This would then result in discussion points(key issues) which when resolved conceptually in meeting/call(eg payment terms, title, O&M) could then go to the wording. To cut the information asymmetry, identifying the deal team including correct persons who can take a CALL on that subject will be must. Also, need to balance timeliness(deal was needed yesterday!), cost and quality. 
  16. Usually, large groups have standard, non negotiable contracts for ordinary course of business, to manage legal risk, with some provisions negotiable. This makes in-house job easier. These depend on your bargaining power, nature and scope of contract and the perspective/importance of items(eg 1 issue with tender)
  17. Also, inhouse counsel not bound by billable hours need to rack up, and often wants to cut to the chase and focus on vital issues

NUJS-Diploma-Course-in-Entrepreneurship-Administration-An unbiased review

As a student of the Sep 2016 batch of this online diploma course( a JV between NUJS Kolkata and a legal startup iPleaders), I thought to give a review of this course, now that I am at the end of the course.

-Plenty of videos tightly edited and focused on relevant topics from industry professionals
-Business focused and practical points-for instance the structuring checklist is probably well worth the entire course fee
-Phased course outline
-Novel concept and inclusive education.
-Recently introduced apps

Areas of improvement
-Access to the course is NOT lifetime but just 1 year. This can be extended if you are part of their 'Club'/'Whatsapp' group but this appears more fit for college students. They should extend it to lifetime access for students who do well, or on payment of course fee
-Plenty of college students who have a different focus and 'Sir/Maam' culture, this is one key reason why I left the official whatsapp group
-Quizzes are open book and therefore extremely easy-you can answer 15qn in 15qn by a quick Google if you have a reasonable understanding
-the monthly writing assignment
-Obsessive focus on IPR to the extent of watermarking pages, and very little downloadable attachment. This is ok if access lifetime but otherwise quite constructive. Also, charges for printed material is way more than cost.
-Monthly writing assignments focus on minimum word count rather than writing quality.

In brief, I'd say the course is worth it IF you are able to spare 2 hrs/week-thats all it would take on an average. If you wish to take benefit of all webinars etc then double that time.

Tuesday, September 19, 2017

How NPCI is silently transforming Indian payments ecosystem

Quick. Name a major Digital/Skill India/Make in India success story of the public sector, other than IRCTC. Hint, this is related to banking. Given up guessing? Its NPCI.

Last week, Google made the news again in India when it introduced a payment system. However, unlike other players, it chose a different route. Tez is neither a mobile wallet nor a modified version of Android Pay. It is built on UPI. Ever since demonetization(aka withdrawal of specified bank notes), the acronyms UPI, BHIM, Rupay, Aadhar Pay have all entered the general lexicon. What is common between these? All these are  brands/products of the National Payments Corporation of India (NPCI), an umbrella organisation for operating retail payments and settlement systems in India. It is the payments utility of the Indian financial system, which aims to innovate retail payments for achieving greater efficiency in operations and widening the reach of payment systems. L ike India leapfrogged the landline to mobiles, and cards to wallets, payments systems are similarly seeing digital first viz online players becoming mainstream and digital natives. For instance, across smartphones, fully secure, encrypted, virtual payment addresses, etc. 

 It is a Section 25 company (Like GSTN) which has broad-based shareholding across all sectors. The payments system globally has been an oligopoly between Visa, Mastercard and Amex. The developing world however has resisted this, with China locking out these majors and leapfrogging to Alipay, while India has not explicitly resisted them, but imposed limits/caps on their fees. So for these global players, India remains the last virgin frontier.

However, this was not reflected in the pricing which was high, viz anything between `5 to `8 per transaction as switching fee, which allowed NPCI to disrupt the market by charging around 5% of the other, and still earning a profit.

NPCI was created along with UIDAI, and has leveraged the identity/digital revolution to establish itself across debit, credit, contactless and prepaid, with flagship products of National Financial Switch, Cheque Truncation Systemand Aadhaar Enabled Payment System. While these target the bigger value transactions, smaller value transactions are enabled via Bharat Bill Pay, National Common Mobility Card and National Electronic Toll Collection. And of course, the USSD enabled BHIM.

