Approaching Due Diligence

Due diligence is a critical step to rope in an investor into the company.

The hunt begins when 'need' for external money is felt. Though with due considerations to set norms of approaching an investor, 'want' of it may not be synonymous with the 'need' felt. Agreeing on a valuation, post first-hand understanding of the business is at times a sticky issue. All the academic research on arriving at a correct valuation metric seems to go unheeded. Parties usually prefer 'comparable firms' approach with strange discounting factors on the multiples. Finally, a prelim document called 'Term sheet' is signed and dates for due diligence are finalized. Work on an exhaustive checklist begins.

All kinds of possibilities are evaluated by teams- Is the data in place?, Will we be ready in time? etc. In some companies even getting a scanned copy of MOA may be a challenge. Tasks are allocated and work begins by finding all lease agreements, ROC registrations, minutes books etc. The team has to be aligned and given a valid reason for them to work towards the target especially given the sensitivity of the matter. Final milestone is only a mirage at this stage.

Teams get on with the work. There is always group that is motivated towards the task, then there is a section that is building all kinds of possibilities on whether the due diligence is for infusion of funds or sell-out by promoters, still others who doubt if they will continue to have a job. Some are totally cut-off from the demands and live in an alien world where time and priority has no meaning.

Quite surprising in the whole scheme of things is the way the PE has approached the Company. PE ensures 100% confirmation from Company on all aspects of the deal, irrespective of whether the decision to reach the due diligence stage is based on a comprehensive review of company/sector or a pure hunch. The final decision- to invest or not- (to the knowledge of very few) rests with the investment committee of the fund. At times the feedback from the committee is- Sector is not where we will invest, Company does not meet our criteria, Just No for no reason significant enough. And the decision of the investment committee is based on a brief note from one of their team members who lacks even remotest idea of what capability/potential the company has.

I doubt the IRRs expected by the funds across.. 

Disclaimer: The views expressed are personal and should not be linked to author's association with any organization.

Where are the old guys?

Despite being employed with a manufacturing company for last 6 months, I am yet to meet an employee of age greater than 50 yrs whether in my or other companies that I visited. 

My office is located at Udyog Vihar, Gurgaon and I pass through the BPO/Service companies' office cluster at Cyber Greens. Assuming my eyes have not got biased to only look at young, I rarely saw employees who would be in her fifties. 

Of course we may have department heads/CEOs/CFOs etc. in their fifties but how many of us have seen a floor manager or a manager aged fifty. Not all get to grow up the corporate ladder with age. Working age has surely come down but old also seems to have vanished from our corporate environs. Two possibilities may emerge in future:

a) Excluding those who grow to take role of a CEO etc., others aged fifty plus may have opted for an early retirement. They may be doing some part-time job or experimenting their entrepreneurial skills.

b) Or may have joined some other sectors like chemicals, textile, steel manufacturing etc. that are usually located outside the city limits or metros.

I leave this to be probed further by research companies but surely a warning signs for all of us in their mid-thirties- Either grow or perish.

INVESTMENT WORLD : Is it better to rent a house or buy one?

Finally in addition to my calculator (rent vs buy), the article in Business line (July 3 2011 edition) talks in detail about the trade-off between rent vs buy. Given the fact that most of us are very poor savers, real estate investment may be an option but tenure of loan is for sure dependent on current savings and future expected growth in income.

http://www.thehindubusinessline.com/todays-paper/tp-investmentworld/article2154096.ece

Interested can download the calculator from here: Buying vs rent calculator

Continue to live the dilemma but better take the decision fast.

PE investments into food/snacks segment

Finally, our favorite snacks/namkeens get their due. As layman we all knew that its a profitable business once it takes off.

I read about 2 such deals:

Prakash Snacks has been selling its snacks under brand Prakash Namkeens for long. I knew about them in Indore. Akash Namkeen, run by the other brother of Prakash is equally profitable and popular. Indore a fantastic city in MP is known for its snack food. Only Indoreans how tough it was for Mc Donalds and Dominos to convince them to try their products. Sharafa bazzaar is a fantastic place for rich during day when they can buy the jewellery of their choice but in night the place is a perfect place for snacks and enjoyed equally both by rich and poor. 

Sagar Ratna also gets investment for expansion. 

