The sad story of Educomp Solutions

People hear about rags to riches story a lot. We're going to talk about Educomp Solutions. Educomp Solutions was the first mover in the digital educational content provider space. In short span of time, it grew tremedously providing a booster to shareholders' value. Something around the end of 2008 started going wrong for the company. Satyam fiasco happened at that time. Satyam was accused of inflating its revenues and its Chairman  Ramlinga Raju accepted the fraud committed by him. Around that time, CBI also started looking into Educomp. Though, nothing emerged concretely but it was rumoured that Educomp Solutions was cooking its books similarly to Satyam. It was inflating its revenues to drive the share prices. Educomp must had some political connections to get the CBI off its back. Then, after some time, SEBI summoned the Chairman Shantanu Prakash for some insider trading antics. SEBI and Shantanu Prakash reached a non-disclosure agreement by paying SEBI a certain amount of fine. It was rumoured that the Chairman and other high-end employees of the company were involved in insider trading. In 2009-2010, they raised Rs. 607 crores through private placements and diluted shareholders' equity. In 2011, an Income-Tax raid happened on Educomp Solution premises. Meanwhile, Chairman Shantanu Prakash started having bitter relations with his then CFO, Sangeeta Gulati, who resigned from Educomp Solutions very recently. It was rumoured in Educomp Solutions workplace that Sangeeta Gulati wielded more influence on Educomp Solutions than the Chairman himself. In the beginning of 2012, the company was able to raise money to pay off the burdensome FCCBs overseas. In 2011, they were able to securitise certain of their fixed assets with the help of the banks to improve their operating cash flows. But nothing much happened to that extent, as the company was laden with debts and with operating cash flows still struggling. Meanwhile, other big players entered this sector and have now almost commoditised this sector with the revenue per unit falling down.

From 2008 to 2012, Educomp Soplutions has trebled its debt. From 2010 onwards, profits have suffered a lot for this company. They have almost halved. For 2012, profits are already down. EPS has halfed from 2011 onwards. Despite securitisation programme, fixed assets are continuously growing up. Net Cash Flows have turned negative from 2010 onwards. Recently, the company announced that it needed to borrow money again. And, revenue per unit is falling down in wake of new entrants entering this sector. Stock prices are ever falling down. From highs of Rs. 600 in 2010 to dismal lows of Rs. 128 in 2012, this company is witnessing a gradual decline. In late 2011, Chairman Shantanu Prakash was talking about selling some of the fixed assets like schools to compensate for required money.

We can just hope that this company doesn't become a riches-to-rags story.

Behind the concept of Discounted Cash Flows

Discounted Cash Flow is all about valuing future cash flows from a business and then discounting it by a percentage value to the current value of those future cash flows. The percentage value can be your minimum expected returns or any current safe guaranteed returns from fixed deposits or bonds. If the current value of those future cash flows comes out to be higher than the amount you're going to invest  in the present, then its deemed a safe investment. Now there are three variables in this concept. 

1. First, it is the time frame for which you'll be calculating the future cash flows, 
2. then its the growth percentage which you'll factor in to guess out the future cash flows every year, and 
3. the discount percentage.

These variables are vulnerable to individual's perception about a business and as it is, future can't be correctly stated.

But the question is about the preeminence of  Discounted Cash Flow? Why investors all over the globe fall for this concept? Why value investors kneel before it and swear allegiance to it?

Discounted Cash Flows isn't simply about the guesswork of future cash flows from a business. Existing cash flows from any business go back into the company's Balance Sheet as Cash and Bank Balances, ready to be used for the company's purposes or growth or expansion. They're not meant there to be idle. Over a course of time, these incoming cash flows will be used to fuel growth. These cash flows will become assets for the company in future, Fixed Assets or Working Capital, and will aid in further expansion of business and will lead to increased future cash flows from the business.

So, if one is calculating future cash flows in present, he'll able to calculate cash flows only from the existing business or existing level of business. One'll not be able to gauge the growth in business from the utility of the future cash flows. Now, since future cash flows will get converted into assets for the company, the investor ultimately pays for the future total assets of the company or business which will in turn dole out further future cash flows. Thats why an investor valuing a business using Discounted Cash Flow model pays so much attention to the management antics as the perfect utility of the future cash flows depends upon the will and capacity of the management.

In a way, Discounted Cash Flow is a very strong, potent and conservative way of valuing any business. It really discounts the business for any growth resulting from the ensuing cash flows by sticking to the present condition of the business. If valued appropriately using Discounted Cash Flow model, an investor must reap rich dividends (in both forms).

