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Thursday, August 25, 2016

Tricks companies play to avoid divulging too much to investors in the annual report

After reading around 30 annual reports of Indian listed companies this year, I have come to the conclusion that hardly 10% of the report is helpful. However, one needs to read the entire report to find out which footnote/portion is the most useful.

Typically, the reports follow the standard format of Directors Report(Managerial remuneration, director remuneration, board activity), Compliance Certificate, CSR Annexure and then audit report preceeding the audited financials. For companies with subsidiaries, consolidated financials are presented in addition to the standalone one. An annual report should ideally help one understand the story behind the numbers but this is usually not the case because

  1. Companies try and avoid segment reporting citing that they operate in 'one reportable segment'. This even when they claim geographical niches etc.  This helps them avoid divulging data on revenue, EBIT and capex at the segment level
  2. MD&A is merely commentary on up/down without insight
  3. There is no strategy outline, or even if there is, rarely any connection to long term trends
  4. Managerial Remuneration is not justified-rarely are performance KPIs and the scorecard publicly disclosed
  5. Even for the particulars of employee remuneration(those earning above 6MINR/year), companies usually exclude it from the report and send it to shareholders on request. This does  not help a casual reader get a feel for the company's HR/remuneration policy
  6. Where certain footnotes can be incriminating, companies change the alignment of the text from horizonal to vertical or vice versa. This is the case for segment reporting, related party transactions etc. 
All these can be overcome with diligence but it makes the process more painful. For those of you still interested in reading an annual report, following links may help


Two excellent resources for those interested in reading further
http://www.business-standard.com/article/markets/10-important-things-to-analyse-in-an-annual-report-114041600222_1.html
http://zerodha.com/varsity/chapter/read-annual-report-company/

Tuesday, August 23, 2016

GMR Infrastructure Annual Report analysis 2015-16

GMR Infrastructure is the poster child of what ails infrastructure in India, and why equity investors often get the short end of the stick despite a well intentioned management. With a family trust resolving succession issues, reputed board members and iconic projects some even being the subject of case studies such as Delhi Airport/Kishangadh highway etc, GMR Infrastructure does command valuation premiums even basis reported numbers, while it trades at a P/BV of 1.6(negative PE multiple). However, it has been mired in regulatory issues(delays in gas linkages to power plants, court ordered delays in hydel plants, Maldives airport nationalization, Kishangadh highway bid cancellation due to 'force majure', CAG audit report claiming undue benefit to DIAL operator and power tariff regulators delayed acceptance of force majure to permit fuel price hike pass through), Some of these have reflected in the audit report with the management refusing to write down asset balances which are clearly doubtful,

The below table indicates that if the audit adjustments were given effect to, the company's reported loss would increase by 74%-172%, while the reported networth will erode by 53%-96%. This shows the importance of perusing the audit report and not just going by reported numbers

Little wonder then, that whenever there are regulatory announcement, the stock price oscillates like crazy. And with a F&O lot size >10,000, it is quite risky for speculators without insider information

Now, GMR is by no means alone as these links indicate. However, it is one of the most detailed and complex cases, therefore prompting me to write a blog post.
http://www.capitalmarket.com/CmEdit/story11-43.asp?SNo=869509
http://www.business-standard.com/article/pti-stories/sebi-exchanges-ask-75-firms-to-restate-a-c-on-audit-red-flags-115070500259_1.html

Monday, August 22, 2016

India Gate manufacturer KRBL annual report-some comments

Recently, I read the annual report of KRBL. Following observations

  • Typical 'lala' company with sole propritary auditor albeit quite well paid at 18lakhs, underpaid professional KMP(CFO at 35lakhs and CS at 7 lakhs; cost auditor at 0.5lakh).
  • Spent just 10% of CSR budget(!)-prudent financial management :D
  • Brand focus with commensurate R&D investments
  • Exports are largely to middle east
  • However, the company substantiates its leadership posiiton claim with data from AC Nielen on overall, traditional and modern trade market shares. 
Some accounting red flags via unexplained expenses growth in key items not commensurate with sales/explained factors

Amounts in Lakhs
Note Pg Item FY 2016 FY 2015 Variance Comment
29 149 Internal Auditor's Fees 32.5 20.22 61% E&Y appointed from 1 Oct 2015, at probably double the remuneration of earlier auditor(Pg41)
29 149 Land, Warehouse & Godown Rent 948.75 278.72 240% Topline growth only 7%, so this is unusual
29 149 Insurance Charges 144.92 77.95 86% Topline growth only 7%, so this is unusual
29 149 Testing & Inspection Charges 107.4 28.02 283% Export Sales growth only 40%(overall 7%) so this is unusual
30.02 150 Auditor Remuneration(Taxation matters) 10.77 1.69 537% Unexplained auditors payments-red flag


In totality, since the CAGR in revenues, EBIT, PBT are in line, and there has been debt reduction, the company does not seem a risk. However, above is an example of analysis which one could do to identify accounting risk.

