We need to give Kejriwal time: he is testing the waters

 


Vivek Kaul
We are a funny country. We kept voting the Congress party back to power time and time again for a period of more than 65 years without asking any questions. The party made a mess, turning India into one of the most corrupt countries in the world, where governance has more or less collapsed.
And then comes a man, a former bureaucrat, an IITian, who promises to turn the system around. Arvind Kejriwal is his name. And he is—at least in terms of intentions—our best hope. But, ironically, we want him to be battle ready and give us answers for all that has been wrong with the country right-away.
Here are some doubts that I have seen appearing across the conventional as well as social media:
a) Kejriwal and India Against Corruption(IAC) are too obsessed with politics. It could be a movement if they dug up facts against municipalities, industries and others. (A status of a Facebook friend)
b) They don’t have the organisational strength to propose a viable alternative
c) If Kejriwal is starting a party I’d like to know his economic policy too. Shouldn’t just begin and end in catching thieves? (Another status of a Facebook friend)
d) What is new about all that he has pointed out? It’s just a rehash. (A favourite with newspaper editors. And something which The Economic Times suggests in its lead story today. And even if it is a rehash, does that necessarily make the issues being brought into the public domain by Kejriwal and IAC less important?)
e) What interest groups does the movement represent? What are its priorities, apart from radical transparency and a maximalist Lokpal bill? Where does it stand on religious minorities? What compromises would be unacceptable? (As an editorial in today’s edition ofThe Indian Express asks.)
While these are important questions that Kejriwal and IAC need to answer, but expecting them to answer them immediately and all at once is a tad unfair. If we Indians could give the Congress party 65 years, and still not get many answers from them, we can surely give Kejriwal and his team 65 weeks, if not months, to come up with the answers.
Let me paraphrase lines written by my favourite economist John Kenneth Galbraith (borrowed from his book The Affluent Society) to capture this cynicism against Kejriwal and what he is trying to do. “When Indians see someone agitating for change they enquire almost automatically: ‘What is there (in it) for him?’ They suspect that the moral crusades of reformers, do-gooders, liberal politicians, and public servants, all their noble protestations notwithstanding, are based ultimately on self-interest. ‘What’, they enquire, ‘is their gimmick?’” At the same time we Indians tend to ignore the absolute power enjoyed by the Congress party which has now led to a situation where the Congress leaders are simply not used to answering questions that are asked. As Salman Khurshid, the Union Law Minister, said a couple of days back “Wo (Kejriwal) kahte hain ki hum sawal poochenge tum jawab dena. Hum kehte hain tum jawab suno aur sawal poochna bhool jao.
Getting back to Kejriwal in an earlier piece, I had equated Kejriwal’s decision (then Team Anna) to form a political party to a disruptive innovation. Clayton Christensen, a professor of strategy at Harvard Business School is the man who coined this phrase. He defines it “innovations that transform an existing market or create a new one by introducing simplicity, convenience, accessibility and affordability. It is initially formed in a narrow foothold market that appears unattractive or inconsequential to industry incumbents.”
The point being made here is that a disruptive innovation always starts small and appeals to a small segment of the market. It cannot be everything for everybody from day one simply because the resources are limited.
An excellent example of a disruptive innovation in an Indian context is the Nirma detergent which was created in 1969 by Karsanbhai Patel, a chemist with the Gujarat government’s department of mining and geology. Patel started making the detergent in a room in his house. On his way to office, which was some 15 km away, he sold 15-20 packets every day. Thus, started the great journey which within a decade would give sleepless nights to the top management at Hindustan Lever Ltd (now Hindustan Unilever Ltd).
But the point is that Nirma started small. Patel sold a few packets everyday and his area of operation was limited given the limited resources available to him. The focus was on making a detergent which was much cheaper than the Surf from Hindustan Lever, which dominated the market back then.
Amul, another disruptive innovation, started small in Anand in the Kaira district of Gujarat. But soon it would become very successful and move to other districts in the state as well. In the end it would also be responsible for making India a largely milk sufficient nation that it is today.
Another great example is that of Apple, which brought about a revolution in the personal computer market. Again Apple started small and focused on one section of the market.  As Clayton Christensen told me in an interview I did for DNA, “Apple made a wise decision and first sold the personal computer as a toy for children. Children had been non-consumers of computers and did not care that the product was not as good as the existing mainframe and minicomputers. Over time Apple and the other PC companies improved the PC so it could handle more complicated tasks. And ultimately the PC has transformed the market by allowing many people to benefit from its simplicity, affordability, and convenience relative to the minicomputer.”
