PVR Cinemas - House Empty - Future Bleak - Retail Shareholders Euphoric

Warren Buffett’s seemingly most popular quote “Price is what You pay and Value is what You get” doesn’t seem more destroyed or intrigues the patron more, when one pays ~Rs300 / USD 4.5 for a 100 gms box of popcorn at an Indian multiplex, whereas in India 700 million people earn less than Rs 100 per day or say ~USD1.4 / day

But this piece isn’t about the Indian Economy, its about the market darling - PVR Cinemas.

Allow me to place a disclaimer right here – I love PVR Cinemas, I along-with my wife and mother almost never miss a movie at PVR and she loves the popcorn - being from the old school. If I were to tell her that the ticket costs 2000 Rs a piece in Gold with green tea (that she loves) (a Twinnings tea bag worth Rs 3 dipped in hot water sold at some 80 times the cost) she might have a heart attack. But this is a secret between PVR and me. Mom never gets to know of it.

The purpose of this piece is to inform the gullible minority shareholder that while all the institutions are dumpin the favourite PVR stock, You are being made the muppets and when the music stops, you will have nowhere to run. Its pertinent to mention that the shareholding of people with less than 20,000 shares has shot up from 3.5 – 10.5% in a matter of just 9 months.

Lets analyse the company that’s now more expensive than TESLA - already trading at some 800 PE

PVR generates an EBITDA of Rs 60 per patron / movie watcher

Sale of F&B is Rs. 948crs or ~ 28.8% of total sales and 55% of Movie Sales Revenue or Rs. 93/patron.

Cost of F&B is 8% of sales thus 72.5% Profit Margin on Popcorn or say Rs. 67/Patron comes from F&B

Which means EBITDA Loss of Rs. 7/patron is generated by (Sale of tickets + Advertisement Income + Convenience Fees + Other Operating Income) the core business.

SO ITS SAFE TO ASSUME THAT PVR IS JUST A POPCORN AND A NACHOS COMPANY

I feel sorry for the shareholders of the company that places its QIP at Rs 1719 and within a few months has to come up with a rights issue at Rs 784 because the ever burgeoning debt, is unmanageable, future is uncertain and probably the promoters have to be paid arrears of their handsome increments even while the wealth of minority shareholders is being blatantly destroyed – some by pandemic – some by the promoters. 

Here are the statistics

As per the management, in a recent concall in May, the breakeven of PVR is at at 20% occupancy and Average Occ that PVR enjoyed is 35% in precovid times (And achieved an 18% EBIDTA and 0.8% PAT margin), One question that comes to mind is – if capacity utilisation in the best of the times is 35% generating such abysmally low PAT, what effect will a lower occupancy have on the P&L and the Balance Sheet

And the EBIDTA sucks because the promoters who own a mere 18.79% of this company draw a cumulative salary (besides all other perks and privileges) of ~ 28 Crores that is slightly more than the PAT of the company. A back of the envelope calculation pegs the EPS for promoters and family at approx Rs 32 per share while its a paltry Rs 4.95 for other shareholders.

It’s a shame – more so in India – because stockmarkets are shallow, lack depth, and most shareholders have no access to genuine research on the basic and key metrics of the company, intention of the management, and self centricity of the promoters at the cost of minority shareholders.

PVR has been incurring ~ monthly expenses of 63 Cr (assuming 50% waiver on rent and CAM charges) so if this year is more or less a washout, it would have burnt approx. 750 Cr without any mentionable revenue in FY 2021) And that explains the short runway of the amount of Rs 300 Cr collected thru the rights (in Aug 2020) that might not have lasted beyond 5 months.

“The business is under a grave irreversible threat”

Ask a producer of a film and he/she is under permanent nervousness till one week after release of his movie - not knowing whether one would be able to recover costs, make profit or lose the skin.

The immense sense of freedom that most of the producers such as Ronnie Lahiri have found by releasing movies on OTT is heartening. Gulabo Sitabo was a great hit, made him the money and de-risked his investment. Top OTT players are happy to buy movies at a cost + basis, thereby de-risking the producers and the OTT players such as STAR, Amazon, Netflix have pockets tens of times deeper than the size of Indian film industry at ~13800 Cr (1.8 B USD) where the Bollywood is a mere ~1000-2000 Cr per annum

For the record Amazon and Flipkart burn a combined sum In excess of Rs 1,500 crores just during their Diwali sale alone.

OTT is really the future because a family can watch a movie in the convenience of ones Living room where the annual subscription of the most expensive platform is less than the cost of “just one” movie with the family at a multiplex. We haven’t yet discounted the pain of navigating the traffic, parking, lack of social distancing, risk in the AC (after Corona) world where the human psyche has got permanently mutated because of the present unexpected vicissitudes. The brilliant analysis by Seetharaman in The Ken sums up the dilemma and the zero sum game for the cinema halls.    

No wonder that the sale of large TVs and projectors that cost as little as Rs 10 K on amazon has shot up in the recent times because of the newfound freedom by the movie buffs.

Low budget films, some of these dramatically  awesome in content and direction, that cannot afford a big budget theatre release have found a new freedom and recognition and have been able to shed the risk bias of the patron because the incremental cost of watching this movie is almost nil for a family (if at all the same turns out to be a dud or below expectations). Not that the wounds inflicted on the populace by Salman Khans Tubelight or Aamir Khans Thugs of Hindostan  can ever be healed. And on top of that the Rs 300 popcorns.

OTT reduces/almost-eliminates piracy and provides a reach to the most under provided sections of society where access might be a problem, but internet works at a good speed.

The demise of Cineworld with 9500 screens was a shock that had to down its shutters on almost 90% of its business due to the pandemic. And the hunger of retail shareholders to lap up the PVR stock seems unsatiable.

