Why 3G will Never take off in India
Read on for a completely different view on Why 3G market and its potential in India is not so good as it is made out to be.
The fundamental problem is that many products are created to be sold, not used- Yanagi Japanese Designer
Are you one of those people who believe that 3G may be a bit low today in India but is going to take of really big time in the near future ? Huge amount of data consuming public is imminent because you see so many people with smartphones around ? May have heard telecom companies paid a bomb to get 3G spectrum and govt for a change made a lot of money . Surely you think that telecom companies are not stupid to overpay for spectrum and hence in a country of around 600 million active connections they are going to milk money by 3G data usage by public.
Unfortunately this is not going to happen in even near future. The a seemingly simple consensus view – 3G will take off really big in India, it just needs a bit of time say 2-5 more years- just as it happened in developed countries.
What I am saying is that 3G will not take off as per predictions of almost all analysts and telecom companies. It will remain a fringe/negligible percentage of overall telecom users in future (maximum % of active users may not go beyond 10% even in next decade because 4G/LTE/BWA may be adopted and 3G almost skipped). The only way 3G usage can shoot up is when some company can make a phone with User Interface which is even simpler and delightful than iOS of Apple(and all of its copycats) and of course price it below Rs. 5000/7000 or $130 (unlocked of course).
Read on for a completely different view on why 3G will not take off as per almost everybody’s expectation. I promise your time in reading will be well utilized. Why 3G and 4G will NEVER take off in India Why 3G and 4G will NEVER take off in India.
Just Dial IPO Analysis
This would be an analysis of Just Dial IPO which was refiled with SEBI in August 2012. The earlier one was in 2011 but was cancelled due to adverse market conditions. This post will be a bit long but worth reading because of unique business of Just Dial .
First some disclaimers- If you read this and invest in IPO when it comes out and LOSE money don’t sue me. If you make money contact me on my email/blog and I will try to take 1-2% of your Profits J (how is that for free advice). If everything fails and you really want to sue me GO ahead. This is a country where Kasab is still alive, hale and hearty, eating biryani from tax payer’s money and no sight to be hanged. What do you think you can do by suing me?
I had been an employee of Just Dial for around 9 months which was the best learning experience of my lifetime as I had the privilege to interact with Mr. Mani and his brilliant senior management team of Just Dial. This gives me unique insight in one of the really different businesses not just in India but in the whole world. There is a not a single business on the planet which works almost exactly/close to how Just Dial makes money on that scale. (Rs. 250 crores odd revenue and Rs. 50cr worth profits last yr with 0 debt and return on capital close to 40+% for last 3 years).
My analysis will be primarily based on the basic parameters on how Buffett would like to invest in a company like
- High return on capital employed with little or no debt with strong free cash flow for the owners and pricing power.
- Strong durable competitive advantage
- Able and honest management
- Available at a fair price (this is the 1st question) and
- Predictable earnings/industry (this is the second question).
If you are more of financially inclined person Financial Data and Calculations Just Dial with all the numbers and you can directly see that pristine looking financial statements and ratios people dream of.
Here is a one line business model of Just Dial – When people need to buy something (goods or service) from some shop/business they call up Just Dial which in turn provides that data (business phone number, address) free of cost to person calling but Just Dial charges the business owners to make sure their phone number/address goes to the caller. How simple yet how difficult to beat.
I have put ratio analysis right at top so that you have a basic idea about financial strength of the company and no need believe in some kind of ‘STORY’ as it generally is with overhyped losing businesses (aka organized retail , Suzlon , Infra , DTH) .