Those interested in the annual report can download from below:
http://krblrice.com/fy-2016/annual-report/2015-16%20Annual%20Report_KRBL%20Limited.pdf

Monday, August 8, 2016

India Cements Annual Report 2016-some takeaways

In line with the increase in cement prices and improved economic outlook in its key areas of Andhra Pradesh/Telangana, the India Cements stock has returned ~40% in a few months. While it seems a speculative short in light of its murky corporate governance, I thought it apt to look at the report and see if any redflags. Following is the key points I saw-emphasis via red ink etc is all mine.

  • Unexplained Increase in auditor remuneration by 25%-Statutory auditors are M/s.Brahmayya & Co. (Registration No.000511S) and M/s.P.S.Subramania Iyer & Co. The Board of Directors at its meeting held on 26th May, 2016, based on the recommendation of the Audit Committee approved the payment of remuneration to the Statutory Auditors of Rs.50,00,000/- (Rupees Fifty Lakhs only) EACH (enhanced from Rs.40 Lakhs each) for the year 2016-17, besides reimbursement of service tax and all travelling and out of pocket expenses. 
  • Unresolved CSK(Chennai Super Kings) dispute: The Company was informed that CSKCL had sought the permission of BCCI, for the distribution of its shares by India Cements Shareholders Trust to the non-promoter shareholders of India Cements and India Cements Ex-cricketers Trust, on September 30, 2015. The Company has also been informed that the approval of BCCI is awaited.
  • Price increase despite overall capacity bulge-possible cartels? As the company puts it "The Indian cement industry which has a capacity of over 370 million tons could achieve a capacity utilisation of around 70% only for the year under review. The South in particular was affected with a much lower capacity utilisation. While the industry had to cope with inflationary pressures, including additional pay-outs on account of wage board settlements for the employees, the impact of the same was considerably reduced due to the sharp fall in oil prices and thereby reduction in the price of fuel. With fairly consistent selling price of cement coupled with improved operating parameters, the Industry could make reasonable bottom line despite lower capacity utilisation; the silver lining being the recovery in cement demand towards the end of the fiscal. ..The overall net plant realisation for the year was Rs.3793 per ton against Rs.3587 per ton in the previous year reflecting an increase of 6%"
  • Competition Act penalty still pending finality: The order passed by the Competition Commission of India (CCI) on 20th June 2012 against certain cement manufacturers including the Company alleging contravention of the provisions of The Competition Act, 2002 and imposing a penalty of Rs.187.48 Crores on the Company among others, was appealed against and the Competition Appellate Tribunal (COMPAT) allowed the same by its order dated 11.02.2015 setting aside the Order CCI and has remitted the matter back again to the CCI for re-adjudication while directing the refund of the pre-deposit of Rs.18.75 Crores to the Company. The matter is pending before the CCI after completion of the hearing on 22nd January 2016.






Sunday, August 7, 2016

Key takeaways from DLF Annual Report 2015-16


  • Employee cost reduced from Rs 349crores to 316crores despite a 20% revenue growth. 
  • 31.3MnSqft is rented out for Rs 26000MINR(annualized) at a 95% occupancy rate. This equates to Rs 850/Sqft/year or Rs 71/Sqft/month(!!). This with a reinvestment capex of just 5% of rental revenue. 
  • Investments in infrastructure paying out
    • 16lane road 8.5kms length from Delhi to Golf Course road nearing completion
    • Cybercity metro investments and highway spend
  • Consolidated Borrowing costs reduced y-o-y from 11.86%(11.48% standalone) to 11%(10.55% for standalone)
  • CSR Spend of 10.4crores is fully spent
  • Around 2000 permanenent employees of which 18% women
  • MD&A section contains details on litigation notably SEBI, COMPAT and P&H court orders. This is material but cannot be fully appreciated from the annual report.
  • Possible transfer pricing complexity here-since holding company does NOT account for majority of assets or profits. Below table indicates this. There does not seem negligible risk of tunneling since these key entities are nearly all 100% owned. But this profit split is strange.