If this virus - that has permeated such degrees of fear in the society is here to stay for a foreseeable future then the future of multiplexes is in grave danger and that explains why the institutions or the big boys of the stock markets are strategically reducing their stake while holding the price at present levels and retail muppets (shareholders) are hungrily buying the stock to take the retail shareholding up from 3.55% in Dec 2019 to 10.32% by Sep 2020.

Unless another equity infusion takes place, The PVR debt will continue to burgeon, for many many years, to its peak of approx. 2100 Cr by Mar 2022.

Its loss might peak out at Rs 566 Cr by the end of this FY 2021

But the fact remains that – at the CMP of 1250 and FY 21 fwd PE of ‘maybe’ 1000, this is the most expensive stock on the planet beating Tesla dry and hollow and far ahead of its global peers such as AMC, Cineworld, Cinemark and Cineplex most of which have corrected by 60-90% while PVR is being distributed to the minority and gullible retail shareholders. (As there is absolutely no certainty on quantum and timing of full recovery, we have used Trailing numbers to benchmark globally. Also, a size discount is applied)

Going by these calculations and benchmarks, PVR (ceteris paribus) while deserving its rich valuations should slide down to under 400 when its performance, reasonable valuations meets to say hello to its eventual fate.

Minority shareholders singed by the narrative built around a stock always almost are left holding a rotten tomato.

Looking fwd to gain some confidence post this Virus, when I can again take my loving mom to get her favorite popcorns at PVR – in the meanwhile sell the family silver to check-in into PVR ‘only if' there is no other show going on.

Co-authored with 
Ravi Sharma @caraviusharma ; https://www.linkedin.com/in/ca-ravi-u-sharma-65901b97/

 

10 Blunders - 1 Arrogant Company - Millions of Shareholders Suffering (The story of ITC)

 

Dear Board Members,

As a minority shareholder while I sift thru the 368 page Annual Report (AR) of my company, it seems and appears to be a manifesto of a large political party that is proud of what its done in the past and what it hopes to do even if nothing sounds or appears to be value accretive for the shareholders. 

Markets are wise and perceptions are strong and the 1.5 million investors who have reposed their faith and trust in you, seem to be losing the confidence in Your leadership. Else ITC that was once the most respected company wouldn’t have performed so miserably on the bourses inspite of the 368 page chest thumping manifesto.

I must say you are failing miserably while sitting in the comfort of your mahogany and leather lined offices, a mutual appreciation club of 14 people presiding over an annual revenue of over 50,000 Crores each one building large personal empires thru generous grant of stock options and over the top compansation while I am seeing my wealth erode by the hour.

ARE YOU ANSWERABLE?

The unbridled power that you wield without being questioned by a real promoter / entrepreneur has spelt a real disaster as I fear that my company is being taken on the same self destruct path that General Electric, Nokia, Blackberry and Exxon Mobil have been taken in the last 2 decades and the less said the better as to how value destructive this journey has been for them because there was no one to shake up Jack Welch at the right time (he became the greater God without being one). For way too long these companies and their respective managements suffered from Hubris not able to see a fast approaching train while being frozen on tracks, not able to course correct - eventually leading to their demise. 

While I will ask some specific questions, the crux of this note is that if you cannot protect my wealth thru the alleged magic of your strategy and leadership – You don’t have the moral right to hold these positions and lead my company.

ARE YOU ANSWERABLE?

The First Blunder 

The biggest blunder of diversifying into hospitality and continue to burn cash and capital in this black hole using cash generated by the cigarette business (which is the only meaningful cash flow division) is nothing short of financial hara-kiri on minority shareholders. You have acted no differently than most of real estate developers who want to own a hotel / hotel chain from their free cash flows because its sexy to own one when it’s the most unprofitable industry and most susceptible to economic mood swings. 'Dala Bhukara' is fine – I appreciate it and love it too, You should have stopped at that, but then it was simply stupid to burn thousands of crores of my money by assuming that every hotel will be as successful as dal bhukara. I would like You to share with the public – Who is advising you to spend thousands of crores of shareholder wealth to build these large hotels (and overspending on most of these).

Who (employee or consultants) is regurgitating on excel sheets - the potential of new hotels and how are these people made accountable? The AR must include a detailed P&L and BS of each of my subsidiaries hereafter clearly mentioning the ROCE on a quarterly basis.

At Rs.17.9 lacs revenue per room per annum of revenue you have missed the bus of being any formidable hospitality brand even while you can't stop gloating on all the award and accolades that the hotel division has got. Mind You - most of these are all subscription based awards (awards and accolades is a paid international scam at the cost of the hospitality industry) the sooner we realize this the sooner we will stop burning cash. I would like to know how much money has been burnt in annual subscription of these awards.

ITC Grand Bharat with 104 keys is generating a mere revenue of 28 Cr p.a, that’s is lesser than some successful Lemon Tree Hotels on a revenue per key per annum basis.

It is pertinent to ask what’s the spend per key of all the hotels that have been built grounds-up in the last 10 years. If it is anything more than 2 Cr per key (all in) there is something dramatically wrong with our projects team and financial forecasters. How many hotels have performed in line with approved financials from the time of board sanction of these projects within the next 5 years. This is an important analysis that You should seek and make the same public.

ARE YOU ANSWERABLE?

The entire rigmarole of Fortune Hotels with 4000 rooms is generating a mere profit of 2.76 Cr – who is responsible for this and why is this abysmal performance being tolerated at my cost?

Welcome Heritage does a NP of  a mere 40 lacs with 36 hotels , 900 rooms and the management bandwidth at my cost.

Which international brand / concept are we benchmarking ourselves against to justify our investment in the business and which of my employees has his/her skin in the game in this business and how is the executive compensation tied to the performance of the Hotel Division.