Ratio Analysis (A dream for any CEO)
|Liquidity Measurement Ratios|
|Days Inventory Outstanding(DIO)||0||0||0||0||0|
|Net Sales Per Day||1.9||2.5||3.6||5.1||7.5|
|Average Trade Receivables||4.2||0.5||5.6||5.4||0|
|Days Sales Outstanding(DSO)||2.1||0.2||1.5||1.0||0|
|Cost of goods sold (taking it as total expenses)/365||1.8||2.2||2.9||3.9||5.5|
|Average Accounts Payable||24.3||25.3||40.3||47.0||21.9|
|Days Payable Outstanding(DPO)||12.9||11.2||13.8||11.8||3.9|
|Cash Conversion Cycle = DIO+DSO-DPO||-10||-11||-12||-10||-3|
|Profitability Indicator Ratios|
|Operating Profit Margin||4%||10%||21%||23%||26%|
|Net Profit Margin||2%||8%||14%||15%||19%|
|Return on Capital Employed (PAT/Total Capital)||2%||7%||15%||15%||21%|
|Return on Net Worth(PAT/NW)||5%||16%||29%||31%||51%|
|NA as it’s a debt free company|
|Cash Flow Ratios|
|Operating CF to Sales||20%||7%||26%||32%||33%|
|FCF Return on Net Worth||23%||0%||39%||44%||65%|
|FCF to Operating CF||60%||0%||72%||68%||74%|
|Valuation Ratios still mystery as no price declared|
That’s a very bad heading but I could not think of anything else .
What is evil — “ Evil is Knowing Better but doing worse “
Mr. Daniel Kahneman(the nobel winner) is one the most amazing thinkers of modern era who has just completely changed the way we look at the world and the decisions taken by people in the world. His brilliant book(http://www.amazon.com/Thinking-Fast-Slow-Daniel-Kahneman/dp/0374275637 ) is a 20 times read. You can just keep reading again and again and again – discovering new things every time you do that. It makes you understand why probably you took a decision when ideally/rationally you should not have done so. So why the critique post ??
Well having read the brilliant book Thinking Fast and Slow by Mr. Daniel Kahneman I noticed something strange in every single question he had ever asked for framing his theories mostly related to monetary gambles/chance/risk taking . They will NOT apply completely to the thousands of Bankers, Traders, Lenders, Insurance Sellers(who are or should I say were too big) –who are taking decision under risk . The reason the theories will NOT apply is NOT because decisions are complex or theories completely wrong or they are using System 1 instead of System 2 but because the crucial elements (situations/conditions) are almost always neglected in almost all questionnaires for any psychology/logic tests undertaken by any researcher.
I searched for various of his articles and the references he himself used for writing those and I could not find the most important factors which affect decision making under risk in real life organization/situation .
The choice of picking a decision using rational calculations or System 1(intuitive) based on prospect theory or whatever is secondary to the conditions surrounding the decision making. The conditions surrounding decision making are NEVER extraneous or too unimportant in real life.
This analysis will look at the financial risk taking while showing that prospect theory(http://en.wikipedia.org/wiki/Prospect_theory) cannot explain the decision making in financial world today when complete picture of conditions which leads to reckless risk taking is taken into account i.e. the incentives (bonuses), Superiors’ orders, managing other peoples’ money, too big to fail and implicit guarantee from all Central Banks around the world that you will be saved even if you completely screw up (the whole firm or consequently even the economy).
I would love if Mr. Daniel Kahneman applies all his theories of decision making to the bankers and financial industry as we know today to show how effectively it predicts the actual actions of these Lords of Finance. I am sure the theories cannot be applied to decision making of bankers which have brought terrible misery to millions around the world and amazing riches to bankers and financial institutions.(if you do not believe this stop reading!!)
I argue that what happens in REAL world more than 99% of the time when real people (almost all in some sort of organizational set up) are taking real decisions in organizations which can be observed by anybody is not explainable completely by theories like prospect/certainty effect/loss aversion/utility/System 1 or 2, etc.
I am not a professor who can catch 50 students and give them a sheet of paper with 5 logic questions (each with 2 choices) and then extrapolate them to real life decision making. I will ask the same questions which have been asked in the book Thinking Fast and Slow at the end of the write up. The only difference will be – I will use context/surrounding events before anyone has to decide which option to choose. The responses I am sure will be exactly normal as what happens in real life but the responses will violate most of the existing theories regarding decision making under risk.
(NSE 532638 | SHOPERSTOP)
Shopper’s Stop Analysis and Future Expected Returns (Investors Stop???)
Here is kind of analysis which I guarantee that you would have never read or heard anywhere else on Shoppers Stop (Organized Retail), its future growth potential limits and the expected return from point of view of equity investor in Shoppers Stop or Pantaloons or Trent (Westside).