Another example is Sony. “In 1955, Sony introduced the first battery-powered, pocket transistor radio. In comparison with the big RCA tabletop radios, the Sony pocket radio was tiny and static laced. But Sony chose to sell its transistor radio to non-consumers – teenagers who could not afford big tabletop radio. It allowed teenagers to listen to music out of earshot of their parents because it was portable. And although the reception and fidelity weren’t great, it was far better than their alternative, which was no radio at all,” write Clayton Christensen, Michael B Horn and Curtis W Johnson in Disrupting Class — How Disruptive Innovation Will Change the Way the World Learns.
So like all other disruptive innovations, Arvind Kejriwal and IAC are small and do not have the necessary organisation to take on heavyweights like the Congress and the Bharatiya Janata Party (BJP). Also, their views on a whole lot of issues that plague India aren’t known.
But what Arvind Kejriwal and IAC have managed to do is focus on one issue – i.e. the nexus between politics and business, and the cosy relationship even between rival political parties. In the case of the Congress party, the nexus between Robert Vadra and DLF has clearly been brought out. And in case of the Bharatiya Janata Party, its businessmen President Nitin Gadkari has been accused of using his political standing to favour his businesses.
This focus has helped Kerjiwal to appeal to the so called “middle-class”. It has also managed to clearly rattle his biggest opponents, the Congress party and now the BJP. The Congress party unleashed a string of lawyer ministers to defend Robert Vadra. The BJP yesterday had both the leaders of opposition in Rajya Sabha and the Lok Sabha (Arun Jaitley and Sushma Swaraj) along with three party spokespersons defending Gadkari in a press conference.
Also right now is the time when Kejriwal and IAC are building their brand. And as marketing guru Al Ries keeps saying, “Focus is the essence of marketing and branding”. They are doing just that. There is no point in spreading their thin resources all over the place. Once the brand is built they can gradually start moving to other issues.
By then, hopefully, more people would have joined them also. Any disruption does not come as an immediate shift. Similarly, the IAC isn’t going to take India by storm overnight. It will need time. In a way Kejriwal and IAC are in a similar position like the Congress party was in 1885 when it was formed. The initial aim of the party was to get a greater share in the government for educated Indians. The party wasn’t opposed to British rule at that point of time. The point being the Congress party wasn’t clear from day one all that it would do in the years to come. As years went by, things evolved and the party led India to its independence and tried to come up with answers to questions that arose along the way.
The challenge for IAC will be to figure out how to hold the interest of the people once they start losing interest in the corruption issue. Also they might appeal only to a section of the voters initially, probably the urban middle class, like Apple PCs had appealed to children and Sony radios to teenagers. So they are likely to start off with a limited appeal. Chances are if they stay true to their cause their popularity might gradually go up over the years, as has been the case with disruptive innovators in business.
Any disruption does not come as an immediate shift. As the authors write, “Disruption rarely arrives as an abrupt shift in reality; for a decade, the personal computer did not affect DEC’s (Digital Equipment Corp’s) growth or profits.” Similarly, Kejriwal and IAC aren’t going to take India by storm overnight.  They will need time. And as time goes by more questions will be asked of them and they will need to come up with answers.
As I had said on an earlier occasion, there are three things that can happen with this disruptive innovation. Kerjiwal’s party tries for a few years and doesn’t go anywhere. That doesn’t harm us in anyway. Kejriwal’s political party fights elections and is able to build a major presence in the country and stays true to its cause. That benefits all of us. Kejriwal’s political party fights elections and its candidates win. But these candidates and the party turn out to be as corrupt as the other political parties that are already there. While this will be disappointing, but then one more corrupt political party is not going to make things more difficult for the citizens of this country in anyway. We are used to it by now.
As far as Arvind Kejriwal and IAC go, they must well remember these famous lines from Majrooh Sultanpuri, the famous Hindi film lyricist and Urdu poet.
Main akela hi chala tha janibe manzil magar,
Log saath aate gaye aur karawan banta gaya.
(Loosely translated, it means this: I had started off alone towards my goal, people began joining and a huge caravan began forming!)
The article originally appeared on www.firstpost.com on October 18,2012. http://www.firstpost.com/politics/we-need-to-give-kejriwal-time-he-is-testing-the-waters-494970.html
Vivek Kaul is a writer. He can be reached at [email protected]