ARE YOU ANSWERABLE?

The Second Blunder

Small irrelevant businesses that we have ventured into must be taking immense bandwidth and time (board meetings, audits, finalization of accounts, consolidation) why are we in the businesses such as Antrang Finance that generates a mere 6 lacs a year. I would like to know the details of every business / subsidiary that generates less than 50 Cr of NP after taxes. In the scheme of things and larger objectives there should be a board resolution passed that defines / disallows continuity, if certain thresholds aren’t met by any subsidiary.

The Third and Series of Blunders

Our acquisition history and parameters are abysmal. That eeks of internal misjudgements. I might not need to tell you that a series of these judgemental calls, gone wrong with alarming regularity, might be perceived to be fraud. Nimyle, B Natural, Savlon – have you ever calculated the price paid for acquiring these businesses and the value accretion/destruction that these businesses are doing for me. Your endeavor to build on these brands might be noble but the subsequent performance is abysmal.

Enron wasn’t a fraud at the beginning , But they lost their way alongside because they didn’t know when and where to diversify and how to wisely allocate capital and burnt cash and rapidly eroded shareholder wealth. Don’t take my company down that path or history will find it difficult to forgive You.

When I read about the ITC Sangeet Research Academy I couldn’t stop laughing for 5 minutes. The cacophony of the music of frustration is still ringing in my brain. While I would like to know the total cumulative annual spend in this musical initiative since 1977, I kept wondering that the music for all the gurus and the budding musicians is playing fine while the music for the shareholders is dimming with an alarming speed or might already have stopped a few years ago. What a paradox..

BECAUSE YOU ARE ANSWERABLE

The Fourth Blunder

The FMCG division launched in 2000 generates just 3-5% PBT, thats a meagre 6% segment ROE (vs >35% of other FMCG players) – put Your hand on your heart is this justified. The QOQ and YOY narrative, propagated by You that 'we are becoming a global FMCG brand' is fine – how is it value accretive for me – because our operational performance is miles short of our competitors.

Are our employees lackadaisical and suffering from sloth because they don’t have a real BOSS or there is something drastically wrong with our strategy and execution. How have we benchmarked ourselves against the top 5 competing FMCG companies?

I would like to know if the salary growth of all the people earning over 35 lacs per annum is directly correlated to Revenues and EBIDTA of those divisions and if NO – it tantamounts to the very premise where we begun – My cash business is being used to fund the inefficiencies of the entire company without a credible benchmarking against other brands / businesses that are doing well. How are we different today from an inefficient PSU. 

The so called Dividend Yield is a paradox - How would You justify the same to investors who entered the stock on ~14th July 2017. Yes agreed i am getting some 7-10 Rs a year in dividend while losing a major part of my capital. 

The Fifth Blunder

For a Balance Sheet of my company’s size you have failed repeatedly to disclose Your CAPEX plans and capital allocation plans in advance – isn’t that taking the executive power to a level of unsanctioned discretion? While I am suffering with my capital erosion you guys are building personal empires of reputation and brand building.

ITC Infotech @ 2300 Cr per annum of revenue and single digit PAT must be the most underperforming IT company in the country. Do we take pride in investing businesses that underperform and continue to make the shareholders believe that the future is bright (why has the board not thought of divesting this and all such small divisions) and if NO – what’s the boards commitment on revenues and PAT in the next 5 years for this company.

The Sixth Blunder

You recently acquired Sunrise at approx. 3.7 X the FY 1920 revenues of 591 Cr at a PE of 37.

How does this deal add to my geographical diversification? How is this value accretive to me? And why would you pay this valuation when you aren’t able to sustain a 15 PE for my company? How did the board approve an acquisition at 37 PE while struggling to keep my valuation even at 15 times.

Why could we not expand our own spices division to strategically expand our geographical reach with internal talent and resources and had to go thru the path of an expensive acquisition.

Norway’s food major Orkla acquired Eastern Condiments (almost double the size of Sunrise) at 2.1X Sales and at 18.5X earnings. Which team was responsible for the due diligence of Sunrise and it would be in the interest of the shareholders if the negotiation documents and files are brought out in public domain.

For a minority shareholder watching from a distance, this is nothing short of an internal fraud. If my company is receiving Outstanding Performance Award by CII for its spices, does our management not have the wherewithal and talent to setup and expand our products’ geographical reach rather than paying a hefty premium just to capture a market share.

ARE YOU ANSWERABLE?

The Seventh Blunder

The executive compensation keeps going up and shareholder wealth keeps coming down. It’s a shame that in the last approx. 12 years the revenue has gone up from 16000 Cr to 50000 Cr and the employee cost is almost stagnant at 9% or has marginally inched up. Where is the operational leverage? Where is the demonstration by the management to incrementally and geometrically increase revenue and thereby profitability for every additional crore spend in Executive Compensation?

Some of the most progressive companies on the planet (such has Amazon) have a cap on executive compensation at less than 160000 USD per annum and all additional comp is through stock awards.

Our compensation system acts as a disincentive for executive outperformance and in the absence of a real my-baap of my company, I – THE MINORITY SHAREHOLDER am suffering.

In 12 years the revenues are up approx. 3.12 times and employee cost is up 3.26 times. And most likely the perks, hidden benefits, Pension Plans, Travel Plans, Drivers, Cars, Leave Encashments are not even a part of this metric. I would like a declaration / system – where every penny spent on every employee is a function of CTC that’s declared and filed without any benefit being accrued under any other account head.

Do you – dear Board Members understand the concept of operational leverage?

ARE YOU ANSWERABLE?