Key takeaways from Reliance Industries Annual Report for 2015-16

It is not everyone's favourite pastime to open a 400+pg annual report, but I could not resist the urge to read the RIL annual report once it was released. Here goes my takeaways(in no particular order). Those interested can download it from http://www.ril.com/getattachment/56a9a0bd-d1e1-4735-9e8f-ece1e7e71e87/AnnualReport_2015-16.aspx

  • As versus prescribed CSR spend of ~56 crores, they have spent ~67 crores. Interestingly, nearly 90% of this is via Reliance Foundation and not directly.
  • They have a CFO and a Joint CFO, who earn Rs 14crs and 11crs respectively. The division of work between them is not too clear
  • Pg 13 and Pg 53 highlight Reliance's products in everyday life, and the product cycle chemistry. This is a must read for everyone
  • Mukesh Ambani has accepted remuneration of ~40% of his approved limit, in an effort to set a personal example for moderation in managerial remuneration. 
  • Jio's strategy seems similar to Wechat, in my view, considering the wish to integrate payments, communication and ecommerce. Would be interesting if they succeed.
  • On reading the ambitious plan for Jio which would account for ~20% of group capital employed, I decided to hunt for reviews of the pilot launch. This link(http://techpp.com/2016/05/26/reliance-jio-apps/) is not very complimentary of the user interface, and therefore apps like Magzter, Netflix could rest easy for some time
  • Under Prabir Jha, Reliance had switched to employee friendly initiatives like a 5 day week, RALP etc. But now, there is hardly any mention of HR in the report. While Reliance has a good employee brand (maybe not among IIM graduates but overall), the report could have focused more on building this
  • The company is VERY science  and technology focused  as evident from the space devoted to the discussion. 
  • Reliance achieved a 7yr high GRM/barrel of $10.8, which it attributes to  The ability to operate at high utilisation levels and switch product slate to suit market conditions enabled RIL to capture margin optimisation opportunities in the market.
  • Under an innovation program GenNexHub, the company encourages startup via incubatio as follows: During the four-month-long programme, GenNext Hub conducts workshops and mentoring sessions for start-ups in the areas of customer development, market traction, operations, product roadmap, fund raising and pitching. It also provides expertise in IP, legal, financial compliance, HR and specific sectorial expertise. GenNext Hub is uniquely positioned as a global programme that helps start-ups think big and grow fast. This seems inspired by Rocket Internet, since the areas are not too relevant to Reliance. 
  • The financials were not too insightful but that is only to be expected from a company audited by the Big4. 

Saturday, August 6, 2016

How management affects financial reporting-the case of Tata Power and Adani Power

As a veteran reader of annual reports would know, accounts (even audited ones) are subject to several adjustments/interpretations. This is because on the same facts, different people can take the same view. Auditors merely ensure that the management interpretation does not cross canons of incorrectness.

Facts in brief
Adani and Tata had bidded for coal based power plants respectively with capacities tied up under power purchase agreements (“PPAs”) for twenty five years with substantially fixed tariffs. The PPAs for these plants were made based on the commitments / understanding that domestic coal linkages would be available to meet the fuel requirements. However, adequate coal linkages were not made available due to various reasons not attributable to the respective subsidiary companies. In response to pleas for compensating the losses due to above, the respective state electricity regulators had granted part relief in form of interim compensatory tariffs, however this matter was litigated and has not reached finality as of now.

Stance taken by Adani Power-Recognize revenue
As per the assessment by the Management, it would not be unreasonable to expect ultimate collection of an equivalent amount as the CT towards relief due to impact of Force Majeure events which is predicated on the legal advice that the CERC may be guided by the principles of restitution / mitigation of the impact of the promulgation of the Indonesian Regulations and non-availability of short supply in determining the extent of impact of Force Majeure events. In view of the aforesaid, the Company has continued to recognise total revenue of H3,374.66 Crores on account of the CT upto 31st March, 2016 (including H674.19 Crores for the year ended 31st March, 2016 and H857.35 Crores for the year ended 31st March, 2015) based on the formula and methodology prescribed by CERC vide its order dated 21st February, 2014 considering the same as the most appropriate basis for measuring impact of the Force Majeure

Stance Taken by Tata Power-No revenue recognition-Director's report for FY 2015
CGPL has been legally advised that it has a good arguable case. However, in view of the pending appeal as mentioned above and considering that the amounts associated are significant, CGPL has not recognised revenue amounting to ` 757.89 crore for the year ended 31st March, 2015 and ` 1,019.06 crore for the period from 1st April, 2012 to 31st March, 2014. 
Above stance not expected to change as the company has not recorded this income in the audited accounts for the year ended 31 Mar 2016.