Please read the below analysis and always keep in mind the following 4 simple facts:
• Indians on an average spend close to 60% of their expenditure on FOOD.
• Organized Retail have just 1% or even less share of FOOD sales in India.
• Indians spend around 10%-11% only on clothes, beauty products and footwear.
• Almost 80%-90% of sales of Shoppers Stop or Pantaloons or Trent (Westside) are clothes , beauty , accessories and footwear products and less than 10%-15% comes from food sales and that too comes from great brands of food (Nestle-Maggi , Cold Drinks , Biscuits ,Milk products ,etc which are razor thin margin business)or commodities which are again almost zero margin products.
With the above thoughts firmly in mind here goes my analysis.
With Organized Retail currently being around 6-7% of total retail sales I am predicting that in next decade or two it will not reach even close to 18-20% of total retail sales and I’ll back it up with logic.
This prediction is completely opposite (downright negative if you want to say) compared to every single projection available in India and abroad by any institution on future of Organized Retail. The prevailing wisdom is Organized Retail will soon by 2015 or so (add 1-2 years more if you like) capture almost 15%-18% of total retail sales in India and in the process the companies like Shoppers Stop or Pantaloons or Trent (Westside) are great buys even at P/E of 35+. Again I have not seen sell ratings on any of these companies except one by Nirmal Bang. Rest all are positive on this sector as a whole factoring in years of future growth at a return on capital which is at least twice of what these companies have shown in last decade of phenomenal growth when in fact for 4-6 years credit was as cheap as air.
The consultants , analysts , investment bankers and investors may have got it all wrong in trying to figure out how much expansion can the Organized Retail logically have in India given India’s unique expenditure pattern , infrastructure , real estate and electricity situation which is completely different from anywhere in the world .
This happens because a typical person who is consultant/analyst working in a company which brings out studies on growth potential of Indian retail may have say a package of minimum 12/15 lakhs per annum and his spending is less than 10% on food but he buys jeans at Rs. 4000, shirts at 2000 ,shoes at Rs. 5000 , perfumes at 3000 , LED TV at 50000 and some furniture at 25000 from the mall and he just cannot connect with how real India spends money on even though the data is right infront of his eyes.
These guys’ brains just short circuit and use System 1 (part of type of thinking of brain which uses shortcuts to make things easy) as opposed to System 2 (which is purely rational and calculative) as explained brilliantly by Daniel Kahneman in his amazing book http://www.amazon.com/Thinking-Fast-Slow-Daniel-Kahneman/dp/0374275637
Infact there would actually be a complete limit on how much Organized Retail can ever grow and capture the total retail expenditure in India (My guess is around from 6-7% today to 18-22% in coming 2 decades and that’s being too positive)
Read more for completely different way to look at Shoppers Stop !
Dish TV India – A Critical Analysis
Why would a Senior Management Personnel Not answer what is Debt/Equity ratio of company
I was randomly just watching business news channel (whenever I want some fun I put on Biz channels in morning at around 9 AM when guys give ways to make money in next 3-4 hours!!!) and came across startling fact whereby a Dish TV senior management personnel on TV did not answer – what the debt to equity ratio of the company is and gave an evasive reply . (Early week of December)
Couple of days later I heard same thing from someone senior from a company WWIL refuse to answer the Debt to equity ratio question . It was amazing and that led me to dig a bit deep into what are these companies where the management just DOES NOT answer the most basic question – What is the Debt Equity Ratio of your Company ?
Ben Graham’s Advice
I will start off this analysis by quoting the real Guru (Benjamin Graham) who laid down rules of investment around 80 years ago which are:
“You may take it as an axiom that you cannot profit on Wall Street (or Dalal Street) by continuously doing the obvious or the popular thing.”
“What seems to be obvious and simple to the people in Wall Street, as well as to their customers, is not really
Obvious and simple at all . You are not going to get good results in security analysis by doing the simple, obvious thing of picking out the companies that apparently have good prospects — whether it be the automobile industry, or the building industry, or any such combination of companies which almost everybody can tell you are going to enjoy good business for a number of years to come. That method is just too simple and too obvious — and the main fact about it is that it does not work well.”