The Eighth Blunder

Our stakes in EIH and Leela have a MTM loss of approx. 1250 Cr in just one last FY. What's the rationale in holding onto these investments when we don’t really know how to manage our own hotels in the first place or make them world class by any stretch of financial performance. Not a single rupee should be allowed to be invested in the hospitality business to fund losses or any further CAPEX. And every business balance sheet should fend for itself for its OPEX and CAPEX without dipping into our cash generated from the primary business – Cigarettes.

The Sri Lanka investment of 1800 Crores (~236 M USD) so far, baffles me as a shareholder. And I understand that the project is far from complete. Who are we building this empire for and how will we get our investment back? Do You have a plan besides just an excel sheet to justify this black hole.

ARE YOU ANSWERABLE?

The Ninth Blunder

Our abysmal ability to engage with capital markets / investors / analysts is nothing short of abject neglect (no mybaap syndrome). If you had succeeded in creating any mentionable shareholder value – this attitude is pardonable. But while You are all doing exceptionally well, with your compensation and hefty sitting fees and perks, the lack of investor and market engagement is taking me and my shareholding for a ride. Why cant we have a mature set of professionals who have the knowledge and the art of engaging with investors and the media.

ARE YOU ANSWERABLE?

The Biggest Blunder

You are conducting an average of 41 committee meetings a year. Take out the weekly offs and holidays, You are meeting approx. every 5^th day. FOR WHAT? And what are you achieving for me? Except strategically destroying my wealth and value of my shareholding at my cost and charging exorbitant sitting fees? Gentlemen the average age of my board is approx. 65.6 Yrs. God give You all a happy healthy life but don’t treat my company like a retirement resort.

You talk of Triple Bottom Line repeatedly trying to be the 'pallbearer' of goodness – While every section of society gets a mention – the shareholder is left out of that focus - high and dry. If I was on Your mind – You wouldn’t waste a single rupee in reputation management through charity and social activities and alleged multiple bottom-line spiel till the interest of minority shareholder is protected and demonstrably served.

While every corporate house has declared salary cuts in view of the pandemic – there is no evidence of any salary cuts in my company. on the contrary you have recently chosen to reward yourself for destroying shareholder wealth. Is that morally and ethically correct even while the latest Tax filings reveal that our advance tax returns are lower by almost 50%. That portends that the Net Profit is likely to fall dramatically - At whose cost?? – MINE!

Another large conglomerate / business house indulged in empire building, international acquisitions at obnoxious valuations, over leveraging, failed product/car launches all at the cost of minority shareholder and to sate the ego of a few top guys in position of authority and they have reached a precipice of existential crisis.

Its becoming increasingly irritating to be repeatedly reminded through media, about the deep value and future potential of my company under Your leadership – Lets stop behaving like the state that talks of glorious vision in year 2050 (safe distance away) – because by that time none of us will likely be alive. Its not to take the credit away for many good things that are happening in my company but pls remember Good is not Good enough because we need to be Great. I must confess we are far from Great and not even looking in that direction.

Pls get Your act together and don’t allow my company to get to a point of no return. A few more mistakes and a little more neglect – And you would have succeeded in destroying one of the finest companies in the country to a mere HAD BEENS…… Remember markets are unforgiving and it would take no more than a few quarters to get our share-price to double digits.

God Bless You and God bless ITC

A distraught shareholder…………

Co authored with 
Ravi Sharma @caraviusharma ; https://www.linkedin.com/in/ca-ravi-u-sharma-65901b97/
Uday Bhaskar https://www.linkedin.com/in/uday2210/

Investors are Dancing - But no music can be heard

Is a Financial Tsunami Building up?

Just as the stock price of Tesla kisses $2000 (and by the time i finish writing this piece, it might be $2200) and Apple is way past the 2Tr$ Marcap, I receive a text message from an enthusiastic friend of mine who first started investing a few months ago (March 2020) after being forced to work from home and shared his stellar success at his new-go at the markets. He shared his desire to be a professional fund manager and started exploring ways to get a SEBI license to be a RIA (Investment Advisor) or a Portfolio Manager.

Being an investor since 1992 when I made my first investment and having managed funds for family and friends all life and now as a professional Fund Manager since the last few years, and having seen euphoria and fear again and again, I can say with some degree of confidence that this time it isn’t different and something is about to give way.

Covid has been the most unfathomable disruption, the likes of which hasn’t been seen by anyone alive today. The concept of Black Swan stands redefined which – till now – was an unexpected and improbable event and people would often relate to it by comparing it with a Tsunami or an accident or a sudden unexpected failure of an enterprise with global ramifications.

No one had ever imagined that within days, the global borders would be closed, airlines across the planet would be grounded (95% still remain grounded as I write this), and all levers of the global economy (travel, trade, manufacturing, shipping) would come to a grinding halt. ‘Sudden Stop’ in global economy was an academic expression that became a reality almost instantly.

Some 30 million Americans lost their jobs (more than 3 times than the previous highest), markets crashed by about 40% in 3-4 trading sessions, China got blamed for its alleged Chinese Virus, oil hit (-) 37 $ while the global leaders remained clueless and the only policy response was a complete lockdown of nations as leaders grappled with the  enormity of the situation.

Hundreds of millions of people have lost their jobs and millions of small businesses have shut down forever and the economic contraction has been so secular that some of the most high flying businessmen and executives have resigned themselves to the new normal only yearning for their basic needs to be met for their families and themselves.

While some countries have shared the real data and the extent of severe and unprecedented economic contraction, most have conveniently chosen not to release the same either to avoid embarrassment or to avoid panic. But imagine, for a second, that everything (revenue, earnings, profit, salaries, rentals, commoditiesetc etc etc) gets deflated by 40-70% - what effect it is likely to have on the global economy.