Even without Vadragate, the DLF stock should be a sell


The stock price of DLF closed yesterday at Rs 218.9 yesterday. It was down by 9.7% during the week.
None of the major stock brokerages has changed its recommendation on the stock since Arvind Kejriwal attacked the company. Nevertheless there are strong rumors going around that the brokerages are getting their real estate analysts to call up their biggest clients and recommending them to slowly sell out of DLF stock. This may to a certain extent explain why the stock price of the company has fallen by over 10% since Friday.
Stock brokers rarely issue direct sell recommendations on stocks. There are primarily three reasons for the same. The company on whose stock the sell recommendation is issued can limit the access the analyst has with the company. So there might be no information sharing, site visits etc. This can put the analyst at a huge information disadvantage vis a vis other analysts.
An out and out sell recommendation also does not go down well with institutional investors the biggest clients of stock brokers. This is because a sell recommendation can spread and lead to everybody wanting to sell out at the same time. This can lead to the value of the investments falling dramatically. And nobody likes that.
And, finally, any brokerage makes more money by issuing a buy recommendation than a sell recommendation. This is primarily because when it makes a sell recommendation it can only earn commissions from its own customers who sell the stock. Whereas when it makes a buy recommendation it can get it brokers to call on new customers and get them to buy the stock.
Due to these reasons none of the stock brokerages have issued a sell report on DLF, even though great political risk seems to have become attached to the company.
Nevertheless the fact that DLF might have major political risk going with it has only recently been identified and registered into public perception. But even with that the one big reason investors should stay away from the company is the massive debt that it has on its books.
The debt has constantly been building up since the financial year 2007-2008 (the period between April 1, 2007 and March 31, 2008) during which the company decided to re-list on the stock exchange.
The debt as on June 30, 2007, was at Rs 10,436.6 crore. This number five years later stands at Rs 25,060 crore or 140% more. The debt of the company has grown at the rate of 19.1% on an average every year.

DateTotal Debt (in rupees crore)% increase over previous year
June 30,200710,436.60
June 30,200814,220.9036.26%
June 30,200916,32014.76%
June 30,201021,67732.82%
June 30,201123,86310.08%
June 30,201225,0605.02%

Take a look at the above table. It shows very clearly that the debt of the company has gone up year on year since 2007. Any company which takes on more debt does so in the hope that the extra money helps it to expand and thus earn more money in the process. But is that the case with DLF?

DateTotal Quarterly Income (in rupees crore)
June 30,20073121
June 30,20083846.3
June 30,20091746
June 30,20102161
June 30,20112503
June 30,20122329

The table above throws up some very interesting numbers. The total quarterly income of DLF as on June 30, 2007(the period between April 1, 2007 and June 30, 2007) was at Rs 3,121 crore. The total quarterly income of DLF as on June 30, 2012(the period between April 1, 2012 to June 30,2012) was Rs 2329 crore or 25.3% lower.
So the debt of the company has gone up by 140% in the last five years. But during the same period the quarterly income has fallen by a little over 25%. To be fair to the company quarterly sales do not always reflect the annual trend. So let’s take a look at the annual numbers and see how they stack up.