Takeaway
Both the below companies are audited by the same Big 4 auditor Deloitte. Yet on very similar facts and the identical rulings, the companies took a very different view to revenue recognition, and the . Tata Power conservatively chose not to record revenue considering the high stakes involved, while Adani Power decided to record it basis management assessment. Accounting risk is therefore higher in the latter, from an investor perspective. While the statutory auditor has qualified the audit report in Adani possibly for this reason citing it as an internal control weakness, this is more a process rebuke than calling it wrong accounting
According to the information and explanations given to us and based on our audit, a material weakness has been identified as at 31st March, 2016 in the Company relating to inadequate internal financial controls over financial reporting in respect of revenue recognition on account of additional tariff claims pending determination by regulator, and final outcome of the litigations.

Friday, June 10, 2016

Trading equity or commodity futures-a comparative analysis

In my view,  IF one’s views on a stock are driven primarily by the price of a particular commodity, then it may be better to invest directly in that commodity itself, due to more leverage, than trading via that future. This will be a more direct view and lower risk of trade slippage, as evident in below table where commodity futures wins over equity futures.


Parameter
Equity Futures
Commodity Futures
Overall winner-which results in less trade volatility
Trade impact Cost/
Market Depth
Depends on free float
Usually negligible
(high for Agri)
Commodities
Market Manipulation risk  on underlying asset
Possible(and has happened earlier on expiry)
Possible, but not easy to prove and usually counterbalancing forces prevail
Commodities
Stock specific issues causing value traps/spikes
Possible(eg Cairn loan to HZL-cash trap)
NOT APPLICABLE
Commodities
Sector valuations convergence
Possible-multiples may change due to ‘re-rating’
NOT APPLICABLE
Commodities
Insider Trading
Possible
Front running of OPEC meetings possible
Neither
Geopolitics factors volatility
Domestic level
International Level(but domestic drives agri also)
Neither
Market Trading Times
9:15am to 3:30pm; Monday to Friday
10:00 am to 11:30 pm(Agriculture till 5pm)-Monday to Friday
10am-2pm Saturday-only Agri
Commodities-Can be done AFTER full time job
Cash Settled
Compulsary
 Physical Settlement risk possible
Equities
Circuit Filter
+-20%
+-9%(or 4%-6%)
Commodities

Should you trade commodity markets or commodity stocks-an example of CAIRN India

Whenever I trade stocks in ‘commodity’ sectors such as sugar, metals, energy(or stocks dependent heavily on them), I wonder whether it is better to directly trade the underlying commodity or not.
Below example compares taking exposure on the related commodity future(CRUDE OIL) instead of taking on the related stock futures-CAIRN INDIA. Margins/Prices are taken from Zerodha margin calculator and are illustrative.
Parameter
Equity
Equity Futures
Commodity Future
Underlying security
CAIRN INDIA LTD
CAIRN INDIA LIMITED-JUNE16 FUT
CRUDE OIL
CMP
141.65
142.8
3347/barrel
MIN LOT SIZE
1 share
3000 shares
100 barrel
MIN TRADE SIZE
14.65
428400
334700
DELIVERY MARGIN
(% of trade size)
100%
13%
6%
INTRA DAY MARGIN MULTIPLE(times of delivery margin)
10x
2.5x
2x


From the above, it seems evident that IF one’s views on a stock are driven primarily by the price of a particular commodity, then it may be better to invest directly in that commodity itself, due to more leverage, than trading via that future. This will be a more direct view and lower risk of trade slippage, as evident in below table where commodity futures wins over equity futures. 

How individual investors are disadvantaged in the stock markets and what you can do to overcome it


Parameter
Disadvantage
What you can do/Turning it into an advantage
Access to institutional equity research reports
Quite limited, and chances of front running-circulation to preferred clients only
Read reports for the business insight, do the valuation/price targets yourself. Also, use sites like ICICI/MOFL and RJ.in for getting relevant reports
Algorithmic trading
Complex to set up and  practical challenges to run it
Buy algo strategies from places like return2wealth.com or else participate on sharp price moves to benefit from mistakes in the ‘prop algo’
Order Filling
Collocation so chances of front running order flow
Give enough steep margin so that losses are minimized eg-No market orders, falling knife
Risk Capital
Limited risk capital
Trade with capital you can LOSE once you have COMPOUNDED the returns you like
Seriousness
Chance of treating lightly/less attention as not a full time job, else distraction from full time job
Prepare shopping list(trading plan) and review at noon if any changes to it. Also treat it like a business with monthly P&L tracking
Team
Single man army/limited bandwidth or emotional support
No boss/second guess of decisions/autonomy
Market Access
Limited access to overseas markets or strategies like covered calls/Stock Lending
Advantage as can cover stocks which are screened out due to float etc
Charts/Software/Terminals
Not available to a day trader or individual investor
Avoid distraction-go for swing trades as far as possible-as Apps will not permit
Type of orders placed
Limitation from using basket etc which are not available on phone/app
Try and place stop loss/cover after entering the trade, if active monitoring not possible