If the savings rate from income varies from 1% to 25% in different parts of the globe (it is believed that more than 70% Americans have less than $500 in savings and the max savings rate is about 25% in China and India), it is safe to assume that every person on a monthly salary / entrepreneur is already digging into life investments and assets to keep afloat as the inflow (after salary cuts or loss of income) is far lesser than the outflow. Majority of my friends and acquaintances have either stopped their SIPs or redeemed their Mutual Funds. I read that last 2 months have been the worst for the MF industry because of incessant redemptions and negligible inflows.

And Yet…

The Indian and global stock markets have shown immense resilience making these an easy ATM to churn out daily profits for Robinhooders.

Human memory is short and 10 years is a long time to lose and gain confidence all over again and the stars (Corporations and Executives) of yesteryears fade away while the new ones emerge on the evolutionary principles of Creation - Preservation and Destruction

It is believed statistically that 95% of market participants and fund managers have less than 12 years of experience which implies that only 5% have seen the crash of 1987, 2000, 2008 and a few other mentionable flutters in between. And human mind is generally tuned to be optimistic as hope and evolution trains the mind to expect a better future always in every which way. Little credence is given to people who invoke caution and sometimes border pessimism as a result of lifelong experiences and perhaps that’s the reason the world is deriding WarrenBuffett for having lost a decade by underperforming and not investing in Tesla and Amazon and all the 30 yr olds have seemingly outperformed by simply investing in Tesla or Kodak or Overstock kind of shares.

Parameters such as performance Ratios, Profits, Real cash in the hands of shareholders have lost every mentionable significance and price earnings of 200/300 or even 1000 in case of Tesla seems like 'THE' new normal.

And while the bears have been irreparably scathed in this recent melt-up, it would be prudent to remember that over long periods of time, either the price catches up with the fundamentals of a stock or the fundamentals catch up with the price,  but just to put the things in perspective (and I know nothing about Tesla and am not a Tesla basher sitting here in India – but it’s a good example) if Tesla was to maintain its present earnings, it would take about 1000 years to fully recover ones investment through Tesla s present earnings. Anyone who buys a Tesla stock now is valuing it at approx. a million dollars for every car sold.

Markets are a beautiful place that allow immense wealth to be created and accumulated for people who have patience and discipline but history is replete with examples of more than 70% of investors of all times to have permanently lost capital by chasing garbage (aka penny stocks) that seems to provide short term euphoria.

Lets talk of a few Indian stocks and themes or should I say wealth destroyers.

Between 2003 and 2008 Infra and Housing was a great story and a mere ‘infratech’ (use of tech and infra) in a company s name would get it rerated. Unitech, IVRCL, HCC, NCC, Sintex, DLF, …………… have destroyed almost 99% of shareholder wealth and most of these names have got delisted leading to permanent destruction of wealth. During hay days these were stocks that were the market darlings

Then came the era of banking and finance. Between 2009 and 2018 NBFC s and Banks had a dream run before the euphoria and invincibility of the sector was popped by the ILFS, Yes and DHFL type of fiascos and recently while a top outgoing CEO dumped his entire shareholding and ESOPS of 26 years in a jiffy (perhaps to pay for the expenses of grocery, maids and electricity bills during tough times amidst the pandemic), the gullible public and minority shareholders will be the last to keep holding the hot potatoes and the music would stop suddenly.

And Now

We have the API and the pharma theme on an assumption that all the medicine factories on this planet will stop production and all pharma orders will come rushing to Indian companies and the world population might start eating medicines instead of fruits and vegetables all produced by Indian pharma companies.

The same story gets repeated again and again. While the robinhooders are gloating in the wealth created by some new age, recently discovered pharma companies doubling in the value in less then 2-3 months, the end is always painful when the music or the party stops. And by the way graphite was the pharma of today or pharma/API was the graphite of those times.

The 5% people who have been around, all of them understand this, having gone thru cycles, but the 95% neither have the wherewithal or the research to truly fathom the depth or the lack of it in the present euphoria.

Every crop must be harvested at a specific and optimum time, lest it should rot. Same goes for ones stocks, corporations, businesses. Buying or creating is natural to ones instinct of evolution, letting go / harvesting is an art which very few understand or develop. And most end up in a feeling of regret esp small and minority retail investors who fall in love with their stocks, cannot sell and take the profits home.

The trouble is that most fund managers are obliged to be eternally optimistic (ignoring the risks) else they would face redemption thereby leading to lesser fees for the fund-house. Very few investors realize that cash in itself is a strategy and a position worth considering and to be in from time to time.

As Howard Marks says “To be a disciplined investor you have to be willing to stand by and watch other people make money on things that you passed on”.

Irony of the markets is well evidenced, rather strongly in just this one case in point :- PVR Cinemas

PVR used to be a perfectly fine and a successful popcorn and coke reseller till the pandemic struck and just 11 days of disruption in March saw its profit fall thru the floor. The future is bleak with zero sale in first 2 quarters and any of the movie buffs whom I have spoken to in Delhi, Bangalore and Bombay (where PVR has max screens) are not going back to a cinema hall as people have found a new freedom on OTT platforms and using affordable projectors at home and replicating a cinema hall effect without risking oneself to the virus-exposure. 

Producers are preferring - selling to and releasing movies through OTT platforms as that reduces their risk to zero. And yet retail investors are finding virtue in this company that has zero sales, bleak future, debt ridden and trading at 300 times its trailing earnings and no visibility of the future earnings. Some PVR stock lovers say – all will be well in a few years, we are looking at 2030.

CNBC has single headedly taken it upon itself to create a euphoric environment shrouded by global liquidity and has allowed all dubious promoters to talk up their stocks only on the base of 'positive commentary' as if the alchemist in them can turn just commentary into profits, cash and dividends.

On the other had a company like ITC that produces more cash and profits than all the other 6-7 top FMCG companies, is debt free, is trading at abysmally low valuations (15 times trailing earnings) and yet the robinhooders find it less appealing.