DateTotal Yearly Income (in rupees crore)
March 31,200814655.01
March 31,200910392.55
March 31,20107791.31
March 31,201110091.54
March 31,201210207.88

The table above throws up some very interesting numbers. The total quarterly income of DLF as on June 30, 2007(the period between April 1, 2007 and June 30, 2007) was at Rs 3,121 crore. The total quarterly income of DLF as on June 30, 2012(the period between April 1, 2012 to June 30,2012) was Rs 2329 crore or 25.3% lower.
So the debt of the company has gone up by 140% in the last five years. But during the same period the quarterly income has fallen by a little over 25%. To be fair to the company quarterly sales do not always reflect the annual trend. So let’s take a look at the annual numbers and see how they stack up.

DateTotal Quarterly Income (in rupees crore)
June 30,20073121
June 30,20083846.3
June 30,20091746
June 30,20102161
June 30,20112503
June 30,20122329

As we can see from the above table the total income of DLF has come down by 30% in the last four years. Though it has recovered to some extent in the last two years. What is interesting is that between March 31, 2008 and March 31, 2012, the debt of the company has more than doubled to Rs 25,066 crore.
What does all this tell us? Here is a company which is earning less money than it was in the past but is constantly taking on more and more debt. More debt means more interest to pay as well. As the annual report of DLF dated March 31, 2012, points out “the company’s borrowings from banks and others have a effective weighted average rate of 12.38% p.a. calculated using the interest rates effective as on March 31, 2012 for the respective borrowings.”
This means the company is paying an interest of 12.38% on its debt of Rs 25,066 crore. This translates into a yearly interest of Rs 3103.8 crore. This works out to 30.4% of the yearly income of Rs 10,207.88 crore and is much more than the companies last quarterly income. The interest burden of the company this year is 2.7 times its last year’s net profit of Rs 1,168.68 crore.
Other than the interest to be paid the company also needs to pay off the debt that is maturing. Its total debt of Rs 25,060 crore is a little over 21.4 times its last year’s profit and two and a half times its annual income.
This tells us that the company is in a financial mess. It is highly unlikely that the company will be able to pay off its debts from its normal sources of income and profit after tax. Given this, the only way out for the company is to sell off its various assets as well as non-core businesses.
But that is easier said than done. It has been trying to sell its wind power business for a while now. Media reports also suggest that it is in the process of selling off Aman Resorts its foray into luxury hospitality business. The hotel DLF set up with Robert Vadra is also reported to be on the block. A couple of months back DLF managed to sell off its 17.5 acre land plot in Mumbai’s Lower Parel area to Lodha Developers for Rs 2750 crore. The company also managed to sell off Adone Hotels and Hospitality for Rs 567 crore. All these investments got the company into the financial mess that it is in as it took on more and more debt to expand. The company also claims to have a land bank with a developmental potential of 345million square feet.
In the economic environment that prevails it is becoming more and more difficult for DLF to sell of its assets like land and other businesses.
DLF had listed on the stock exchanges in July 2007 with great fanfare. The stock price reached an all time high of Rs 1207 in January 2008. Anybody who bought the stock at its peak, like a lot of investors did, would have seen the value of his investment fall by a whopping 82.1% by now, making the stock one of the biggest destroyers of stock market wealth over the last few years. Chances are this might just continue in the days to come.
The article originally appeared on www.firstpost.com on October 13, 2012. http://www.firstpost.com/investing/even-without-vadragate-the-dlf-stock-should-be-a-sell-489374.html
(Vivek Kaul is a writer. He can be reached at [email protected] He does not own any DLF stock. Neither is he on short on it. He may have some indirect investment in DLF through the equity mutual fund route)
 
 

DLF and Vadra may have misled us on the ‘advance’