Lets understand these acronyms a bit better
-UPI: 24*7 instant money transfer, with value added facilities of customer ID like email address, Scan and Pay/Collect and Receive/QR Code/free of charge notifications and multi lingual, the last part being vital for financial inclusion. The ‘instant’ credit allows it to substitute ATM, however customer security(via 2FA and PIN)/dispute handling/fraud treatment will be critical to its replacing credit cards

BHIM- Launched in December 2016, the BHIM app is essentially a rebranded version of UPI and Unstructured Supplementary Service Data (USSD). Available on the Android app store, the app allows users to send money, receive from friends, family and customers through a mobile number or payment address. For that, one has to register his bank account with BHIM, and set a UPI PIN for the bank account.

-One may wonder why UPI when IMPS already offers instant credit. However, the features of single APP(across all banks) and P2P give it an edge.

-NPCI being a bank owned utility reflects in their ability to retrieve account details in a masked manner, which is passed to BHIM via encryption to the extent required. However, it is not neutral in the sense that wallets are not linked to UPI so far-it is unlikely they would want it, as it’s a competing tool anyways.

-Rupay-This is India’s answer to VISA/MasterCard/Amex. It has 380+ MnRupay cards issued by 800+ participating banks, driven by Kisan Cards and PSU banks mainly. However, private sector is also issuing these cards(eg PAYTM virtual Rupay card), due to the advantages of no need for hedging Forex risks, low fees(switching fees nearly 1/3 of global peers) etc.  Also, for the less tech savvy banking segment such as RRB/Cooperatives, Rupay  has allowed them to enable their customers with good technology. Interestingly, the global tie ups for cards are not with the biggies, it is with Discover Financial Services and Japan Credit Bureau.
For more information, the below links are useful:
Of course, such initiatives are not without their detractors. The government announced an outlay of nearly 495crores to encourage BHIM transactions. The private wallet players felt this was not neutral. Ironically, it’s the private sectors who have lagged behind neutrality, for instance, the ability to read all 5 payment constitutes(Mastercard, Visa, American Express, RuPay ,UPI) in one QR code was only within BHIM. Other UPI apps had not followed suit. So now the government mandated it.

Tuesday, September 12, 2017

Annual Reports 2016-17-Part I

Ecoplast Limited, Valsad(Gujarat) based manufacturer of plastic films mentions that it has increased capacity of value added products from 1000MT to 2400MT. Presumably, this change effective Sep-16 will drive mix improvement and eventually sales/profit growth. For a company with total EV of ~45crs and capacity ~10,000MT, this 14% mix improvement should be substantial.

Kaveri Seeds saw its EPS(Earnings per share) more than halve during the period, but most of this change was due to an exceptional item viz lumpsum recording of disputed seed royalties of earlier years. The company however explained it in a single line viz An overall deficit monsoon in the Kharif season 2016. The exceptional item disclosed as  As per the agreement with M/s. Mahyco Monsanto Biotech India Limited, during the financial year the company has made a provision of Rs.5923.80 Lakhs for payment of royalty against the short provided royalty in the previous years.

Zicom saw disruption of its import and distribute business model due to the Budget 2016 provisions, wherein CCTV/security components were allowed at NIL customs duty with corresponding excise benefits, which helped Make in India players. They had to take an inventory writeoff, and with the Middle East slowdown, also had to writeoff receivables from Qatar, UAE etc, with order slowdown. They therefore delayed bank repayments to the tune of 94Crores, which almost entirely got converted into equity via SDR at valuation of Rs 43/share. However, they still took additional funding via working capital borrowings(!!) mostly from PSUs who ideally should have stopped lending

UFO Moviez is exploring interest adjacent business models such as UFO Framez is a cloud-based advertising technology platform..offers hyper local advertising clients a seamless avenue to advertise on UFO’s in cinema advertising platform, co branding of local greenfield cinemas under the brand 'NOVA'(maybe learning from OYO), as also Cinema on Wheels/Club Cinema. These have implications for growth of Just Dial, multiplex stocks like Inox/PVR and media in general

