8K Miles & the Minority Shareholder

We have a special treat today. Kimi has written a guest post for us

Kimi or Krishnaraj Venkararaman is an investor based out of Bangalore.

 

I had a semi-awakening while standing on the footsteps of Chennai Central Station many years ago. An auto driver quoted ₹ 200 for an important address I had to go to. He circled the station and dropped me just a few meters ahead, to my destination. Surprised, but also a man of my word I handed ₹ 200 what should have been ₹ 5, and ventured to ask him about pricing. He said, “Sir, suckers like you come very rarely these days. And we have to make the most of limited opportunities.”

For long I felt a lonely sucker until I began investing.

The stock market attracted so many of us that I at once felt like home. Our community even has a name – minority shareholders. We are privileged to be wooed by everyone – promoters, management, brokers, fund houses and the media. It’s true that many of us move out after experience, but India has a demographic dividend that keeps on giving. However the flip side of a large supply is that companies take it too easy and make ‘suckering’ nakedly obvious.

And I want to send a message to them to do a better job.

Take 8K Miles Software Services Ltd (NSE:8KMILES), a ‘technology company born on Cloud’. In April 2018 their CFO was reportedly awarded for being ‘quiet’, ‘working behind the scenes’ to make sure that 8K Miles is ‘safe and sound’. Their auditor Deloitte however writes that this award winning CFO’s financial statements cannot be relied upon and may undergo big changes.

But that’s not my point.

My point is that the same Deloitte also helped pick up this CFO for awards, ‘after sifting through 1000s of companies’! Moreover the CFO’s real behind- the- scenes work was to sell his shares. Soon after the Board announced a ₹ 7/share dividend on May 10 2017 he started selling. After dumping nearly half his stake the dividend was revised down to ₹ 1 / share!

So why was the CFO selling shares of an award winning company? According to the CEO, “….Ramani (the CFO) has….eh there are…there are…see basically eh I own 55% of the company shareholding and I have not sold one single share from the inception. Ramani as part of his eh charitable eh and a eh trust what he was selling and he has made an announcement in the analyst analyst meet also….”.

We are led to believe that the CFO had a charitable commitment for about ₹ 60 crores. But the CEO also knew, as he was speaking, that the CFO provided an unsecured loan to 8KMiles soon after selling his stake. That’s what they have signed on, in the Annual Report.

As such, the structure of 8KMiles is like a complex asana.

A California based NRI takes control of an India listed trading company, converts it into a software company, which in turn starts US entities located in the same California. Almost all the action in the Balance Sheet / P&L happens there, including buying of various US businesses in exchange for cash / stake dilution. The Indian entity mostly only provides funding for the US entities whose accounts in turn have never been shared. Often the interests of Indian shareholders in the US entity are diluted even as they are not properly informed (as pointed out by the Secretarial Auditor). Till date no one knows who the remaining 37% owners are.

We are kept entertained in the annual report with buzzwords like Cloud, Artificial Intelligence, Deep Learning, Machine Learning,Block chains, Platforms and so on. Plodding through the financial statements (that the auditor admits may change bigly) is not so entertaining.

For its work Deloitte charged shareholders around ₹ 22 lakhs. For that sum even suckers expect something in return. Like, to check if a copy paste job is done properly, or that management does not say one thing in one place and the exact opposite in another. But, no.

1. Deloitte does not think Sandeep Tandon who holds 6.01% of the company as per exchange filings,holds more than 5% of the firm. His name is missing from names of shareholders holding more than 5% share in the notes to accounts.

2. Management says 8KMiles advanced a sum of ₹ 708.25 lakhs made to a related party on page 177, but the same amount, is not a material transaction with a related party on page 179. How can something be true and not true at the same time?

3. Can a financial liability also be a contingent liability at the same time? On page 165 & 177 ‘Contingent Consideration for Acquisition’ of around ₹ 21 crores is shown as a crystallized liability. In other words something is simultaneously surely owed to and, may not be owed to.

Minority shareholders are always ready to be gullible but management has to put in more efforts to conceal the obvious. Look at this.

1. The CFO sells close to 80% of his shares partly to provide unsecured debt to the company which then provides debt to its US subsidiary, which then funds US companies owned/managed by the NRI promoter. Those companies are yet to pay full interest.

