Saturday, April 13, 2013

A case of going broke?

With market volatility making life difficult for equity-driven brokerage houses, the players are scouting for newer, innovative tools. But have their efforts really paid off?

Biologists have applied game theory to explain genetic mutations. Legal arbitrators have used it to understand negotiations. And brokerage houses are fast mastering it to muscle out competition with every means possible. For these brokerage outfits, it is an age where profits talk, survival of the fittest is the style of living, and constant evolution of their model is a necessary deed. But at what cost?

With the market continuing to misbehave, many broking houses that had mushroomed during the great financial markets boom (2004 to 2007) find themselves in a soup. As many as 48 firms were even forced to surrender or shut shops on NSE & BSE between July 2010 and June 2011. And for the lot of 1,800-odd that continue to breathe, most (predominantly dependent on equity broking) are struggling due to the continuous fall in revenue, which during the past two years has been as killing as a 25% drop on a q-o-q basis. This has left them figuring out: “what next?”

On the surface, the situation may not look as bad, because turnover (equivalent to the total values of deals conducted – both institutional & retail) of the domestic equity brokerage industry did grow by 46% in FY2010-11 to touch Rs.339 trillion ($7.48 trillion; as per ICRA). But a look at the particulars give wrinkles to well-wishers. 86% of the turnover during FY2010-11 was contributed by the low-margin derivatives segment (average broking yield of 3-5 basis points). On the other hand, the contribution of the lucrative cash segment (yield of 10-12 bps) continued to decline. As per ICRA, between Q2, FY10 and Q4, FY11, the average daily trading volumes (on BSE & NSE) in the cash segment fell by a high 33% to Rs.161.15 billion. This implied a fall in the share of the cash segment at the exchanges from 26% in Q2, FY10 to just 10% in Q4, FY11. This change in trading mix, coupled with sustained high competition that triggered a price war in a highly fragmented market, dragged down average rate of commission to 0.15% from 0.4%, ensuring a 1 bps fall in brokerage yield y-o-y to the sub-4bps levels in FY2011. In FY2010, the average daily turnover (ADTO) of emerging segments like options and commodities – which were once imagined to fuel growth – grew at 127% and 110% respectively. [Currently the ADTO of commodities is Rs.460 billion, with a broking yield of 1-2 bps or lower.] Another fast-growing segment is called currency trading (in which trading in India started in September 2008 and today, the ADTO is at Rs.450 billion with broking yield between 0.6 to 0.8 bps). These three tools appear attractive, but have not worked in the name of diversification. Reason: ultra-low yields.

Another not-so-successful attempt – in recent years, to create a diversified revenue stream, brokerage houses have ventured into capital market related funding activities. But while this move was expected to earn them money in a sunbathing mode, the outcome has been quite the contrary. The capital market financing book (which consists of margin funding, loan against shares & promoter funding) of 19 large brokerage outfits (tracked by ICRA; which has increased to over Rs.160 billion by March 2011 from Rs.120 billion in March 2010), has taken a beating due to a constant rise in cost of funding (courtesy: RBI’s rate hikes), and the failure to pass on the cost to the clients. Result: return on equity invested for the financing business is down from 15% to 12% (and even this is sans the operating expenses & credit costs).


Source : IIPM Editorial, 2012.
An Initiative of IIPM, Malay Chaudhuri
 
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Friday, April 12, 2013

Right idea, wrong radar

Competition Commission of India has notified its norms to prevent M&As from creating monopoly like situations. But they may prove ineffective and even counterproductive in their current form by virat bahri

Chances are bright that you will not catch the usually staid Bill Gates make a politically sensitive statement. But in one of his very famous comments a few years back, he had made three of them in one go. He lampooned his own country for not being able to catch Saddam Hussein, called the EU a passing fad (doesn’t look so way off anymore!) and also exclaimed that he was sick of fascist lawsuits! Gates’ reaction was to the different lawsuits that Microsoft had to confront on either side of the Atlantic. A number of companies like Microsoft have gone through hell facing legal ire when they are deemed to have reached dominant positions in their respective industries and also misused these positions to generate supernormal returns, kill competition or exploit customers.

The Competition Commission of India (CCI) has recently taken some steps to prevent the possibility of M&As leading to monopoly-like situations in India, whether they are solemnised within or beyond its borders. The norms stipulate that post merger/acquisition entities with combined assets greater than Rs.15 billion (or > $750 million globally and at least Rs.7.5 billion in India) or belonging to a corporate group with turnovers greater than Rs.60 billion in India (or >$3 billion globally & at least Rs.7.5 billion in India) will have to notify. Similarly, combinations with turnovers greater than Rs.45 billion in India (or > $2.25 billion globally & at least Rs.22.5 billion in India) or belonging to groups with turnovers over Rs.180 billion in India (or >9 billion globally & at least Rs.22.5 billion in India) will have to seek approval. Industry people hail it as a great decision for a country that is seeing increasing M&A activity. But will these norms be effective enough? Or can they prove counterproductive instead?