Sunday, September 10, 2017

Delta Corp-2016-17(2017) Annual Report overview

Motilal Oswal has been bullish on Delta Corp (read the below reports  http://www.motilaloswalgroup.com/AnalystVideo/Pdf/227183999DELTA-20170321-MOSL-IC-PG042.pdf and also the most recent one (http://www.dsij.in/productattachment/BrokerRecommendation/DeltaCorp_BUY_Motilal_31.08.17.pdf)

Having traded in and out of the stock between 145-180 levels, I thought to revisit the annual report to analyze how the business outlook has changed. The 256 page annual report (http://www.deltacorp.in/pdf/annual-report-2016-2017.pdf)

1)Currently, only 12 Indian states offer lottery, six states allow horse racing, and two states (Sikkim and Goa) and one union territory (Daman) allow casino-based gaming. ..In India, while on-shore casinos are permitted in Goa, Daman and Sikkim, off-shore casinos are permitted only in Goa, and online casinos in Sikkim and Nagaland...Regulatory moat since onshore casinos in Daman/Sikkim can only be set up in 5 star hotels-Delta owns the only 5* hotel in Daman and this business has a long gestation period. Also, Goa presumably would not issue any more licenses. These are however high regulatory risks
2)Management guidance of no further growth capex-However Adda52 M&A deal does not sync
3)Two other listed entities to piggyback-Arrow Textiles and Delta Magnets-latter is a self professed turnaround story
4) Equitable managerial remuneration increase-The average percentage increase made in the salaries of total employees other than the Key Managerial Personnel for Financial Year 2017 is around 11% to 14%, while the average percentage increase in the remuneration of the Key Managerial Personnel is NIL.
5)Conservative revenue recognition: As per the company's policy, gaming revenue is recorded based on net gain/loss at the end of each day. The revenue recognised includes gaming related taxes and duties which the Company pays as a principal but excludes amount collected on behalf of third parties such as entry tax.
6)Pedigree in promoters, auditors and board: Promoters are the Mody family(noted lawyer Zia Mody's husband). Audit committee has renowned audit partner Chetan Desai, and auditors are Grant Thornton.

Points to see further
1) In case of one of the subsidiary company there is a default in payment of Interest to FCD-A, FCD-A1 holders since April 2010.
2) Nearly all the promoter shareholding(40%) held in the form of trusts potentially to ensure smooth inheritance for the owner's daughters. Is this good(ensure continuity) or bad?
3) Normalize shareholders equity numbers-As per the IND-As reconciliation, 318.6 million Rs is the increase in retained earnings/equity as at 31-03-2016(Date of IND-AS). This is due to ~770 M INR goodwill offset mainly  by investment markdown ~383 MINR.
4) Sikkim not material from financial perspective-Key revenue driver seems gaming positions which is 1500 at present. Sikkim contributes to ~12% of this. While Daman approval awaited for ~1200 positions which will rampup capacity by 80%, this is therefore key number to watch.

Risks disclosed in QIP Document
1) Relocation of Goa casino ships out of river Mandovi: The company claims on-shore casinos are more profitable however this risk factor Pursuant to the letters dated April 7, 2017 of the Government of Goa each issued to our Company, HCEPL, and DPCCPL, we have been asked to submit a fresh undertaking in favour of the Government of Goa to relocate the operations of our Offshore Casinos out of the river Mandovi by June 30, 2017
2) Limited Pricing Power: While they can drive footfalls, they cannot really "hike prices" or show pricing power as the inherent nature of the business is house %.  While we may modify our entry fees and introduce new games or modify existing ones, the ability of our Company to charge our customers for its services offered is limited
3) Natural Disasters-However company claims to have insurance against earthquakes, floods etc

Tuesday, September 5, 2017

India Services Sector-some takeways from Deloitte's report

Recently, I stumbled across the below report India Services Sector | A Multi-trillion Dollar Opportunity for Global Symbiotic Growth. While the report proceeds along predictable lines of asking industry status, subsidies and more infrastructure with less taxes(:D), this was quite useful to provide base rate data and some context for India shining. Some views basis that report(Italics is quotes from report, with my comments in normal text with listed company names in bold. Please note, this DOES NOT CONSTITUTE INVESTMENT ADVICE

 Conversion of 75% of the existing single screens into two screen multiplexes can unlock revenues of INR 40-50 billion for the film industry through higher average ticket price, occupancy rate and advertising and food and beverage revenues This is nearly 30% of the present realization. Could be positive for UFO Moviez. 