The Curious Case of Mr. Robert Vadra "Gandhi"

The recent news reflecting upon supposed financial misdemeanor by DLF and Robert Vadra is coming to the point of "Loans and Advances" by DLF and Robert Vadra's companies. DLF gave Mr. Robert Vadra Rs. 60 crores interest-free to Robert Vadra through "Loans and Advances" items on Balance-Sheet. And as viewed from certain newspaper reports, Robert Vadra's companies gave supposed salaries to Robert Vadra through "Loans and Advances". The issue of Loans and Advances seems devious ones..

Often one can find huge sums of Loans and Advances on a company's Balance-Sheet and there's little or negligible information regarding that in the Schedules of the Balance-Sheet. It was always supposed that Loans and Advances can be mismanaged to one's benefits and the current case of Robert Vadra and DLF is pointing towards the same.

Its time the companies come forward in a more transparent way towards the same and the shareholders must take the habit of questioning them.

Why one should be wary of ESOPs?

ESOPs or Employee Stock Options are a modern instruments of incentivising employees by corporations or companies. But as we move forward, ESOPs are becoming controversial regarding their usage both from the point of shareholders as well as employees.

Firstly, ESOPs straightaway dilute the equity of the company, thus hampering shareholders' interests. Nobody likes to see his stake being diluted.

Secondly, as a motivational instrument too, ESOPs are becoming controversial. If an employee is issued ESOPs, then the benefit that employee will have from ESOPs will be reliant on the overall performance of the company and that'll come from the collective performances of all the employees or co-workers. Why should an employee's special efforts be put ransom to the efforts of other employees? In a way, ESOPs are unfair to employees too. Rather, they should be compensated straightaway in form of salary raises, bonuses, perks or incentives. So, ESOPs fail this purpose too.

Thirdly, the expense on ESOPs are not accounted in the expense sheet, thus inflating profits and artificial stock price increases.

Thus, budding investors must be wary of ESOPs and must ask the management regarding its true utility.

Is it worth buying Cash?

I was checking into Piramal Enterprises Limited. This company was in news after it sold to Abbott its formulation business for a huge sum of money. Kudos were levied upon Mr. Ajay Piramal for selling the business so high. He's now being regarded as India's biggest "value investor". He's considered a brilliant manager by almost all investors in India. His company Piramal Enterprises Limited has been considered as a "value" bet by a management guru from Gurgaon and he talks about adding Mr. Ajay Piramal as a manager  to this bet. Sounds convincing...

Bajaj Corp

A newspaper article..

http://timesofindia.indiatimes.com/business/india-business/Bajaj-Almond-Drops-volume-growth-to-sustain-at-18-20-levels-Analysts/articleshow/16641521.cms

Speciality Restaurants Limited - Mainland China

Last night I was looking over the recently concluded IPO launch of Speciality Restaurants a.k.a. Mainland China. From the front, it immediately reminds you of Jubilant FoodWorks a.k.a. Domino's Pizza and it bullish run in past two years. Speciality Restaurants owns a number of other brands too like Oh!Calcutta, Bengali Sweets, Flame n' Grills etc. They have disclosed their statements from 2009 to 2012.

What's wrong with various stock investment forums?

There are lots of stock investment forums on internet and their owners work very hard in operating and maintaining them. Most of them are investment professionals and have long stints in stock markets. Some of them have even turned activists, often taking business managements to their tasks. But something is missing with these stock investment forums.

What's "value" for value investor?

A "Value Investor" in its conservative sense relies only on numbers in absolute terms. For him the underlying value has utmost importance. Now, this underlying value might derive from unlocked assets, cash or maybe future growth. For a value investor, everything needs to be optimum: the buying price, growth and future cash flows. He come to a value based upon these suppositions. From the outside, you might feel that a value investor is only relying on the present value in the business. But this isn't so. His present value takes into consideration the future cash flows. The "Discounted Cash Flow" model is based upon this supposition of which a value investor is a die-hard fan. But here is the pitfall too.

What is Margin of Safety?

Yesterday, I read Seth Klarman's book "Margin of Safety". I approached that book to answer some of my questions. But, rather, it increased my doubts on numerous accounts. Seth Klarman tries to dig deep into the concept of "Value Investing" and then through Margin of Safety, tries to discuss on value investment approaches. Primarily, it was all about "Discounted Cash Flow " model. The only shortcoming which I felt was that Seth Klarman didn't talk anything about business models. He didn't say anything about "Why a certain business model must be favoured?". Though he talked about the importance of cash flows, but he ignored discussing about the choice of businesses.