As per data from PwC, M&A deals in India reached $36.15 billion in 2010, a growth of 85.67% yoy. The more interesting part is that $10.7 billion from the value is accounted for by the Bharti-Zain deal, one of the key strategic bases for which was the unparalleled extent of competition in the Indian telecom market! A point that needs to be underscored is that when you are discussing the entire concept of past and current monopolies in the Indian market, a number of names would actually come up from the public sector itself like Coal India, SAIL (when you consider captive ore mines) NMDC, BHEL, or Indian Railways!

Even a company of the size of Reliance Industries could not monopolise retail in India as competitors had feared. The latest is the claim of the company that it had become the country’s largest food & grocery retailer with a business of Rs.25.13 billion from Reliance Fresh was quickly countered by Pantaloon CEO Kishore Biyani in the media. Meanwhile, Wal-Mart is gaining traction and international players like Carrefour would further open up the market. However, one cannot ignore that when it comes to the private sector in India, a number of situations amounts to oligopolies or monopolistic competition across industries. And when it comes to understanding whether a monopoly situation exists or is being misused in diverse sectors, financial benchmarks can fall short. For instance, in aviation, even a Jet-Sahara (which just managed a profit of Rs.96.9 million in FY 2010-11) or a Kingfisher-Air Deccan combine (net loss of Rs.10.27 billion for FY-2010-11) has found it tough to stay in the black. And these players are actually monopolising some key sectors in the aviation space! In industries like cement and steel or even real estate, the dominant issue that has pestered the government has been cartelisation. Indeed, private companies in such sectors have succeeded in duping customers and artificially raising prices, but can M&A laws specific to one combined entity/corporate group really help there?


Source : IIPM Editorial, 2012.
An Initiative of IIPM, Malay Chaudhuri
 
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Monday, April 08, 2013

A script made for ‘unhappily ever after’ endings?

Corporate cultures trying to manage creative processes are viewed with suspicion. And considering how they are destroying our film industry, it’s not without reason

For the most part, corporate cultures have been quite adept at creating highly efficient and result oriented business processes and adhering to them to ensure more predictable outcomes. Managing creative processes, on the other hand, has often been considered the Achilles Heel for professional managers. Therefore, when the trend of corporatization of India’s film industry began a few years back, there was reason enough to view the entire phenomenon with skepticism. And today, if we look back at the string of box office disasters that they have led to, those fears are justified.

Our most recent debacle in this regard is Mausam, the Shahid Kapoor-Sonam starrer directed by Pankaj Kapur and co-produced by Vistaar Religare (JV of financial services player Religare & Vistaar Entertainment), Eros International Media & Cinergy. The final verdict on its performance isn’t out yet, but it opened to around 40% bookings and initial word-of mouth is making it worse. The most interesting aspect of the movie over the last week has been the Twitter war that Shahid unleashed. Film critic Taran Adarsh had tweeted that Mausam’s numbers were below average, to which Shahid shot back saying, “So all those trying so hard to s***w Mausam can go s***w themselves.” Adarsh replied back saying that Shahid should introspect into the movie’s shortcomings rather than “maligning him (Adarsh) on a public platform”! In fact, one industry source tells us, “All of Religare’s projects are big flops and one suspects foul motives behind spending so much money into big films.” Other notable examples of such terrible flops or rank average performances come to mind. Raavan was one of the biggest of last year; reportedly bought by Reliance for Rs.1 billion. Reliance Big Pictures was also involved in Kites, another box office failure (both lost an estimated Rs.1 billion together). UTV’s Ronnie Screwvalla has a background in the entertainment industry, but he is now well known for deploying the corporate model. And last year, UTV Motion Pictures was party to another huge debacle – Farah Khan’s Tees Maar Khan (reportedly saved only by opening collection of around Rs.500 million) apart from Sanjay Leela Bhansali’s Guzaarish (lost around Rs.350 million), which also failed to enthuse the box office. This year, the record has continued with Saat Khoon Maaf, which failed to enthuse audiences. PVR Pictures was involved in two big ones - Khelein Hum Jee Jaan Se (lost around Rs.300 million) with Ashutosh Gowarikar Productions and also acquired domestic theatrical rights of Action Replayy (failed despite being a Diwali release & lost Rs.150-200 million). Their co-production Aisha with Anil Kapoor also flunked.


Source : IIPM Editorial, 2012.
An Initiative of IIPM, Malay Chaudhuri
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Thursday, April 04, 2013

B&E This Fortnight

INTERNATIONAL
BUSINESS, ECONOMY & FINANCE
Hello moto!

