November 07, 2014

Why Indian Companies Are Smart to be "Short-Sighted" and "Risk Averse"

Extracts from the brilliant article by Dr. Ajay Shah:

Let us start with short-sightedness. The best firms in India are able to borrow five--year money at around 13%. At 13%, a rupee five years from now is worth 54 paisa today. A rupee ten years out is worth 29 paisa today, and a rupee twenty years out is worth 9 paisa today. In contrast, a rupee next year is worth 88 paisa today. With this kind of discounting, it is not surprising that projects that yield returns next year (i.e. 88 paisa today for each rupee of profit) are very attractive when compared with projects that yield returns 10 years from now (i.e. 29 paisa today for each rupee of profit). This difference -- between 88 and 29 paisa -- is striking. In a world with high interest rates, being short-sighted is rational.

...What about risk, and the willingness to undertake risky projects? Modern finance teaches us that when firms are able to issue equity into liquid and efficient capital markets, the risk premium that they face is driven by the `beta' of the company's stock against the index. The long run historical rate of return on Nifty is around 21%: this is also the long run historical cost of capital that the typical firm faces. A firm that has a beta of 1 against Nifty has to plan on giving a return to shareholders of around 20%. If the future is discounted at the rate of 20% per year, it makes sense to look for cashflows in one or two years. It also makes sense to look for less risky (i.e. low beta) projects. In a world with a high cost of capital, short-sightedness and a lack of venturesomeness are rational outcomes.

...If you believe that this economic reasoning explains the bulk of the short-sightedness that afflicts India's firms and managers, then there is an extremely optimistic implication: it is not very difficult to change this behaviour. If we make a transition into an environment with low inflation, low interest rates, and low risk premia, then that would give us a whole new breed of risk-taking, far-sighted firms and managers. The management gurus would even write books about the new generation of Indian managers who have developed a `new culture' of doing risky, far-sighted projects.

Dr. Shah also highlights how the solution to this "cultural problem" we Indian entrepreneurs have can be achieved through through a combination of financial sector reforms, pension reforms, fiscal strengthening and capital account convertibility.

Arun Natarajan is the Founder & CEO of Venture Intelligence, the leading provider of data and analysis on private company transactions, valuations and financials in India. Click Here to learn about Venture Intelligence products that help entrepreneurs Reach Out to Investors, Research Competition, Learn from Experienced Entrepreneurs and Interact with Peers. Includes the Free Deal Digest Weekly Newsletter: India's First & Most Exhaustive Transactions Newsletter.

November 06, 2014

How ICICI Bank's K.V.Kamath learnt from an air hostess and a bellboy

From Charles Assisi's column in Mint:
...why is it a stewardess on Jet Airways greets each passenger who gets on board with a smile? For that matter, why is it if a guest asks for directions at any Ritz-Carlton property, they aren’t directed, but led to where they want to go? Everybody, from the bellboy to the hotel manager, follows the rule. 
The stewardess at Jet Airways told Kamath’s colleague their research on passenger behaviour indicated that when greeted with a smile, people lower their guard. For instance, if a flight is delayed or the meal they expect is not on board, as a thumb rule, most people take it in their stride. In the absence of a smile, even minor deficiencies are viewed as offensive, people get boorish, and their behaviour permeates to others on the flight, making it a harrowing experience for the crew. At Ritz-Carlton, the key Kamath observed is empowerment. A bellboy is empowered to take time off from whatever it is he has been assigned to do if a guest walks up to him with a request.  
Having studied both these cases closely, Kamath took a call and introduced the idea of lobby managers at all ICICI Bank branches. Trained by professionals from the hospitality business to greet customers with a smile, they ask around if anybody needs assistance, and help make their dealings at the bank easier. “It’s a soft skill we picked up because we were curious about the workings of those in the hospitality business,” says Kamath. 

Arun Natarajan is the Founder & CEO of Venture Intelligence, the leading provider of data and analysis on private company transactions, valuations and financials in India. Click Here to learn about Venture Intelligence products that help entrepreneurs Reach Out to Investors, Research Competition, Learn from Experienced Entrepreneurs and Interact with Peers. Includes the Free Deal Digest Weekly Newsletter: India's First & Most Exhaustive Transactions Newsletter.

November 05, 2014

"Trust the hoodie, ditch the suit" and Why "Brahmin's Coffe Bar" aces "Chez Nous"

If you are an entrepreneur who would not have the patience for snooty waiters and difficult to translate/interpret menu cards, you might have some interesting takeaways from this article by Paddy Padmanabhan in Swarajya based on an analysis of the ratings of Bangalore restaurants. Extracts:
Peter Thiel, billionaire founder of PayPal and the first ever outside investor in Facebook, talks about this in his new book Zero to One, and offers some interesting theories. He talks specifically about the spectacular boom-bust of the alternative energy industry in the US, especially solar, which was decimated in the 2009-2010 period by cheap Chinese products that were subsidized heavily by the Chinese government.

He proposes that the solar industry’s woes were brought on by CEOs who were sales guys in suits who had no idea about the technology and even less about the hard questions that needed answering for the business to be viable over the long term. He clinches his point with an interesting visual contrast between Brian Harrison , the urbane, grey-haired and immaculately suited CEO of the now defunct Solyndra on the one hand , and a jeans-and T-shirt clad Elon Musk, head of luxury electric car-maker Tesla.

...Whether we like it or not, there is inbuilt bias that most of us carry when it comes to highly subjective qualifications like reliability, prestige, and quality. Beware of these biases the next time you pick a restaurant to take your family out for dinner.


Arun Natarajan is the Founder & CEO of Venture Intelligence, the leading provider of data and analysis on private company transactions, valuations and financials in India. Click Here to learn about Venture Intelligence products that help entrepreneurs Reach Out to Investors, Research Competition, Learn from Experienced Entrepreneurs and Interact with Peers. Includes the Free Deal Digest Weekly Newsletter: India's First & Most Exhaustive Transactions Newsletter.