2. The CEO says there are about 500 people employed outside India. Most of these 500 are said in the US. The financial statements say it also develops and ‘capitalizes’ software products from these entities. So where do they work? The company’s website lists offices but these are office suites and not development centers that can house hundreds of people. The rent paid by these entities put together is in Rupee terms just 50% more than what it pays in India, while employing 250% more employees. I don’t know how that’s possible. Unless they have bunk desks (like bunk beds) – one on top of the other.

3. A company that has more than tripled revenues over three years and develops/buys so much of software (~ 60% of tangible/intangible assets), has less computers & accessories than it did then!

4. The company says it books revenues even on expired contracts that are ‘under renewal’.

The list is much longer but you get the drift. It goes like this –

Management presents financial statements that the auditors, whose namesake shortlists the CFO for awards for making sure the company is ‘safe and sound’, and such CFO who has sold most of his shares of this ‘safe and sound’ company, ostensibly for charitable commitments, but actually to provide unsecured loans, which in turn is ultimately used to fund the US promoter’s interests, such auditors who say such financial statements may change bigly, charge ₹ 22 lakhs but cannot spot a copy paste error, can hold something to be yes and no at the same time, such financial statements who subsidiary accounts where most money is made is not shared but whose shareholding keeps changing.

Shareholders are now asked to approve these financial statements.

The denouement is on 29 September 2018 when the AGM will be held, at 8:59 am. Why 8:59 am? Why not 9:00 am? That’s because Rahu Kalam starts at 9 am and management knows that protecting sentiments of minority shareholders is more important than protecting our shareholder value

Notes from the AMFI Mutual Fund 2018 Summit

The guest post below has been written by well known and highly respected Pune Financial Advisor Sanjay Rao. He can be reached at  9673895854 or sanjaycrao@gmail.com

I had an opportunity to attend the AMFI Mutual Fund 2018 Summit on Aug 23,2018 in Mumbai.

The theme of the event of #ThinkDigital .

The opening address was given by Mr A Balasubramanian, Chairman , AMFI

He gave a brief on the industry outlook. A presentation was shown on the Mutual Funds Sahi Hai campaign.

Key Takeaway points:
1>Two years ago, if you were speaking to someone and you said mutual funds, that person would complete it by saying – mutual funds are subject to market risks. But now they complete it by saying – #mutualfundssahihai
2>The next wave of growth in MF industry may be led by retailing of debt schemes…be ready…AMFI showcased their new investor awareness campaign.. “Mutual Fund Fixed Income schemes mein bhi FD wali baat hai “
3>47% of the record 16 million individual folios added during FY2018 were SIP accounts

The next speaker was Mr Deepak Parekh, Chairman of HDFC . It was a pleasure to see him in the flesh

He highlighted everything that he thought was wrong with the industry and along the same lines mentioning how much more growth can be achieved

Key Takeaway points:
1>Doubling the Assets under management in 5 years
2> To do away with providing incentive to distributors by taking them to foreign locations under the pretext of training. He said this was more prevalent in the Insurance industry and should be curbed.
3>The AMCs should rationalise the cost structure
4>The advisors should be well trained in order to prevent misselling
5> Bad financial decisions are made in good times so the industry should grow prudently and not irrationally
6> Diversification . The MF industry should hire more women

Then the keynote address by chief guest, Shri Ajay Tyagi, Chairman , SEBI
He expressed concerns over the growing concentration of assets under management (AUM) among the top seven players and emphasized on the need of having more competition to ensure uniform growth among industry players.

Key Takeaway points:
1>He commended the industry for achieving stellar growth over the last few years, but added that the Indian mutual fund AUM to GDP ratio continued to be lower at 11 percent of GDP as compared to global average of 62 percent
2>Risk management – Debt funds have to be more vigilant about the risks they are taking and how these risks are being valued.
3>Promote direct plans- He stressed that AMCs should promote direct plans more actively in investor awareness campaigns.
4> MFs must go to smaller towns

The next speaker was Dr Uma Shashikant, Chairperson ,CIEL who spoke via a video call from the USA

She compared the USA mutual finds with that of India and so to why the penetration was so much over there.