This dichotomy will self correct sooner rather than later and will come with its own collateral damage which most new entrants in the markets aren't ready to handle.

Harvest Your crop, take profits off the table, let some notional profits be lost along the way but evaluate the risk and reward that any company, valuation, story, potential – offers.

If this fine art of valuation equilibrium can be discovered, small investors would do themselves a great service of increasing their longevity in the markets and protecting their capital.

Enjoy the party, stay close to the door, so when the stampede starts, You can safely escape without being trampled.

My twitter handle @manurishiguptha

www.manurishiguptha.com

www.mrgcapital.in

Is God The Richest & The most Selfish being on the planet?

The Fragile ground, God's been occupying for 5000 yrs

Human Race and all other living beings were pretty much content with foraging sleeping and procreating for millions of years till God arrived and changed every single order that existed since last 2 million years, made us all useless, allowed us to comfort and bask in the warmth of its existence and the proverbial eye that it kept on us.

We Human Beings found solace in our hopes and beliefs because our focus shifted from the just the next meal and safety from adversaries & superior animals in food chain, to future comforts, education, aspirations, ambitions, greed, career, outperformance among the same species (highly characterised among the human beings of the present day mostly measured by solitaires and purses among women and cars and homes among men).

For the longest period of time we found comfort in deriding and under-appreciating Darwin and refused to believe that the fittest survive and organisms evolve and the weak perish. Because God came in between. As God was really the ultimate saviour from all known and unknown perils so far.

And God took advantage !!

The politics of white smoke over The Vatican, the hindu belief of karma etc, Islamic belief of shahada sanat zakat sawm hajj all made the human mankind dependant on the emotional crutches of the mind and faith and belief in the unknown and unseen.

All this while, in the human memory (average life span 70 years and active memory 50 years) people remembered what was convenient and passed on what was even more convenient. And God survived and thrived because we became slaves of the future aspirations for ourselves, for our progeny and started believing in God as the protector and the provider.

God has also been terribly lucky for an infinitely long time. Everything that is known to and seen by man has a limited lifespan. Take the strongest of edifices, the largest of corporations, beliefs and ideologies – irrespective of the robustness in those times - these had limited longevity. The largest corporations have hardly been able to survive more than a hundred years, East India Company was really more an Empire rather than a company and yet perished.

And God lasted the longest !!

Because humanity never lost faith.

Divide and rule came to be believed to be more of a modern day adage but it always existed. It always was what drove the world based on difference of opinions and beliefs and created just about enough conflict to maintain a balance in-spite of the religious holy wars. And agree or not, different Gods, through their self anointed representatives, tried hard to use this tool to control their respective fiefdoms.

Vagaries of nature in the form of Tsunamis, Earthquakes, Diseases, Floods, Droughts were never global, so-far, and we could always blame on the collective karma of the region.

The Tsunami of 2004, the hurricane Katrina (even though hurricane Galveston of 1900 was the most severe) were all severe but isolated events and we humans spared a thought for the fellow humans who lost their lives and were in the middle of such adversity but moved on with our lives the next day as the world moved on and the global economic engine moved efficiently. Deaths owing to these adversities became sad statics after a while.

Corona perhaps is the most secular event that has ever happened to Earth and all the purveyors of religion stand exposed because while the world waits for the vaccine to be discovered (which some say, is 18 months to 5 yrs away) the Gods have abandoned their posts, through which they used to instil hope and fear, and are suddenly missing in action.

Why else could such a scale of trouble not be sorted out by God. Most of us have resigned to our deservingness bias or the Just-World theory because “God is Great”

But one hypothesis definitely stands theorised – “God is only our fair weather friend”

Because the rapidity with which God deserted the guardianship of human race, its own places of worship is rather alarming. I was surprised recently, that the representative/incarnation of God was too angry to shake hands with a young lady.

Now lets look at the God’s PnL and Balance Sheet

Between the top religious organisations (links to research on their assumed wealth below) this is one corporation of religions that seems to enjoy all authority and no responsibility. Sift through the articles and the God’s (all of theirs) Balance Sheet could well be over 50 trillion dollars. About 2-3 years of USof A ‘s GDP.

This is just the declared wealth. In addition to available data, each of the top 50 religious places of worship earn over 150 million dollars each per annum. A temple in India annually earns about 27 million US $ from just the sale of human hair that are given there as offering.

Bottom line – These numbers are staggeringly unfathomable. And enough to remove all miseries from the planet.

The Associations, Trusts and Bodies that control these religious institutions should now rise to the occasion and open their coffers and allow the vast quantum of wealth collected from the contributions of the very people who are in peril.

Governments through their powers must exercise their right to make these religious organisations responsible, in the national interest, for the greater good of humanity and nations. National treasures must be used and monetised to manage national and global calamities. The gold reserves of religious institutions that are off balance sheet items, off the reserves of the central banks of respective countries across the planet must be used to alleviate the suffering (financial and hunger and medical)

Why else are we all paying annual premiums (through our pilgrimages and offerings) to God if it’s not buying the mankind any insurance.

God isn’t represented by a place, person, shape or festival. God is and should be a way of life, conduct character and compassion towards the beautiful planet and its habitants, where we got a chance to 'BE'.

"Rise up Oh dear God and demonstrate Your benevolence and open up Your coffers, for You haven’t been on a more slippery slope in over 5000 years."

References

Vatican Roman Catholic Church

Padmanabhaswamy Temple, Kerala, India

Tirumala Tirupati Devastham

5 Richest Religious Organisations in the World

Shridi Sai Baba Trust

What Indian Kings and Leaders have in common - “Keep’m Poor!"