For details please read:

a) http://articles.timesofindia.indiatimes.com/2011-02-10/india-business/28540828_1_due-diligence-buyouts-bjn-group

b) http://www.fnbnews.com/article/detnews.asp?articleid=30114&sectionid=1

Food/snacks business in India is a cash rich business with no upfront capex spends. 

I appreciate business sense of PEs like Sequoia Capital and SAIF partners who considered investing this industry. 

Should be expect an announcement for a snacks business from Ratlam anytime?

Corruption, Inflation & Monsoon worries

Corruption

I am not very supportive of Lokpal bill. Its need questions the viability of our constitution. Do we not have systems within current set-up that check this? All the credit to unearth the corruption cases- Bofors, Hawala, Fake stamp paper, 2G, Common wealth etc. should go to only to our democratic set-up where judiciary and investigating agencies are independent enough to act.

I do not discredit what Anna has done for India but threatening to re-start fast is an overkill and too immature a reaction. Why does he not exercise rationality and diplomacy in fighting for the draft of Lokpal bill with government? Fasting and mass movement methods help create awareness but decisions should be taken post a thorough and comprehensive analysis of all factors in play. 

Is corruption such a worry when we have millions following our rich Babas who preach how to be better humans? Is there no corruption in US or  in China or in any other developing country? Its better if we spend our energies on narrowing gap between rich and poor. In my view poor in our country should have access to good healthcare facilities, education and programs to make agriculture in this country a profitable/viable profession. 

While we claim to have build on a very efficient and cost-effective distribution channel we all know where is all the money made- the intermediaries who trade at no risk of their own. This situation at times prompt me to support FDI in (multi-brand) retail. Farmers through Gram Panchayats can always fix the price at which they sell to big retail chains and hence not threat of repeat of what Wallmart has done to US. We are not as capitalist as US.

Inflation

In current state of affairs extra effort on part of RBI to target inflation is wrong. We all understand why inflation impacts growth but I feel extra efforts on inflation targeting is making GDP growth short-lived- just a few quarters spread over a span of 2-3 years. Lets risk a little with high inflation. If we have to growth at 9-10% year-on-year containing inflation below 8-9% may be a challenge in the current set-up (atleast for a period of 5 years). Government should ensure through its social schemes that poor is least impacted, rest market forces will make higher inflation a 'zero-sum game'- no single agent in economy makes disproportionate gains.

Monsoon

We are lucky that monsoon this year is expected to be normal and on time. 

Proud user of Kinect (XBox 360)

This note is not impulsive but post a thorough evaluation and experience of XBox Kinect.

I had first experienced Kinect when my colleagues carried it to our office to experience it. This was sometime in November 2010 when Kinect was not launched in India. 

Since then I had been planning to buy it for my kids. I believed they may enjoy it for sure. I was not sure if we as adults would be able to enjoy the Kinect experience as much. I was wrong. I and my wife enjoy it and much more since its not just sitting in front of TV with some control gadget in your hand. One really needs the stamina and will power to play it.

Last month I visited Croma at Faridabad and decided not to wait for my elder daughter's birthday till June 13. We went for it. I appreciate that I somehow curbed my instinct to not go for purchase of LCD 40 inch TV as well. Had I opted for it the experience would have been much different.

Kinect is synonymous to Kinetic energy. Energy produced in motion is called Kinetic energy. Same is the case with Kinect. You need to have atleast 10 feet by 10 feet of free space in front of TV. You are not to wear any sensor require any gadget to control or run the game on Kinect. Couch and bean bags are now only for visiting friends. 

Kinect costs around INR 24 K with a free CD. We bought 2 additional CDs- Sports and Dance series. Dance series has a work-out mode. Excellent to practice it post a 20 minute run on tread mill. I am sure no one will miss an aerobics session. Sports CD has boxing, volley ball, football, athletics, bowling and table tennis games. You have the option to play with computer (at different levels), with another player and in some cases even four of us can play together.

On Saturday last week post a 2 Km run on tread mill, I challenged my wife for a boxing match. I dominated first round as I was warmed up. However, round 2 and 3 belonged to my wife. I never planned my effort well and hence lost due to exhaustion. We opted for a Volley ball match later and somehow managed to rescue some pride.

I already have a list of 4 guys who have already decided to get one. 

It seems good days for Microsoft are around- Windows 7 ( more stable and less frequent updates), MS Office is more cheaper and hence a success with home users  and Kinect adding a totally new dimension to gaming.