Key Takeaway points:
1>One of the reasons being that American investors because mutual funds are offered as part of retirement plans (401k plans). Unless Indian govt nudges Indian investors, cultural barriers favoring deposits will remain in place
2>It is important to build products that suit investor preferences like ‘retirement funds which keep changing asset allocation as the investor reaches closer to goal’

Post this Ms Usha Thorat, Former Deputy Governor ,RBI spoke on strengthening the Indian Debt market.

Quite an intelligent talk. She spoke in depth of debt bonds and the need for fund houses to monitor companies besides rating agencies

We had an hour lunch break where we could network with other IFAs

Post lunch was a Panel Discussion- Leveraging Digital for Intermediation with
Mr Anuj Kumar, CEO, CAMS
Mr V Ganesh , CEO , Karvy
Mr Ramesh V, CEO, MF Utility
Mr Neerav Kaushik , VP, Franklin Templeton Services(India)

A very good discussion on what being really Digital Digital means.

Taking money out of an ATM machine, POS counters where still you have to interact with physical intermediaries are not totally digital.

Spoke on how much more awareness needs to be made for IFAs to go digital
Out of 157 crore banking transactions only 5 crore through complete digital mode..Are we really digital? A great point brought in by V Ganesh

Next was the most dynamic sessions of the day ,Leveraging Technology for the next phase of growth by Mr Vijay Shekar Sharma, Paytm

The amount of energy and enthusiasm that he showed made us come out of our post lunch slumber and the crowd couldnt have enough of him

He was talking of how disruptive Paytm was going to be to the MF industry

Key Takeaway points:
1>He said -we want to become the wealth advisor to the auto rickshaw guy and a shopkeeper. If the auto guy earns extra Rs 500 on a certain day, we want him to pick up the phone and in 3 clicks invest it. I’m sure a lot of the IFAs were squirming in their seats despite a smile on their face.
2> He wanted promote zero based commissions funds with real time access to CKYC, Subscription and on the spot redemption. The points he made seemed logical but pointed he knew the regulators would have their own take on this
3>The country is not in English. It’s a good idea to give mutual fund statements in regional languages. Making them digital would cut costs and trees too.He gave very good examples of how Paytm was achieving all this.
4>The most amount of gold was sold on Paytm.
5> At the QnA when an IFA asked how can one invest in a MF by 3 click with no knowledge, he gave comparisons on how one wouldnt buy a shirt online cause the feel,style,fitting cannot be physically seen. Well now most of the online buys are in fashion. There will be disruption whether we like it or not. I’m sure the way he spoke,the energy and the Paytm accomplishments would give most of the IFAs a true sense of whats coming.
6>Paytm is the largest seller of Hero bikes in the country, even more than the distributors and here we are talking about something intangible asset like MF.
One of the best sessions of the day

The next panel discussion was Leveraging Digital for Intermediation – The Key to Customer Expansion
Mr Rajiv Bajaj, Bajaj Capital
Mr Jignesh Desai, NJ India
Mr Hemant Rustagi, WiseInvest Advisors

Key Takeaway Points:
1>Mutual Fund business is also psychological and needs tech plus touch – Rajiv Bajaj
2>If the mutual fund industry needs to double AUM, we need minimum of 5 lac advisors onboard – Jignesh Desai,

Contrary to what Vijay of Paytm was saying ,Hemant and Jignesh were talking on how important the role of an advisor was.

When people do a 3 click investment they are actually agreeing to knowing what the product risk is — but do they really.

The final Panel Discussion of the day with some of the veterans from the Mutual Fund Industry to discuss The Way Forward with moderator Tanvir Gill of ETNow :
Sanjay Sapre, President, Franklin Templeton MF
Kailash Kulkarni, CEO, L&T MF
Swarup Mohanty, Mirae Asset MF

They were generally talking on the MF trends and how important it was for an advisor to do their due diligence for the client as its the name of the entire industry/fraternity at stake and not just the advisors.

Headed back to Pune after a well worth time spent.

Kerala Floods: Bipolar Impact on Stocks

Note by well known Kochi investor K S Priyan 

Bi-polar impact of Kerala deluge: big win coming for some & permanent loss for others.