 In India, fantasy sports is called ‘game of skill’ which is outside the purview of gambling. With rising number of sports enthusiasts, internet penetration and usage of smartphones, India would be an obvious destination and business choice for fantasy sports operators. Nagaland is the only state in India that has issued online gaming licenses for skill games including fantasy sports Will Delta Corp be able to capitalize on this or be disrupted? Already, virtual gaming is big abroad.

The Ministry of Urban Development has come out with a Smart National Common Mobility Card (NCMC) model to enable seamless travel by metros and other transport systems across the country, as well as retail purchases.  If this disrupts wallets, impact on PAYTM

 The government has accorded CGD network the status of public utility. This will allow the CGD system to increase its reach and make it comparatively easier to secure government licences and clearances Increasing competitive threat to Adani Gas Indraprastha Gas, Mahanagar Gas

• The government has in-principle approved the decks for use of LNG as an auto fuel. The draft norms for LNG application in road vehicles will be ready in FY2018 Demand to explode for listed gas players? 

Facility management has become a tool that allows businesses to integrate their noncore activities, focusing attention on core activities...Government regulations including Private Security Agencies (Regulation) Act 2005 and Foreign Direct Investment Policy and Goods and Services Tax is building the foundation for a key segment of this (Facility management) sector. Positive for Teamlease

 As companies increase their workplace wellness expenditures, it generates many related business opportunities, including a proliferating number of third-party providers that supply services, products, and platforms (e.g., screening assessments, diagnostic tests, incentive programs, wearable devices, counselling services, etc.) Positive for listed diagnostics and health insurers

Sunday, August 6, 2017

GST Implementation-Myth vs Reality

Any major reform is painful, and this is true with GST also. While the Central Government(and to a lesser extent, the State Government) got plaudits for a landmark transition, the business sector was impacted and this continues. From a change management perspective, this Government probably deserves a 3 or lower, on a 1-5 scale. This is because of delayed finalization in rules, last minute rates announcement, and very limited test runs/public APIs. While this allowed consultants to get a windfall business, this decreased corporate ease of doing business.

What needs improvement:

  1. Unregistered vendors reverse charge: The government probably imposed this rule intentionally to force small vendors to register anyways to avoid pressure/blacklisting from their registered suppliers. However, awareness campaign has been deficit (for example, 20lakhs limit not applicable to interstate suppliers), thus leaving the education job to a short staffed companies
  2. Lack of Official Tariff :The government has given PDFs at 4 level code while leaving a 18% residuary clause, thus throwing open the GST rate classification of several items. 
  3. No harmonization in HSN/SAC: Depending on turnover, vendors have option to cite 0/2/4/8 digits of HSN code on the invoice. This poses a challenge for ERP system validation rules, as also reporting of procurement. 
  4. Lax merger framework: In an invoice level matching framework, there is no changeover period applicable for merger/amalgamation. This is posing challenges
  5. Delay in Registration allotment: The registration window closed on 31 Mar 2017 and reopened on 1 Jun 2017. For those who delayed new registration(NOT migration) pending the release of final rules, they had only a week to take fresh registration. 
  6. Automated matching of PAN not allowing for exceptions: Imagine trying to update your GSTIN name(Core field) while PAN is still under old name. This would throw up an exception not allowing you to proceed, and resolve issues offline

The good points:
  1. Twitter Page for queries: One can directly tweet the government their queries on GST, and await responses
  2. Extension of timelines: The return timelines have been extended due to lack of readiness of Government IT infrastructure. 
  3. ICAI education: The Institute of Chartered Accountants of India has released lots of high quality material on its website free of cost. This is really a great public service. 