Vivek Kaul
Skylight Hospitality Private Limited is a company majorly owned by Robert Vadra. His mother Maureen holds 0.2% of the company. Hence the remaining 99.8% are owned by Vadra. The latest balance sheet of the company filed with the Registrar of Companies throws up some very interesting information. The balance sheet is dated March 31, 2011. The balance sheet used by Arvind Kejriwal and Prashant Bhushan to make the charges that they did against Vadra was dated as on March 31, 2010.
Skylight has a total paid up capital of Rs 5 lakh. Fifty thousand shares of Rs 10 each have been issued. Robert Vadra owns 49,900 shares and his mother Maureen owns the remaining 100 shares. The company claims to have raised no secured loans or unsecured loans for that matter. This means that the owners of the company have put Rs 5 lakh of their own money into the business.
The company has total assets of Rs 48.53 crore. Of this the company has fixed assets worth Rs 16.18 crore. Other than this the company has investments worth Rs 24.37 crore. It has cash and bank balances amounting to Rs 4.77 crore. And it has given loans and advances amounting to Rs 3.21 crore to others.
But the question is how can a company which has a paid up capital of Rs 5 lakh fund assets worth Rs 48.53 crore? This implies an asset to shareholder capital ratio of a humongous 971 times. The question is how did a company in which the owners have invested just Rs 5 lakh end up with assets of Rs 48.53crore?
One answer could be that the company borrowed money and used a part of this money to buy assets and a part of this money was lying in the bank account and had been lent to others. But as I mentioned earlier Skylight has no secured or unsecured loans.
So where did this money come from? For this one has to look at the liability side of the balance sheet. The company has a liability of Rs 58.05 crore. The balance sheet that I managed to download from the ministry of corporate affairs does not have schedules attached to it. Hence one really doesn’t know what these liabilities comprise of prima facie.
But some educated guesses can be made from the statement issued by DLF and the balance sheet of Skylight as on March 31, 2010. Lets first start with the DLF statement “M/s Skylight Hospitality Pvt Ltd approached us in FY 2008-09 to sell a piece of land measuring approximately 3.5 acres just off NH 8 in Village Sikohpur, Dist Gurgaon…DLF agreed to buy the said plot, given its licensing status and its attractiveness as a business proposition for a total consideration of Rs 58 crores. As per normal commercial practice, the possession of the said plot was taken over by DLF in FY 2008-09 itself and a total sum of Rs 50 crores given as advance in instalments against the Purchase consideration.”
So DLF gave an advance of Rs 50 crore to Vadra’s Skylight against a plot worth Rs 58 crore. What the company does not clarify what does it mean by normal commercial practice? Does the company give advances worth Rs 50 crore amounting to nearly 86.3% of the value of the property, to other individuals who have no prior experience in real estate as well?
Also how is an advance different from a loan? An advance is typically made to someone known, which is true in this case. Vadra has claimed to be friends with people who run DLF. The other interesting thing is that an advance is typically short term. So in this case DLF advanced Rs 50 crore to Vadra in 2008-2009. That advance of Rs 50 crore was on the balance sheet of Vadra’s Skylight as on March 31, 2010. This means an advance of Rs 50 crore was with Vadra for a period of between one to two years.
An advance for a period as long as that is not an advance but basically an interest free loan. An advance is typically given when the company expects the deal to be completed within a few months.
Now let’s back to the balance sheet as on March 31, 2011. The fixed assets of Skylight as on this date were valued to be at Rs 16.18 crore. This is exactly the same as the fixed assets of Skylight as on March 31, 2010. Hence, it’s safe to say that the balance sheet is referring to the same fixed assets. The scheduled to the balance sheet as on March 31, 2010, point out that these fixed assets are land plots. One land plot is shown to be worth Rs 15.38 crore.
In fact this is the same plot which DLF is talking about. The balance sheet of Skylight as on March 31, 2010, shows an advance of Rs 50 crore from DLF against this land.
It is reasonable to assume that this land plot against which DLF gave an advance was still with Skylight as on March 31, 2011, given that the value of the fixed assets remained the same when compared to March 31, 2010.