Parameter
Usual institutional disadvantage
Your advantage
Scope of coverage
Usually 10-20 stocks if not more
Can decide what you wish to cover as per circle of competence-However do look at the macro picture also to avoid getting blindsided
Patient Capital Access
Usually impatient capital for mutual funds w/o lockin period-However private equity/PIPE funds/Prop Funds tend to be more patient
You can be patient capital not letting prices dominate your reason for existence
Returns benchmark
Limited risk appetite due to fear of underperformance vs relative returns
Absolute returns
Investment size+Diversification
Need a liquid and big investment to move the needle
Can do with small and concentrated portfolios as well


Sunday, May 29, 2016

Gitanjali Gems 5% dividend in 2016-will history repeat itself of shareholders voting it down?

In 2013, Gitanjali Gems had declared dividend, only for its promoters (who also constitute the management) to vote against it at the shareholder's meeting. This was probably due to opposition from the banks, who had pending dues, and due to general industry downturn then. Now, perhaps emboldened by the slight deleveraging in the year ended Mar 31,2016, the company has proposed a dividend of 0.5 INR(which translates to a nearly 2% dividend yield). This is despite the following liabilities:

  • Income tax and other statutory dues of 20.55Crores and 6.55 crores respectively-the company claims a 'liquidity issue' here
  • Overdrawn working capital loans of Rs 106crores-here the company needs to either provide additional securities, or repay the overdrawn amount. It has jumped the gun and claimed that its offer of additional security is under evaluation
  • Cash Deposit NOT created for debunture reserve maturing next year(as mandated under the companies Act 2013)
  • Overdue loans of 2.4Crores to LIC, and 18.5crs to IDBI-the company has offered to pay on account Rs 4.5crores apparently owed by LIC to the promoter

While there is no statutory prohibition against this that I know of, it is certainly unusual for a company to prioritize paying shareholders first over its employees, lenders and tax authorities-all of whom have more secure claims at bankruptcy. But then, rare are the promoters who accept a token remuneration when their company is making losses-instead they seek shareholder and government approval to keep paying high amounts despite this.
http://www.bseindia.com/xml-data/corpfiling/AttachLive/0D51D97A_DB65_47D5_A848_41FC82916A04_174030.pdf

The stock price jumped 10% on the news but it seems only a matter of time that creditors will protest and have the dividend revoked.

Sunday, April 10, 2016

Rain Industries-the good practice of written replies to possible shareholder questions

Equity research analysts are a privileged lot with respect to management access and 1:1 meetings etc.Therefore, when a company tries to level the playing field by giving helpful replies and seeking questions from investors, it is to be welcomed. The Motley Fool also praises this practice below
http://www.fool.com/investing/general/2015/04/15/one-shareholder-friendly-trend-every-company-shoul.aspx

Companies which do this are
1) Expediators Inc-a freight forwarding firm-Answers FAQs via 8K quarterly filing on all topics-strategy, finance etc. For example http://www.investor.expeditors.com/pdf/fd/8-k_03-15-16.pdf
2) Morningstar-similar to Expediators-http://corporate.morningstar.com/US/asp/subject.aspx?filter=449&xmlfile=450.xml
3) Netflix-answers top questions on the website  http://ir.netflix.com/faq.cfm

Except Expediators, others also have conference calls to supplement them, Rain Industries is the only Indian company I have come across, which follows a smaller version of this practice. It really helps to understand them better and not club them as the petrochem stocks but rather as specialty chemicals..

Reproduced below are the frequently asked questions as outlined in the Mar-16 investor relations presentation(http://www.rain-industries.com/PDF/Rain%20Industries%20-%20Corporate%20Presentation%20-%20March%202016.pdf) This is NOT a new practice but I thought it fit to highlight it now-the company by addressing such questions preempts misunderstanding of its business model and helps for second level thinking. Of course, this is in addition to their conference call which makes them rather unique.

What is the Impact of Crude Oil / Commodity price fluctuations on Rain’s businesses? 
 CPC and GPC prices are not indexed to Crude Oil or any other Commodity prices. They are influenced by their own supply-demand dynamics. Although prices of both GPC and CPC fluctuate quarter on quarter, the spread between prices of GPC and CPC move in a narrow-range. o Sales prices of certain Carbon Products and Chemical Products produced by the Company are indexed to Fuel Oil or other Commodity prices. Fuel Oil prices fluctuate differently from Crude Oil prices. o Certain Raw Material costs and Finished Product sales prices in Coal Tar Distillation business are indexed to Fuel Oil or Other Commodity prices with a lag of few months. There is no impact of falling Crude Oil or other Commodity prices on the business of Coal Tar Distillation in the medium term. The Company has some exposure to the BTX and Ortho-xylene pricing.