From a systems perspective, several challenges emerge due to the large number of exceptions. For example, the following rules breakdown 
  1. Place of Supply=Place of Customer: It is possible that for certain vendors
  2. Vendor Tax Status change affecting the past invoices: If the vendor GST registration is pending allotment
  3. One GST Rate for One HSN: There are options in services for different tax rates basis non GST parameters(eg hotel room rental decides whether 12% or 18%, similarly existence of AC in the restaurant determined the 5%/12%18%, also whether vendor wishes to take ITC determines 5% or 12% for rentacab).
  4. ITC eligibility linked to HSN Code: It is not possible to define ITC eligibility at item level also by HSN code, so one needs to do tax configurations at a much more detailed level. For example, plastering services may be generally eligible for input credit, but not if used for immovable property construction. Therefore, one may either need to define a custom GST status, or else manually edit this. 

The first returns cycle due on 20th Aug 2017(simplified) and 25 Sep 2017(full) will prove the robustness of the IT infrastructure and whether it will crash like the income tax efiling site. 

Sunday, July 16, 2017

How will GST disrupt the CA/accounting, tax and audit profession

In India, the Chartered Accountancy(CA) professional is synonymous with accounting, audit and tax-this does not detract from other professionals of course like CS, CMA, LLBs and tax practitioners. The advent of India's largest indirect tax reform viz GST has the scope to transform the financial professionals industry tremendously. In the short term, there is a LOT of work due to impact analysis, transition, old cases closure etc for which professionals are minting money. But in the medium/long term, the picture is much less clear. Picture the scenario in 2years, where B2B invoices are uploaded online and matched(with government receiving its tax on time) for seamless credit. The income tax audit of these entities can be substantially triangulated with GSTIN data to reconcile revenue and COGS. Would audit become redundant? There are arguments for and against this:
First the positive arguments for simplification( and hence CA revenue declining)

  1. Excise, Service Tax, VAT audits all replaced by a single GST audit. 
  2. Invoice level matching
  3. Government audit interest declining once it receives its tax payment on time
  4. Statutory audit simplified from indirect tax/compliance
  5. Lesser possibility of people evading direct tax while reporting higher GST revenues
Arguments for complexity (and hence bright future for CAs)
  1. Multiple GST rates-hence classification confusions
  2. Residual 18% rate vs lowest 5% slab, chances for government to raise aggressive tax positions
  3. ~40% GDP still out of GST tax net-hence need to check omissions
  4. Reverse Charge for purchases from unregistered vendors-substantial complexity
  5. Non GST expenses like salaries, utilities, taxes-hence cannot prepare full P&L
  6. Multiple GST registrations for Pan India entity, need for record keeping/reconciliations
  7. B2C Invoices uploaded in summary NOT at invoice level-so need for audit here
There will of course be 'Non professional' work such as mismatch reconciliations, vendor review etc but this will be outsourced I suppose. 