As I saw Sengar walking out of the court with a despicable smirk on his ugly face, his expression said “I might have committed the most heinous crime but this is a minor blip and I will soon be back – because in India “Sab Chalta Hai”. How I wish and pray someone had done a Hyderabad on him.

And that smirk has pretty much defined the character of this nation. Whether its corruption , conduct of politicians and citizens alike, getting away with proverbial murder or whatever…..

So as my dear friend, prolific and thought leader par excellence - Andy Mukherjee recommends article after article, ways to take this country out of an economic malaise through large spends on development, in all three scenarios of BC DC AC (Before During After Corona), I beg to disagree with his positivism and audacity of hope, as large part of every Initiative, Govt spending, Tax collection, Infra spend, gets diluted and withered away to land into the pockets of corrupt stakeholders at all levels thereby depriving every single citizen of India – A truly morally and ethically clean nation. And any strategy fulcrummed on a spend centric evolution is most likely to be withered away or land where the tax dollars mustn’t.

Abraham Lincoln s Gettysburg speech in 1863 has been a bedrock of ideology of every democratic nation on this planet, but few nations have been able to follow / imbibe it in its true spirit. Most have just lost the opportunity of implementing true democracy.

Societies that establish democracy on the bedrock of truthfulness and discipline (Singapore) – flourish, but societies that use democracy as a fundamental right to abuse the system and to get away with everything, neither deserve the luxuries of a democracy not would they be able to imbibe a degree of conduct that is expected for a democracy to flourish and function.

Let me endeavour to address a few points that frustrates a middle-class/educated Indian & that are reflective of the state of a nation. And how in the AC (After Corona) world the moral compass of humans and nations could change for the better. But that cannot happen if we don’t recognise and acknowledge the real virus plaguing the deepest innards of our character.

Corruption

In my mind corruption is the most debilitating virus that has embedded in the soul of the nation and if it drains an average of 10% to the Mr. 10 %’s of the nation we are looking at an average annual loss/leakage of approx. 200-250 Billion USD. I am still reminded of a gentleman named Madhu Koda many many years ago (I am not even sure whether he is alive or dead) who in a mere few months of being in power allegedly amassed thousands of crores of wealth through abuse of power. Compare that to an ignorable flutter when a few MPs in the British Parliament submitted a few parking tickets that were fake and had to resign instantly from their positions. An indiscretion like that would be considered a joke in India – maybe considered a fundamental right.

“If one can get away with something, one will most certainly get away” – and that’s the basic problem with democracy.

State of Infrastructure..

Nations have been judged on the strength of their infrastructure – which has catapulted cities/nations to become the global hub of finance and fulcrum of progress – London Underground and not any intellectual superiority,  is one single catalyst that has catapulted London to become the financial hub of the World.

It is believed that India has a total length of 4.3 million Kms of road network that’s managed by state / central governments. Each KM of road costs approx. 1.4 mill USD for a national highway and about 0.7 mill USD for a feeder road/state highway to construct. At an average of 1 mill USD per km, we are looking at staggering numbers that are being spent on infrastructure – primarily roads. A leakage of a few percentage points (at a general norm of 10%) we are looking at billions of dollars of leakage by junior officers, contractors delivering deficiency of service and quality. (rough estimates peg this at 3-5 Bill USD). Most roads across the country need to go through just one rainy season to get completely eroded. It was shameful in the global media, when a prankster made a video wearing a space suit and what appeared to be craters on moon were in reality a usual road in Bangalore.

And during my world travels, when I end up visiting same areas year after year, I haven’t seen any eroded road even on the usual routes that I travel because roads there – last for years without any maintenance. Why – Because they do their job right as per specifications and as per contract.

Enforcement of Contracts

In one of my jobs, I entered into a registered contract to provide some service to someone. And the other party used my service for a year and reneged on the obligation to pay me for it. Shame on our internal system of judiciary and enforcement of contracts that I, I the last 2 years haven’t been able to even deliver the summons to the other party inspite of all the technological advances of emails WhatsApp text-messages because we are still romanticising the systems of 1900’s of a court official delivering subpoenas and leaving all loopholes to be exploited. A nation where a registered promise cannot be enforced – has no real future and can never enthuse any degree of confidence either in an investor, or an entrepreneur – Because You one get away with everything.

State of PSUs

Someone rightly / clichédly said – Government should never be in the business of business. When Coal India launched its IPO, many many years ago, it was expected to become the most valuable company on the planet at that time. Afterall we were dealing with monopoly, infinite coal reserves (probably the largest in the world) some say enough for another 150 years. Yet Coal india is being operated at the lowest possible level of efficiency. Has destroyed entire shareholder wealth and has seemingly no future. Swaminathan Iyer wrote in the TOI many weeks ago about the inefficiency of Coal India Ltd and the key take away point was – Indian worker produces 0.8 tonnes of coal per man shift compared to Australia that produces 40 tonnes per man shift. In the name of socialism the much earlier Prime Ministers created and concentrated national reserves and treasures as engines of welfare for Politicians, officers and workers at large. If the extraction of coal per person per day cannot be linked to the compensation of the CMD of Coal India and every single of its 300,000 employees – the PSUs will continue to erode taxpayers money and shareholder wealth. It was also the same eminent Mr. Iyer who predicted in Jan 2010 that India will over take China by 2020. Alas it remined a dream that might not come true for another 2 decades….

Some 20 years ago as a 25 yr old manager of a small hotel (at the start of my life) in a small hilly town I would always desire my hotel to be full. I would do all that it took to ensure that every guest who ever checked in would always come back and never go anywhere else. At that time I was keen to get a confirmed business of an Oil PSU to be their designated-hotel for their visiting executives from all over the country. Only to realise, as I overheard during a social gathering, that that PSU has an emotionally watertight contract with a hotel far lower in class and service than mine, because the dealing officer gets approx. 2 lacs a year to renew that contract (Mind You I am talking of year 2000). That year he got a Maruti Zen (a popular car of that time). TVM (Time Value of Money) pegs that amount at about 30 lacs in todays value. Such is the quantum of leakage – All at taxpayers expense.