Big win : Reconstruction, Supply n Leverage

– Cement, roofing, pipe, electrical, wood and plywood cos will have an unprecedented demand starting 15days for next 3months at least fm the staggering amount of reconstruction needed. A fortnight of poor offtake that too in midst of monsoon low season is nothing.

Cement – Ramco,Ind Cement
Wires – Vguard
Roofing- Everest, Visaka
Steel – JSW n others
Electrical – Havells, CG
Other- HIL, Cera

– Lower income households and MSMEs are the biggest users of Gold loans cos and therefore a dramatically higher demand for loans can be expected. On the other hand there will be rising delinquency but as collateral(LTV sub 75pct) is gold, a strong n liquid asset, the net impact will be NIL.

– PV sales will rocket as cars in thousands have been damaged beyond repair. Maruti n Mahindra

– Roads estimated over 5k km have been damaged and need repair or rebuild at express pace. Tar/ Bitumen manufacturers will see demand surge

– Organised retail chains like Big Bazaar n Reliance Mart are running out of stock. In ST their ability to manage supply chain will stand out compared to mom-pop shops.

– Massive medical demand of anti-infection, gastroenteritis, antibacterial etc. Cipla, DRL, Abbott best placed

The ones really impacted are:

– Wonderla will not be able to recover the loss of visitor. Discretionary spend will be seriously curtailed as will be travel fm northern districts to Kochi, an important stream of income

– Rubfila will be impacted in med term with serious hike in RM cost and low latex availability in ST. Weak rupee is not helping in imports either. Questionable ability to pass rising cost

– Insurance cos are going to take big hit. Massive loss for car, crop and establishment insurance. Bajaj Allianz, Hdfc Ergo n NIA would be top of losers

– Banking to certain extent due to slow biz, loan delinquency, damage to branch infra, employee absenteeism. Drop in CASA in ST for Federal, SIB, DXB

– KNR toll controls the main entry to Kerala fm TN side. The traffic is down to trickle and will take time to normalise. Permanent loss

– Air travel is unrecoverable and biggest impact would be to INDIGO

– Aster Medcity, the sole listed hospital has been closed since last week and will take a fortnight to reach full availability. Massive loss expected from biz loss

– Liquor cos are looking at serious loss fm, short-med term impact of wage loss, lost Onam week sale(makes 5-6pct of annual), impacted distribution and competing demand of surplus inflow in next month in MT. USL, Radico, UBL

– Gold retail is complete washout. Marriages have been postponed or planned in low key. TITAN has minor presence

– Tea and coffee estates of Munnar, Wynad n Coorg are in serious trouble fm record rain fm mid-july and now the washout expected to last 2weeks. Further absenteeism will drag prod down for next 6months. Darjeeling estates have taken year to recover fm troubles and sets an example. TGBL, Tata Coffee, Harrison’s etc

– Muthoot Capital will have med term impact on demand and higher delinquency. Collateral(2W) in most cases will be worthless. Onam sale washout is serious but may get normalised in q3

– 2W sales are washout in q2 with entire festival peak lost. May take upto late Q3 for stabilisation of demand

Mixed to low impact :

– VGuard has NO factory in Kerala. Therefore a prod disruption may not happen. Sales especially of high margin stabilizer be impacted in ST fm lost Onam sales in Q2. This will more than be covered in incoming reconstruction n refurbishing demand In Q2-3

– Kitex staff live in dorms on campus fully provided for. The location is on high land. Impact is abysmal if any. Weak rupee is good

-Tyre companies stock RM 2-3 months advance and then Indian prod in monsoon only contributes to 15-20pct of consumption, rest being imported. Global rubber prices are soft and compensate more than enuf for Rupee depreciation.

– Cochin Shipyard has been spared any damage to inventory or work day loss

Easy, Automatic Portfolio Tracking with SimpleMoney

This guest post is written by Pranshu Maheshwari of SimpleMoney, a  Chennai-based fintech startup.He explains his product offering:

If you invest in direct mutual funds or are considering it, chances are, you have been overwhelmed by keeping track of all of your funds across multiple fund houses and portals.

If you have tried your hand at portfolio tracking, you probably know how exhausting and time consuming it can be. You have probably spent long hours in front of an Excel spreadsheet updating your information, or have manually uploaded your information to portals on an all too regular basis.