Thursday, July 6, 2017

How Mutual fund for a day is helping drive Mission 10cr folios

In the last 10 years, AUM of Indian MFs has grown 6x from Rs 2.6Tn to Rs 19.2Tn[1]. However, the number of folios has remained nearly flat in this period, from 48M to 56M, covering hardly 4%-5% of Indians. Why don't more people invest in equities? The answer is often time, expertise, discipline and budgeting.  Personal finance is an area where we tend to overrate our expertise instead of leaving it to professionals. Mutual funds allow the common man to invest on the same terms as HNIs or corporates, via pooled funds(or mutual funds). What is a mutual fund? It is simply a pooled fund following a set strategy, with entry/exit in discrete units. Unlike alternate asset classes, MFs offer liquidity, transparent valuations and fees, and stringent regulation, that too without high AUM limits. Despite these advantages why do people not invest in mutual funds? Many of them are presently investing in alternate asset classes such as ‘life insurance’, property, gold and land. Despite tax advantage to mutual fund investment under 80C, the tax benefit/tax evasion ease of other asset classes has historically depressed folio growth. But with demonetization, ULIP regulation and digitization making it easy to open eKYC accounts, mutual funds can now compete on a level playing field.  In the last 1 year, CRISIL top ranked mutual funds[2] had yielded 19%-28% for large caps, 35%-43% for midcaps, and around 30%-40% for diversified funds. These numbers are attractive enough to build the investment case, even over long term fundshave given a sustained CAGR of 25% over 20years. Imagine earning such returns while continuing to earn from your regular profession. Often, the sustained income from mutual funds allows financial independence at an early age (debt free home etc). 
But you may ask-how can one keep investing for decades despite personal financial commitments? The answer is simple-pay yourself first. Set aside a fixed amount each month, to invest in mutual funds. Even better, avoid market timing by automating SIPs and reduce the chances of slippage. Maybe that day can be in the first week-just after paying monthly commitments, but before impulse purchases lure you with their siren calls. That is why for those of us not yet invested in MFs, or those not using SIP mode, 7thof each month(or ‘Mutual Fund Day’)(MFD) is an opportunity to begin for those who either haven’t started investing in mutual funds or aren’t using the SIP mode. Take the chance to meet your financial advisor or register online  to start a SIP. For those fortunate souls already doing this, consider devoting some time each month or during the next time you discuss with friends, to discuss wealth building measures with them. This 'help a friend' eventually helps them long term and will truly be ‘Fund for a friend’(FFAF) cause aka ‘Each one teach one’. The above 2 behaviour triggers has been piloted by Reliance Mutual fund, which has a financial calculator in the prosperity hub URL, as well as a series of posts on the concept of MFD. Those interested can have a look below.
The MFD concept involves a year long sustained push through coverage on Network 18 channels, popular radio outlets, and moneycontrol. This initiative has begun in Mar-17, and as yet there is no publicly available data on how this specific initiative has worked in terms of new folios, new SIPs or AUM increase[. However, habit formation takes time and probably 6-8 months down the line would be a good time to review. As those who are long term investors in markets, entry of new money only improves the market valuations, and also the overall ecosystem. So this is a positive sign which we all should encourage

[1] https://www.amfiindia.com/indian-mutual
[2] http://www.moneycontrol.com/mutual-funds/top-rated-funds

Monday, May 22, 2017

Investment learnings in the week ended 21 May 2017

Starting this week, I have decided to publicly document my investment learning from what I read. Wherever possible, I include links to it.

  1. Financials/Disclosures: The debacle of a leading listed private commercial bank YES Bank revealing more NPAs than expected , reinforced the fact that bank financials are a leap of faith, and that management integrity/readiness to disclose often correctly accounts for valuation multiples (https://www.bloombergquint.com/business/2017/05/19/should-yes-bank-have-told-investors-about-the-npa-divergence-before-its-qip). Having entered into the bank at levels above its current one, the lesson would be to wait for all mandatory disclosures before entering, like how I do not time quarterly results, extend this to annual results for banks
  2. Auto Industry Perception: The autonomous car revolution would likely not affect the car seats market(people will still sit in cars), which is utility like in the safety and cost aspects(small % of car cost), and if it becomes a car differentiation tool, then as mentioned by Michael Blitzer of Kingston Capital management, companies like Adient (ADNT), the largest manufacturer recently spunoff from Johnson Controls, could benefit. Another example is car tires/tyres, companies like Michelin have technological/regulatory moat in developed markets, and since this is an aftermarket replacement driven, it is more a consumable than consumer durables stock.
  3.  Matrimony.Com: Litigation can be expensive. The company spent ~US$8M to fight a litigation over a term sheet to invest in it, and finally ended up agreeing to pay US$8M to the affected party! While the promoter agreed to refund US$2M of the litigation cost to the company, this is an example of wasteful litigation
  4. QIPs at a discount: Delta Corp and Premier Explosives closed their QIPs at a discount of 5% to benchmark price. Is the bull market finally cracking for these companies? Classic reason why mere QIP announcement is NOT assurance of short term gains. When Delta was at ~170, QIP base price was 163, and finally it was priced at 155. 
  5. Regulatory Moat might erode: Gujarat Gas peak supply in Morbi industrial cluster was 4Mcsm but when the use of coal gasifiers was allowed(ban lifted), industries shifted to 3mth gas supply contract with GG but shift to dirty fuels basis economics. This is a classic case of ephemeral moat and may happen with solar(as in Germany)
  6. Somany Ceramics has ~60% purchases through its associate companies(majority owned by promoters) which may account for lower margins. This analysis by Motilal Oswal in its annual report analysis of FY16 underlines need to read annual reports.