In a move that will instigate its full fledged entry into the telecommunications hardware business, the global search giant Google is set to buy Motorola Mobility for a staggering $12.5 billion. If approved, this will be Google’s most expensive acquisition ever. The deal will boost Google’s mobile OS – Android. Since its launch in 2007, Android has been installed in 150 million devices. Further, more than 550,000 devices join the Android ecosystem daily through a wide network of 39 manufacturers and 231 carriers spread over 123 countries. It’s an all cash deal where in Google will be paying $40 a share – a 63% premium. The deal will put Google in the competition zone with Apple, Nokia and Research in Motion, resulting in significant competitive advantage. The deal is supposed to close by end of this year or early 2012 subject to regulatory approvals in the US and EU. Even after the deal, the Android platform will remain open source as Google plans to operate Motorola Mobility as a separate business entity. The mobile major currently holds around 17,000 patents and the deal will enable Google to better protect Android from anti-competitive attacks from Microsoft, Apple, and other companies. The development will create phenomenal synergies that would enhance the Android ecosystem.

AIG sues BofA
American International Group (AIG) has filed a $10.5 billion lawsuit against Bank Of America (BofA) over the sale of residential mortgage backed securities that are allegedly marred by fraud, misrepresentation and omission. The claim, which is one of the largest to raise its head in the aftermath of the 2008 financial crisis, blames BofA and its subsidiaries to have issued defective mortgages to borrowers who were not in position to repay, packaged them into supposedly low risk securities and sold $28 billion worth to AIG using offering documents that misrepresented the quality of the loans. Despite the huge losses incurred from the collapse of the mortgage market, very few claims have been filed over the past three years. Last year, Goldman Sachs paid $550 million to settle allegations from Securities and Exchange Commission (SEC) for its alleged fraud in marketing of mortgage backed securities called Abacus, which the company did not admit doing.


Source : IIPM Editorial, 2012.
An Initiative of IIPM, Malay Chaudhuri
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Thursday, March 28, 2013

Pravin Kumar

In an Interaction with B&E’s Akhilesh Shukla, Pravin Kumar, CEO, Spanco BPO speaks on The Company’s entry into The African Subcontinent, tie-up with Bharti Airtel, Expansion plans and The Challenges in Employee retention that lie ahead

B&E: While the entire BPO industry runs on the off-shore business model, Spanco is interested in onshore businesses. What’s the reason behind this?
Pravin Kumar (PK): You’re right. At Spanco, we believe in focusing on the onshore business model – as much as 60% of Spanco’s revenue comes from onshore businesses while the rest is from offshore. The benefit of being in the onshore business model is that it minimises the risk of losing business. Besides, at Spanco, we believe in domain knowledge – that is why we just go for select clients and sectors. Most of our clients are from the BFSI, telecom and banking sectors.

B&E: What are the major investments that you are making in your Africa business, especially after getting shortlisted by Bharti Airtel for customer care and back-end support services?
PK: As soon as we entered into the African market, we got the contract from Bharti Airtel. As a result, we became the largest BPO in Africa on day one itself, with a work force of 2,200 people. We have improved the service level with the existing manpower and infrastructure. Earlier, these customer care centres managed to answer only 30% of the calls; it has now improved to 90%. As a result, the number of calls received per day dipped to 12,000 per day from 15,000 per day (as a result of increased customer satisfaction). We have committed an investment of $20 million for the next three years and are planning to hire 1,500 people by the end of March 2011. In the next two years, we will take the manpower level to 8,000. Further, to leverage our India experience, we plan to train some of the workforce in Africa at our facility in India. We have plans to take 100-125 work forces in batches to India for training. This will start from the next financial year.

B&E: What is the kind of growth opportunity you see for BPO businesses in Africa? How is the market different from that of India?
PK: The BPO sector would be one of the biggest employers in the African subcontinent. In the next five years, this sector will employ half a million people in the region in both domestic and international market. The best part of the continent is that they have people who naturally speak English and French. In some parts of the Africa, they speak Arabic also. Their accent is very close to the European countries. The time difference is less in comparison with India. Besides, as the unemployment rate is high, the workforce is cheaper. The average monthly salary ranges from $200-300. We see a huge growth opportunity for ourselves. The market will become at par with our India operation in a span of approximately three years.

B&E: Apart from the customer and back-end support of telecom operators, what are the other businesses you are planning to tap in the sub-continent?
We already have a tie up with Bharti Airtel for $226 million for running its customer care and back-end support for the next five years. The telecom market in Africa will certainly evolve. After Bharti Airtel’s entry, we have witnessed Spanco’s revenues go up. Besides that, we have also got an opportunity to run 66 Airtel showrooms in Africa. We will soon sign the agreement. That business will also flourish with the growth of telecom market in the region. Spanco would foray into power distribution and power reforms too. The power availability in some parts of Africa is as low as 15%, the maximum is 40%. We can add value to these two areas and the sector has a huge opportunity. And yes, e-governance has a high potential for growth too in the continent.


