Friday, February 26, 2016

What they don't teach you at Business Schools (Harvard or not)

As a minority investor your interests should be aligned with the interests of the promoters of the company. Buffett looks for integrity first, followed by intelligence and energy.

As you may be holding 20 positions, you can only infer from AGM or market gossip or genuine feedback about company. 

Some of the hints and clues that minority interest take cue from are dividend policy, communication during bad times, dealing with group companies, acquisition of shares from open market etc.

 One of the big turn offs for investors is when the promoter groups run a large number of companies be they public or private (this is a very common disease with Indian promoters) think ADAG Group, VH Group (Venky's India). 

The key problem is that # of hours in a day are limited and the promoters looking at 5 businesses will do worse than one looking at 1, especially if they invest a lot of personal time in absence of professionals.

 As I am on a constant prowl for opportunities and lately in India now, organic cosmetics, foods *everything* is growing very rapidly, I stumbled upon a company which is associate of a BSE / NSE listed company Poly Medicure Ltd. The company has made its sister company (Vitromed Healthcare) RICH by giving it the jobwork, paying it rent for using premises, buying and selling products to it at so-called arms length.

Anyone interested in further probing the management can ask few simple questions:

Qs 1) Has Poly Medicure got any shareholding in Vitromed Healthcare ?

Likely answer - NO

Qs 2) What were revenues of Vitromed Healthcare prior to alliance / dealing with Poly Medicure ?

Likely answer - Zero

Qs 3) Knowing that certified organic food business is trending, your sister company has founded a step down subsidiary and has ventured into Organic Juices and Organic Cosmetics. This business must be juicy. You invest personal time as does your son in this business. Meaning Poly Medicure Ltd is now being neglected. Anyhow who are the investors and beneficiaries of this organic business ( ?

Likely answer - 100% owned by my family

Qs 4) Okay great, you have all the legal right to have as many businesses in the free land of India. But why are you advertising Poly Medicure's facilities and manufacturing prowess on the website of Vitro Naturals where the listed company that I own a part of gets no benefit and is not compensated ? Shouldn't we be getting some compensation "at arms length" ?

No answer from management.

The reason is, management of Poly Medicure Ltd. is greedier and slipperier than usual, 100% goes into pockets of the family that runs the company listed on BSE / NSE India.

So my friend, avoid companies like these where management shares its second best business with you and keeps the best to itself. These companies will not be long term wealth creators.

Friday, February 12, 2016

Of human stupidity and developing countries business models

I  am not following the buttering approach of Dale Carnegie, "Be hearty in your approbation and lavish in your praise". So, I might not make many friends.

I have a very low opinion of human intelligence, or intelligence itself. If Google founders were intelligent they would not have tried selling their company for 1 Million USD (400,000 times less than its worth today), Bill Gates would not have rejected to buy Google for 1 million USD (he already had 20 years experience in software industry by then).

Humans are luckier than they think they are. Humans control less than a fraction of a percentage of their life, because the percentage of control is so little BUT the perception does not feel so (we believe we control a whole lot more), that is why we are trapped in ignorance and blindness (aka Maya) and often, quite smug about it. There is no sense of urgency to surmount the matrix of delusion and ignorance.

I think that attitude spills over in just about every discipline, business and companies included because eventually human is the director of the business show. That is why analoguesque companies get boiled like frogs and get voted out by digital divas with slow but sure death.

GSK Bangladesh is a perfect example of an asinine management sleeping on the wheels while local pharma companies leapfrogged from nowhere nobodies to now ten fold the size of GSK Bangladesh for example Square Pharma. These companies are on the way to be 100 fold size of GSK Bangladesh and challenge GSK in the UK and the US eventually.

A lot of companies with "MNC baggage" are not likely to make a mark in developing countries as they do not fully appreciate the Jugaad / Frugal innovation required in these markets.

I know a number of investors look at what has succeeded in the West and then use cookie cutter approach to buying same business models in an emerging country. In my opinion  maximum money will not be made in such opportunities. That is why investing will remain interesting ! Companies that ignore social dimension and culture are doomed to stay mediocre.

Some examples of localised business models:

Aloo Tikki burger by McDonalds (more of ingenisation).

1Rs shampoo sachet by Hindustan Unilever.

Sending armoured vehicle to villages for Banking in african countries.

Micro finance loans (Satin Creditcare, SKS Microfinance).

Example from HBR

A group of people from developing country needed to do was to stretch one meal into two by preserving leftovers and to keep drinks cooler than room temperature—a job markedly different from the one higher-end refrigerators do, which is to keep a large supply of perishables on hand, cold or frozen. Clearly, there was no reason to spend a month’s salary on a conventional refrigerator and pay steep electricity prices to get the simpler job done. And just as clearly, the solution wasn’t a cheaper conventional fridge. Here was an opportunity to create a fundamentally new product for the underserved middle market.