No wonder how hard You try – even though oil is floating and being thrown away/sold free across the planet, its still selling at over Rs 70 per litre in India. - Inefficient monopolistic OMC’s do churn a profit – But they could churn many times more.

Imagine this is just one instance of one PSU involving one city and one officer. Extrapolate it to the entire country. You would want to shoot Yourself in the head – if You complete that math.

Take the case of Oil PSUs, NALCO, NBCC, HUDCO, SBI, GAIL, BHEL, BEL, etc etc etc. If the respective Minister’s and MD’s salaries were directly linked to the EBIDTA of these companies and to global thumb-rules of performance of similar industries , they would have all done well. But the massive destruction of shareholder wealth slowly orchestrated by the inefficient stakeholders at large has truly eroded the incentive to perform and sowed the seeds of deep-rooted malaise that has seemingly no cure. And it’s ironical that the Govt wants to IPO The Life Corporation of India. Some quarters of financial whiz-kids are gung-ho on LIC IPO. Mark my words today. It’s the biggest disaster waiting to happen and biggest fraud on existing policy holders who are expected to partake in the growth story of Indian economy and its financial markets.

Spare a thought for an average tax paying Indian 

• 30-40% Income tax
• 18-28% VAT on everything
• Pathetic supply chain management resulting in inflation upwards of 6-8% (that’s the real inflation really irrespective of the statisticians claims)
• Most expensive Fuel in the world – despite of lowest crude prices
• Accumulated losses of PSUs such as Air India @approx 150 employees per aircraft compared to just about 70 employees per aircraft @indigo – the less said the better about the efficiency and hospitality of Air India
• Infrastructure worst than what human mind can possibly fathom or fragile human body can bear
• Public health and public education in shambles that has allowed the private participants (private hospitals and private schools) to emerge and charge obnoxious tariffs for rather mundane services.

If India has to survive the AC era where the likelihood of deflation and depression will hit it like an unexpected Tsunami soon and the futile narratives built around the demographic dividend (youngest population on the planet) have to remain relevant – the character of this nation must change.

Taxation

Social Security / Consistency of salaries and allowances cannot be secured for half the population (Government Employees) by the other half. The recent unsolicited advice by some IRS officers to increase taxes and subjecting incomes / profits to additional COVID cess is both obnoxious and thoughtless and eeks of fascistic mindset while masquerading as communistic in thought processes but sounding more proletariat.

Taxing the very few who are responsible through their capitalistic superiority by taking risks and putting their capital to work should be rewarded for adding economic value to the nation by generating millions of jobs and generating already high taxes that are withered away by inefficiencies at every level with abject neglect of accountability.

On the contrary, rather than taxing anything that moves, all that the Govt needs to do is to allow the corporates to draw a reverse Covid-Cess (from a national corpus created by the Govt to fight these unusual times) that is a percentage of the sum of average taxes paid by the business in the last 5 years or so.

Rather than juggling with a future stimulus that’s impossible to figure out in a complex country like India where the economic engine has come to a grinding halt – Why cant a % of annual taxes paid be returned to the tax payer to alleviate the economic pain.

GST has been a revolutionary reform that reflects the quantum of sale of an organisation. The Govt can easily make a reasonable assumption of the Operating Profit of respective businesses according to their industry and deduct that from the reverse calculation of the revenues and provide that liquidity to enterprises that allows these to survive.

It sounds mighty responsible while sitting on a high horse to say “Dont retrench and don’t enforce a paycut” But can an organisation print/create money? – NO!!

But Governments Can – That’s what Governments are supposed to do while being responsible in good times while collecting tub-full of taxes year after year. And this isn’t the time to worry about Fiscal Deficit as inflation is the last cause of worry when the entire nation is afraid to spend even for basic needs because of the underlying fear of the unknown.

With all the alleged discipline that our policy makers seem to be proud of, we could barely manage a BBB- on our sovereign, does anyone really care if it changes to Junk.??

The stimulus that will save this nation is elusive, and the little flutter that was created so far is 0.8% of the GDP of India whereas USA has already given a stimulus of 12% of GDP and an additional 2.6% of GDP in payroll protection. In rupee terms Indias stimulus amounts Rs.1307 per capita in comparison to approx. Rs 5 Lacs per capita in the US.

The greatest service that our politicians and officers can do right now is:

• Show up more frequently (great leaders are always there in form and spirit)
• Demonstrate that You feel the pain of the common man / businessman / taxpayer / who are going through severe economic compression
• Avoid frivolous, confidence draining statements (Ala IRS officer’s note to revive economy)
• Find simple ways to give much needed stimulus rather than inventing complex formulas (that will never be perfected). Corporations / Individuals have P&L’s and Balance Sheets – Find ways to just use existing declared data to reverse the debits from these statements
• Involve Industry leaders (who run real businesses and manage real situations) to tackle this vicious enemy
• Reach out to political opponents (who are experienced & educated) and shed the walls of partisanship in the face of such adversity
• And above all let the economic engine NOT STOP under any circumstance. Restarting it would take years
• And lastly build confidence among us 1.3 billion people. Loss of Confidence kills the spirit to work, aspire, travel, purchase and that deflates an economy like nothing else.

The AC world is going to be far far different than what we are imagining right now. Not one economist / chartist / thought leader has the mental / academic bandwidth to fully model the effect of Corona on our planet – as right now we are still in the middle of a global crisis that’s unravelling.

But Lets get real , lets get going before its too late.

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