One option to overcome this could be logging in directly to the fund house’s website, but if you invest in different funds, this can be time consuming. With greater awareness of the benefits of investing in mutual funds directly, more of us are now investing across different platforms. Keeping track of all of this can be very difficult.

This is a shame, because mutual funds are actually great investment tools, but it’s possible that some of you might be discouraged from investing directly because of how difficult it can be to keep track of everything. The benefit of saving you 1-2% by investing in direct (rather than regular) funds would be outweighed by the hassle of all this manual tracking!

I tried to figure out if there could be an easier way of doing all this, which is when I built SimpleMoney, a tool that tracks your portfolio by reading the investment statements in your inbox, eliminating the need for data entry or uploading of information.

All you need to do is login, and your portfolio will be loaded automatically. New investments and transactions are added automatically too.

With SimpleMoney, you can see the performance of your portfolio with just a couple of clicks. SimpleMoney calculates metrics like absolute change and XIRR for all your investments. XIRR is an important value that will help you compare the performance of different information and help you evaluate your returns.

You can see this data for individual funds, by asset class, or by type of fund. You can also compare your returns against the market using our proprietary algorithm, CorrectCompare™.

SimpleMoney calculates all these metrics over various time periods, from the last one day to the last five years. I personally find this useful to figure out whether my funds are underperforming against the market, and I have been able to move out of bad investments quickly.

If you invest on behalf of your family members, you can track investments from multiple email IDs on SimpleMoney, and categorize them into subfolios by using the PAN number, folio number or name.

SimpleMoney also shows you all the capital gains taxes for your investments, allowing you to automatically calculate your advance tax liability.

SimpleMoney is free, and it takes just ten seconds of work to track your entire portfolio – we’d love for you to try it out and let us know what you think!

If you have any questions, please get in touch at support@simplemoney.in, and we’ll be happy to answer.

Happy investing!

Valuations in Indian Markets

The post below has been written by well known and highly respected Pune investor Jiten Parmar.

 

Many believe Indian markets are expensive. Nifty P/E is 24.

My take on this.

I believe we must consider the following :

1) Equity competes with the following classes for investment – Real Estate, Gold, Debt (FD, bank deposits, debt MF).

Let’s analyze each of this.

Real Estate:

This asset is in a cyclical downturn. Prices have been coming down and I don’t see that changing in the near term. Real Estate as an investment is not at all a paying asset class right now. And I see lower and lower domestic investment inflows in that.

Gold :
Fascination of gold is decreasing by the day among Indians. I definitely see lot less attraction for gold among the young Indians. Gold imports are coming down. And returns are very low, right now.

Debt :
FD rates, return on debt instruments are coming down by the day. 6-7% return barely matches inflation. So in real term you are really not making anything.

This leaves Equity as the only asset class which can give superior returns.

2) Based on above factors, we are seeing record inflows into equity domestically.

More than 5000 Cr per month coming into equities via MF SIPS apart from lumpsum investments.

LIC and other life insurance also invest a sizable amount in equity.

EPFO and NPS equity inflows have also started. These domestic inflows have really helped in stabilizing and supporting the market even in case of FII outflows.

Our dependence on FIIs has definitely come down. I don’t see domestic inflows slowing down, which will keep fueling the equity markets.

3) Fiscal health of government is also much improved. Tax compliance is bound to increase.

Merging of formal and informal economy has been fueled by Demonetization and will further gather pace with impending GST (a game changer reform).

FIIs are looking at India with renewed vigor (Mar 2017 showed record inflows).

With political stability, reform path is clear.

And a sovereign rating upgrade sooner or later is imminent. This can lead to more FII inflows.

4) Economy is bound to improve from here. Earnings are at a low and sooner or later I see them improving. Massive infra push definitely seems like happening. Many initiatives of government will bear fruit sooner or later.

So, in conclusion, I think that Indian markets may remain expensive or in fact become more expensive.

Corrections may come intermittently (and since many have big cash, will be bought into, thus protecting big downfall).

Runway seems clear at least for the next few years as far as equity is concerned.

And the supposedly expensive 24 P/E may be the new normal for sometime to come.