Godrej’s team designed and built a prototype cooling unit from the ground up and tested it in the field with consumers. The result was the ChotuKool (“little cool”), a top-opening unit that, at 1.5 x 2 feet and with a capacity of 43 liters, has enough room for the few items users want to keep fresh for a day or two. With only 20 (rather than the usual 200) parts, it has no compressor, cooling tubes, or refrigerant. Instead it uses a chip that cools when a current is applied and a fan like those that prevent desktop computers from overheating. Its top-opening design keeps most of the cold air inside when the lid is opened. It uses less than half the energy of a conventional refrigerator and can run on a battery during the power outages that are common in rural villages. At just 7.8 kilograms, it’s highly portable, and at $69, it costs half what the most basic refrigerator does. Because it’s the right size for the job, easier to move, and more reliable in a power outage than a conventional fridge, it surpasses the higher-end offering on the performance measures that matter most to these consumers.

In Kenya, for example, banking services are scarce and transferring money is complicated and expensive. Without access to traditional services, many people must use unsafe alternatives such as hawala—an unregulated network of brokers operating on the honor system—or transport cash by bus. The UK-based Vodafone solved this problem by developing a secure, low-cost mobile money-transfer service. Called M-PESA (M for “mobile” and PESA from the Swahili word for “money”), the system is operated by Safaricom, Kenya’s leading mobile network.

Key insight: Upgrade the already converted

It’s easier to reach people who are already spending money to get their jobs done.

It stays devilishly hard to predict success of disruptive products, Tata's wanted to convert scooter / motorcyle owners to a 4000$ Tata Nano car, but it backfired on psychological grounds of looking cheap. They should have introduced the car in rich markets of Europe first.

Think out of the box, focus on local business models, and be rich.

Bisleri Soft Drink play - Orient Beverages

Much has happened in equity markets since I wrote on the 19th of Jan about a nano cap Orient Beverages ( which is a distributor of Bisleri (~36% bottled water market share in India). I had originally bought @24 Rs in 2014 and sold after it quadrupled in a few months.

Bisleri intends to enter soft drink market in 2016. Ramesh Chauhan had unwillingly sold some of the legendary Indian soft drink brands like Thumbs Up, Limca, Maaza, Citra etc. to Coca Cola in 1993.

It will be their second innings in soft drink market and energy drink.

Orient Beverages has officially announced that they will act as distributors and open plant for the same as per today's announcement.

"Orient Beverages Ltd has informed BSE that the Board of Directors of the Company at its meeting held on February 11, 2016, has discussed that M/s. Bisleri International Pvt. Ltd. has launched some new soft drink products namely (i) SPICY, (ii) FONZO, (iii) LIMONATA and (iv) PINACOLADA. The Company as Franchisee of M/s. Bisleri International Pvt. Ltd. is going to commence commercial production of all said soft drinks shortly in its new plant at Sankrail, Howrah (West Bengal)."

Although one cannot bet too much on nano caps from portfolio weight perspective. In my opinion company could grow top line by 20-30% over next few years. Looks reasonable on MCAP / Sales basis for an FMCG play.

Nice background story:

By September 1993, Ramesh Chauhan realized that there was no point fighting with the giant which was on a poaching spree and decided to “surrender”. It was a very tough decision to make because these brands (Thums Up, Limca, Gold Spot) were carefully nurtured by Chauhan like his own children and now he had to sell them off!! With a heavy heart, he bid goodbye to his brands and sold them to Coca Cola. During the signing of the contract, Ramesh Chauhan turned emotional & cried incessantly.


Thursday, February 4, 2016

Long Term Wealth Creation


As an investor intending to create wealth, my personal opinion is that its easiest to create wealth by buying cheap stocks (low PE) of companies that are growing (even if not at breakneck speed). Not that growth at reasonable price, surfing new technologies does not create wealth.

Change is the friend of society but enemy of the investor. Nice book on change and innovation I read recently (Innovator's Dilemma  Author covers multiple facets of change and difference between sustaining vs disruptive technologies, although a bit dated in terms of examples (written in 1990s) but valid in terms of framework of disruptive technologies. Leading and established companies were actually the first to recognize and frequently prototype disruptive technologies but could not get a board level agreement between marketing, accounting, finance, strategy to commit to disruptive technology due to 1/100th the size of the market at the time.

Very few companies last 50 years these days. And you know that any company or business group that has been around for several hundred years (there are several of them) has NOT compounded at even 10% CAGR. Because 10% Cagr of 1 Million $ over 200 years is 190 Trillion $, where as global assets are ~85 trillion $.

You need to sit up and take note when the company has been around for a hundred years. That implies that characteristics of the industry despite innovation allow for preservation of incumbents. Interesting statement from Nitta Gelatin Japan AR 2015

In the recent ten years the company has decided to focus on branding and consumer products like Gelixer, Wellnex Collagen, and not only excel in manufacturing. Currently Nitta Gelatin is #4 in terms of global capacity of Gelatin Manufacturing.

The company has also opened new subsidiaries in previous ten years in emerging growth markets China, Vietnam and consolidated operations in India. 

The other company that I invested in last year was United Nilgiri Tea Estates India, also a 95 year old company. 

In my opinion next few years may be boring but interesting for these companies as the new money discovers that old is indeed gold.

Love the oldies.


I also love some of these models where MNC competition is not present:

Hair oil usage in India !

Use of storage water tanks in African countries and India (story over for Sintex, diworsefied), as developed world water availability is 24/7. No competition from MNCs.

Artificial hair in Africa.

Gold / Diamond Jewellery (story over for India)

Focus on business models that are country need specific.

Some handicraft wood products in China.

Upcoming models in India (Ayurveda), Natural / Organic Foods.