What is the Impact of falling Aluminium prices on the businesses carried-out by Rain? o Prices of CPC and CTP are not indexed to Aluminium prices and they are influenced by their own supply-demand dynamics. o As CPC and CTP are critical consumables used in manufacturing of Aluminium metal, their global demand is directly proportionate to global production of Aluminium metal and not linked to Aluminium prices.

What impact is assumed from the shut down of aluminium smelters in North America?  The contribution to group revenue from aluminium smelters in North America is ~11% in CY 2015. The new energy policy in North America has provided an encouragement to the smelters to rethink or defer their shut down plans in this region. o Considering the projected increase in production of Aluminium in and around India combined with the major presence in these markets, the Company is uniquely placed to leverage its strategic, deep-water US plant locations with access to certain low-cost raw materials to quickly tap the growing demand for CPC. This unmatched combination allows the Company to re-align its global sales mix through its new, low-cost CPC importing and blending facilities in India

What is the Impact of weakening Euro (and Canadian Dollar) against US Dollars on the businesses carried-out by Rain?
 The Company generates 45% - 50% of revenues from its plants located in the Euro currency zone. About 10% of revenues from these plants are generated in US Dollars, for which costs are incurred in Euros. A 10% decline in Euro-Dollar Exchange rate would result in less than 2% decline in operating profitability in US Dollar terms. o A relatively weak Euro would make the Company’s European products more competitive in the international markets that are US Dollar denominated, resulting in improved capacity utilization and higher operating profits. o The above currency benefits hold true for the Company’s Canadian plants, where operating costs are incurred in currently-weak Canadian Dollars, but where sales are largely in US Dollars.

 What are the plans for de-leveraging the Company, considering the high-leverage? Gross Debt of the Company has reduced by US$ 66 million from US$ 1,211 million as on Dec 31, 2014 to US$ 1,145 million as on Dec 31, 2015. Net Debt during the same period reduced by US$ 53 million. Reduction in Gross Debt is mainly due to buy-back of Senior Secured Notes of US$ 51.4 million, repayments of Working Capital loans of US$ 15 million and exchange rate reinstatements. To reduce debt and optimize interest cost, the Company so far pre-paid Jr. Subordinate Notes $26.3 million in CY14 and Senior Secured Notes $ 51.4 million and partly replaced by low cost debt in CY15. o Net Debt-to-EBITDA is higher at 5X as on Dec 31, 2015; the EBITDA-to-interest for CY 2015 is at 2.3x, although facing challenging business conditions. o With no major repayments in the next two-years; the Company is well positioned to meet all repayment obligations. o The Company has options to make Bullet Repayments of US$ 373 million and US$ 585 million due in Dec.’18 and Jan.’21 respectively, partly through internal accruals and partly from fresh borrowings.

What is the Impact of weakening Russian Ruble on the viability of Russian Tar Distillation Plant? The weakening Russian Ruble will not impact the viability of Russian Tar Distillation plant. The finished product from the new Russian Plant will be sold either in Russia (as an import-substitute) or exported from Russia. With conversion costs being incurred in Russian Ruble, this new plant will be more competitive in the international market

Saturday, April 9, 2016

Beyond shared services-Unbundling the finance organization by outsourcing the ‘core’

Till now, I believed that only certain activities were capable of being outsourced in toto. However, a landscape view of financial report and articles in the press, have made me reconsider this view, and hence this blog post. Please note, reference to organizations is basis my limited familiarity and does not constitute an endorsement of their services.

Some examples of the shared services transition or Uberization of professional whitecollar services are as below

    CFO-Virtual CFO services-these offer services as below
o   Interim Management to firms with CXO vacuum(eg after hostile takeover) 
o   Full time management on long term contracts(1-3 years)
·         Investor Relations
o   Earlier, annual report prepared using help of firms like TRISYS
o   Now, advisors like Strategic Growth Advisors Pvt. Ltd, prepare presentations, schedule conferences and are points of contact along with the company

·         FP&A in shared services(eg Unilever)-whitepapers
·         ERP moving to the third party cloud-a Quickbooks taking over Tally/SAP due to user friendlines

Even earlier, temporary requirements (such as fund raising) were met using merchant bankers who provided the expertise and relationships. But now, even recurring requirements, which would otherwise necessitate full time hires, is now being managed by parties external to the organization

What are the implications of this trend increasing?
  • ·    Finance going the way of IT services-becoming commoditized body shops
  • ·         Large organizations now hiring selectively, and reskilling the team.
  • ·         Startups pay differential to narrow-this option means lesser need to pay top dollar for talent


Will this run the risk of hollowing out the core, when the remaining team members are no longer able to manage the strategic relationships? A well known telecom company which pioneered the novel IT contracts, has now renegotiated the contracts to better manage in house and get control over it. Will these things happen in India? Only time will tell.