Wednesday, April 26, 2017

How to meet long term fixed income goals

For most people, investing is about identifying undervalued investments(stocks, real estate etc) and entering. The areas of position sizing, entry price, portfolio allocation and exit criteria is hardly considered. Additionally,dynamic portfolio allocation, wealth preservation and tax efficient withdrawal are essential parts of a wealth management strategy but due to behavioural finance quirks, are not optimized. Hence, one has the challenge of purchasing different products for different needs, and these products often have different providers, time horizons, design frameworks and regulators, thus leading to cognitive overload by the poor individual investor who has to juggle term plans, FDs, liquid funds, pension funds, equities and insurance. What if one could maximize post tax investment returns, without sacrificing portfolio rebalancing flexibility and liquidity needs?
Let’s consider the case of Mr Akash, aged 30 years,earning Rs 50,00,000 net salary per year, who is in the maximum tax bracket of 30%. He wishes to retire early at the age of 50, but would like to fund some commitments such as children's education, marriages etc. Considering his overall financial position and goals, his financial planner suggests an allocation of 2% of annual income, to fixed income. Now, fixed deposits would lock in the rate for maximum 5-7 years, but exposes him to reinvestment risks. Unlike institutional investors, he cannot purchase a 30 year GSec bond which would give him that locked in return. And even if he directly purchased it, his post tax returns would fall below 4%. His goal is to lock in long term interest rates, but also ensure the investment continues even in the event of death, or inability to pay the annual contributions due to accidental disability, critical illness etc.Also, having seen how some friend's dependents had not been able to effectively utilize the lump-sum maturity payouts, he wishes to stagger the maturity payouts so that in the unfortunate event of death, his family will get the money in instalments and hopefully spend the money prudently. And if he is still alive then as expected, his other investments permit him the luxury of staggering these proceeds. 
Any bank product would not give him protection against inability to pay premiums, nor does it give him any 'upside' compared to merely purchasing a long term bond fund. Hence,desiring guaranteed returns over a long horizon with tax benefits, Mr Akash decides to check the Edelweiss Tokio Life GCAP plan on the advise of his planner. 
The following table shows the IRR obtained basis quote for 30 year male who pays Rs 1lakh/ year for a 10 year premium paying term, and who gets the maturity benefit at the end of year 20.The quotation is sourced from https://www.edelweisstokio.in/product/planned-future/gcap as of 28 Mar 2017, and might be subject to change. 

Post Tax yield
Discount Factor
Cash Flows

Premium at start of year










Maturity benefit at end of year

Total NPV->


This includes insurance benefit(Since product offered by an insurance company)

Looking at the calculation, Akash's first reaction is that it is too good to be true. When a pension plan itself offers only 4%-5%(he knows this having recently taken one for his parent's EPF proceeds), how can the yield be so high? And that too post tax and with insurance? Is there some catch here? The planner tells him that in insurance, due to the persistency issue( people do not pay their premiums despite signing up for it), insurance companies give loyalty additions for just sticking to your contractual terms. Also, the high number of people who do not continue their policies, and the asset liability management of insurance companies, helps them manage the liquidity and solvency risks associated with this plan, and enables them to offer such a high guaranteed return. Since the plan  is eligible for 80C benefits on contribution, and 10(10D) benefits on maturity proceeds, Akash can be assured that his maturity proceeds are tax free(being a HNI he has long ago exhausted his 80C benefits with EPF etc), and that his wealth is enhanced equivalent to pre tax 5.68/70% or 8.061%per year, with the insurance sweetener. While he might pay some slight extra for the riders on premium waiver etc, he realizes that is well worth his piece of mind, and allowing him to solve his fixed income needs with one single product. 
. So with this, Akash decides to sign up for this. He also realizes that the financial product innovation is such that insurance companies can now often beat banks and mutual funds at their own game, and that one needs to be open to new ideas, instead of blindly abhorring all insurance companies due to their past sins.