Source : IIPM Editorial, 2012.
An Initiative of IIPM, Malay Chaudhuri
and Arindam Chaudhuri (Renowned Management Guru and Economist).

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Tuesday, March 12, 2013

She’s Not Yet a Woman To Me

Is Your Child Growing up Too Fast? Check in Time So That ‘Too Much, Too Young’ Doesn’t Leave you with 'Too Little, Too Late'...

Lolita was a literary marvel or a sleaze roll, depending on how you look at it. In any case, whether inside Nabokov’s classic, or outside of it, sexually precocious children are a discomfiting idea to most of us, except maybe wannabe reality-show makers who would stop at nothing.

Sexual precocity is just one of the fallouts to be imagined in tandem with the surging global trend of children attaining early puberty. As if the unbridled consumerism of our times wasn’t already blurring the lines between childhood, adolescence and adulthood, there comes the distressing and confusing, er, period of puberty for children. While 9 to 13 years is considered the normal bracket for pubertal development – a sequence of physical changes – to start, imagine getting pregnant at 10! A girl in Jerez, Spain, all of 10 years, accomplished just that and gave birth to a baby girl last month, at an age when most others like her are only expecting siblings.

It is tempting to get into the moral and legal propriety of consensual sex between minors – the father is a boy of 13 – but choosing to restrict the discussion to its biological complications, we wonder what it is to be burdened with maternity at such a tender age. Dr. Nikita Trehan, Gynaecologist and Laparoscopic Surgeon, says, “It is a very bad idea, since bone development isn’t complete in young mothers. In addition, the mother and fetus will be competing for nutrients during pregnancy. The risk of stillbirths and other health-related problems with the baby increase too.”


Source : IIPM Editorial, 2012.
An Initiative of IIPM, Malay Chaudhuri
and Arindam Chaudhuri (Renowned Management Guru and Economist).

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Thursday, March 07, 2013

GOLF IN INDIA: MULTIPLIER EFFECTS

They say Multi-Billion dollar deals are supposed to get signed when you play golf with the plutocrats. Strangely, the Nabob Parvenu class in India hasn’t quite resonated with such fables despite golf’s presence for quite sometime in India. Thus, just to put paid to current perceptions of the pseudo-club, B&E does a quasi-subjective survey of the sport (and is surprised)

One key example that met our eyes was Digraj Singh, who runs Digraj Golf Inc., a corporate golf business, which has got even the likes of Thomas Cook interested in associating monetarily with the sport in a big way. Digraj started a landmark league that stretched golf: usually a golfing event for men is for 4 days, and for women, 3 days. Digraj Golf Inc. started a league this year that is played in Delhi for over 2 months. And ‘stretching golf’ is not only in terms of the time golf is being played. The plan is to extend the tournament to all those golfers (and by PGTI data, there are 100,000 golfers in India today) who want to play but are either not professionals or do not have the money to pay for regular golf event. Indiver Rastogi, Head, Enterprise Business Unit, Thomas Cook India Ltd, says he and Rakshit Desai, Executive Director, Travel Services, had been thinking of doing something with golf for some time. “So when Digraj came up with the idea of a league with such a broad base, we did not take much time at all to get associated,” he said. They saw golf as an area of change. The Indian Golf League, of which they are the title sponsors, allows their customers to play golf for two months. This was unimaginable before Digraj came up with the league concept.

No wonder, the best brands are teeing off to catch the golf train. Rolex, Mercedez Benz, Seagram, LG, Audi, Aircel, Tata Steel, Indian PSUs SAIL, ONGC... you name ‘em and they are there. The reason, explains Parmar, is that foreign companies realise that India has two major assets lacking in other countries: sprawling landscapes that can house golf courses and a booming economy with a massive disposable income in the hands of the middle and upper middle classes for the country to become the regeneration crib for golf.

From a comparatively insignificant 80 contestants for the Indian Junior Tour some five years ago, there are now 200. But more than any other index, the amateur golf story in India is marked by the stepping in of the US-based sports marketing behemoth, IMG, which now has a joint venture with Reliance Industries (Nita Ambani being the presiding deity for Reliance’s sports investment) to give scholarship to four young golfing talents, who’d be given comprehensive education plus golf training in the Florida-based Leadbetter (named after the golfing legend) institute. The IMG Reliance JV’s Indian golf programme will invest a million dollars on each selected talent, who would go to Florida for an 11-hour per day gruelling course of formal education plus golf training from this year on.


Source : IIPM Editorial, 2012.
An Initiative of IIPM, Malay Chaudhuri
and Arindam Chaudhuri (Renowned Management Guru and Economist).

For More IIPM Info, Visit below mentioned IIPM articles
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