However, as a professional, one should prepare themselves by not only having subject matter expertise, but honing communication and business partnering skills, so that the eventual outsourced setup can be managed by  you

Discount brokers and online trading-the unheralded ecommerce revolution

As Marc Anderssen put it, software is eating the world, and with the advent of cheap personal computing technology/consumer electronics i.e smartphones, this trend has reached B2C sectors such as travel, retail, home services. For those active in the financial markets, one such impact is the ability to trade online through your smartphone app, without needing a terminal or to call. This is possible through discount brokers like Zerodha who facilitate online trading-in fact the cornerstone of their business model is the online self service model which mitigates the need for expensive brick and mortar branches, people and call centres. As a user of these services, i though to list the pros and cons of this, along with eco system impact, since this business is well known to those trading in the markets, but maybe not to the lay person. This is now ~20% of the total volumes but growing rapidly

PROS

  • Cost-Brokerage costs are low-as marginal cost is near zero-this week I read an article in the Economist where brokerage is even free as the brokers get some money from the exchanges to which they direct volume
  • Time-If internet access speed is good, one can place an order in the time it otherwise takes to get through to the agent
  • Convenience-Can be done 'on the move' or even at the desk-This is especially useful for those on field jobs. 
  • Self Service for fund transfer: One can transfer funds if shortage/excess on the app itself, without the need to do a website login.
  • Reduced friction for margin funding: This can often automate the need for margin funding at 0.05%/day or so, and make it less evident to the customer since no explicit margin application done. 

CONS

  • Distraction from day job: One of the reasons organizations insist on brick and mortar offices is the assumption that employees within the same premises will dedicate their attention to their work, and the monitoring of laptops/phones/CCTV/min hours norm ensures that. Online trading through smartphones disrupts this social contract, and makes time leak for those who do it. While employees might be able to juggle both without loss to themself or organization, there would be many who cannot, and who hence lose out in networth and at work. This is the biggest risk to day trading since the market hours(for equity/F&O segment atleast), are squarely in the prime office hours of 9-6-unless of course one works in shift based timings which fall outside this bucket. 
  • 'Fat finger' orders-chances of errors-while there is an order confirmation page AND a post order validation, things can still go wrong especially while closing orders in a hurry
  •  Internet Access limitations/No QoS guarantees-With low internet speeds in India, and inconsistent network quality(telcos doing their best but issues still possible), it is possible that
  • IT Issues(in App)-If the app does not work then the call centre is inundated with call volumes and woe befit you if you have any positions hitting the upper/lower circuit against you.
  • Addiction-Like the well documented smartphone/social network addiction phenomemon to getting updates due to dopammine bursts, the same is true since ready access to prices may make you check your positions more often. 
  • Encourages trading over value investing-With the phone accessible and the ease of trading and MTM data on positions, one may panic and tend to liquidate positions while it was better to hold.
  • Screen size limits charting and other functionalities as it may distort visual effect of charts
  • Not all order types available/Limited functionality-Some order types like bracket orders are not available on apps due to complexity of coding or processing power requirement. While this caters to the most frequent use cases, it does not help advanced users. 
In the future, I see the business driven to technology based differentiation where the app speeds, UI, research and flexibility commands business share like in loan business-where often the one to process the loan fastest or flexibly wins over the lowest cost lender 


Some useful links/References
http://www.thehansindia.com/posts/index/Business/2016-03-24/Discount-broking-set-to-disrupt-equity-trading-habits-of-investors-says-Vikas-Singhania-Trade-Smart-Online/216048

Tuesday, April 8, 2014

Divided you fall-and other lessons from the fall of ICAI, ICSI and ICWAI/ICMAI

When the Companies Act 2013 was in the draft stage, the 3 professional institutes ICAI/ICSI/ICWAI were fighting over how to divide the supposed pie of the additional statutory rewards available, be it designation of their members as key management personnel, pre-certifications, expanding the number and scope of audits etc. Institutes did know which side their bread was buttered, with none daring to offend those in power by analyzing the RIL gas pricing controversy or imported coal based tariff pricing controversy, even though atleast two of them-ICAI and ICWAI-had relevant expertise of the same. Nor did they fight against public waste or corruption or monitoring their members. Now the birds have come home to roost.

ICWAI Initially in Dec13 with the notification of the draft cost audit rules, a storm broke out in the cost accounting professions when it was realized that the scope of cost audit/cost records has been narrowed. At that time, ICAI and ICSI maintained silence on this aspect, with ICWAI left to fight its own battle on the very future of its profession.It postponed its national convention and other events, and focussed on the battle at hand.  In its technical reply to MCA on the rules,
http://www.icmai-wirc.in/assets/pdf_files/WIRC%20Feedback%20final%20PDF.pdf
 WIRC-ICMAI observed that It must be remembered that once the dilution of audit process starts taking  place, it will percolate to all other audits which will be self-destructive process for the Regulation. The institute also gave a more detailed representation where it reiterated the merits of the profession in layperson's language http://www.icmai.in/upload/Institute/Updates/Draft-Rules/Letter-Suggestions-to-SecyMCA141213.pdf
But the representation was in vain, and the final rules notified in Mar14 remained unchanged, and will until the next government is sworn in. But that was not the end of the tale!

ICSI In an ambush, the MCA notified final rules relating to company secretaries requirement and certification, which at one stroke removed the need for wholetime CS/practising CS for most private sector companies! The ICSI was caught unawares, and indeed members and students immediately began protests and agitations. As per the ICSI press release justifying why the Vice President remained at the ICSI office.'A large number of members and students have assembled at the Institute premises at Lodi Road on 4th April 2014. Three of the members were continuing their hunger strike sitting within the Institute Premises. There were agitations at other places all over India on that day. The Police was finding difficult to control the situation, particularly at Lodi Road Office. The ICSI officials rushed to Ajmer to meet the minister who was campaigning, but got little reassurance. They met the MCA officials but got a mixed reply, and indeed pointed arguments about why the change had been done. Despite ICSI's reasoning, the MCA had sharp rejoinders as follows https://www.icsi.edu/Portals/0/MOM.pdf
(a) ICSI stated  about many company secretaries who had received notices of termination of their jobs from the companies who are not too keen to implement governance norms. MCA officials replied that Employment is linked to business cycles in the economy. Government does not guarantee job or work to doctors, engineers, lawyers or any other professional
(b) Regarding that  there is total disillusion among students who have enrolled to the course based on the w
ork  opportunities available..which  have been taken away all of a sudden, MCA said that Institute must plan its intake of students and focus on their quality rather than having anybody and everybody walk in. This is something similar to Government of India’s intake into various services
(c) Regarding the general work demands, the MCA stated that profession must earn its reputation and employment is based on merits.  It should not depend on Government/MCA for ensuring that students/Members of ICSI will obtain employment
(d) To the ICSI's plea of helping in corporate governance, the MCA explained its rationale for dropping precertification on the errors observed by it stating that Assignment of pre-certification of e-forms is government’s expression of confidence on both CAs and CSs on certification matters. However, the quality of certification has been disturbing..A letter in this regard has been sent to President ICSI and ICAI

ICAI Recently, the Competition Commission of India(CCI) found prima facie that .. the choice of the consumer (members of OP) in this case was being limited. The members of OP had no option, but to attend the seminars organized by OP (whatever be the quality of seminars) to get the requisite CPE credits and ordered an inquiry into the restrictive trade practices. If this practice is stopped, then ICAI/ICSI and ICWAI will lose their revenues from seminars, and office bearer's powers/recognition will reduce. Indeed the quality perception of CPE events is itself a wakeup sign for the member services section. like I'd blogged earlier http://andy161.blogspot.in/2014/01/does-mandatory-continual-professional.html    Those interested in the CCI order can read it here  http://www.cci.gov.in/May2011/OrderOfCommission/261/932013.pdf
Also, limitations on audit number in Companies Act 2013, has not gone down well with ICAI since this will make the potential income of members lower

I may be writing a premature obituary of strong and independent professions but I think the writing is on the wall. Without statutory barriers to entry and 'reservation' in professional work/employment, CA/CS/CWA must compete in the open market, often for deskilled jobs in KPOs, shared services and entry level jobs. Hence, to avoid a repeat of the loss in recognition etc following lessons may be insightful 
1) Quality should return to the profession-for example precertification w/o errors
2) True professionalism in training(articleship readily accessible to all, with a high standard of training) and
3) Not depending on statutory work as an essential one but making members ready for service too or to enter new fields like internal audit that is open to all. Indeed, ICWAI had released a slew of internal audit draft guides for public comment on telecom/power etc
4) Respecting other professionals-if ICAI, ICSI and ICWAI had presented an unified front, I doubt MCA would have made these many amendments.
5) Reaching a particular standard and then expecting rewards-Increasing compliance costs of cost audit, secretarial certificate etc w/o adding the intended value is not fair, and that is why India Inc fought back and got ICSI/ICWAI cut down to size..since ICAI is well entrenched, few CFOs/businesspersons would fight ICAI!