So the sale of this land for which DLF had given an advance of Rs 50 crore had not been completed as on March 31, 2011. This means that the advance of Rs 50 crore to Vadra’s Skylight remained on its books for a period between two to three years.
Hence, it was this Rs 50 crore received from DLF which is a part of the Rs 58.05 crore liabilities shown by the firm as on March 31, 2011. And this was the money which basically used to build assets of Rs 48.53 crore.
Given this, DLF’s claim of the money being an advance and not an interest free loan, doesn’t really hold. An advance is typically made for the short term not for a period as long as two to three years, as seems to be the case here. What DLF gave Vadra was an interest free loan.
The investopedia website defines a current liability as “a company’s debts or obligations that are due within one year.” In Vadra’s case the current liability of an advance from DLF remained on the books for a period two to three years. And that clearly isn’t normal.
DLF statement issued over the weekend says “after receipt of all requisite approvals, the said property was conveyanced in favour of DLF.” This must have happened only after March 31, 2011. This is something only DLF and Vadra can clarify on. Or it will become clear once Skylight’s balance sheet as on March 31, 2012 comes out in the public domain, which will only happen sometime by the middle of next year.
What is interesting is that the value of the land against which DLF gave an advance to Vadra’s Skylight is shown to be at Rs 15.38 crore on the balance sheet of Skylight. DLF values this land at Rs 58 crore.  The difference is on account of the fact that Skylight is probably valuing the land at the price at which it bought it at whereas DLF is valuing it at the market price.
But then it brings us back to the question how did a firm which had a paid up capital of only Rs 5 lakh buy land which is shown to be worth Rs 15.38 crore on its own books? Where did the money come from? DLF only came into the picture after Vadra’s Skylight had bought the land and wanted to sell it to DLF.
There is another interesting point that an article in The Hindu points out. Skylight’s balance sheet as on March 31, 2010, has no entries for fixed deposits that it holds or the interest that has accrued on these fixed deposits. But the balance sheet does show a series of fixed deposits on which tax has been deducted (TDS) at source by banks.
The total tax deducted at source from 19 fixed deposits amounts to Rs 4.95 lakh. TDS at the rate of 10.3% is deducted on fixed deposits by banks when the interest paid during the course of the year is greater than Rs 10,000. This means that Vadra’s Skylight has earned  an interest on fixed deposits of amounting to Rs 48.06 lakh (Rs 4.95 lakh/10.3%). If we assume a rate of interest of 9% .then the total fixed deposits amount to Rs 5.34 crore (Rs 48.06 lakh/9%). But there is no mention of these fixed deposits in the schedules to the balance sheet. The number can be greater also given that banks do not deduct interest on fixed deposits till the interest during the course of the year amounts to at least Rs 10,000.
Also as on March 31, 2011, Vadra’s Skylight made losses of Rs 9.81 crore on a capital of Rs 5 lakh. Given this, can it continued to be categorized as a going concern?
Robert Vadra has accused Arvind Kejriwal of politics of opportunism. Politics is all about opportunism, this is something that Vadra must understand by now, given that he is married into India’s biggest political family.
Vadra as the son-in-law of Sonia Gandhi, the President of the Congress Party, which is India’s oldest and currently the biggest party in Parliament has to above suspicion, like Caesar’s wife. He cannot simply getaway by trying to strike an emotional cord by putting up status messages on Facebook and not putting out a point by point rebuttal to the charge made by Kejriwal and Bhushan.
The article originally appeared on October 8, 2012 on www.firstpost.com. http://www.firstpost.com/business/dlf-and-vadra-may-have-misled-us-on-the-advance-483293.html
(Vivek Kaul is a writer and can be reached at [email protected])

DLF borrows money at 12.38%; lends free to Vadra


Vivek Kaul
DLF is India’s largest listed real estate company. During the hey days of the company a few years back, such was the craze for the DLF stock that Kushal Pal Singh, its owner, was listed among the ten richest people in the world. Those days are now gone.
The company has recently been accused by Arvind Kejriwal and Prashant Bhushan of giving interest free loans amounting to Rs 65 crore to Robert Vadra. Vadra is the married to Priyanka Vadra, daughter of Sonia Gandhi.
Kejriwal and Bhushan have released documents which clearly show that companies set up by Vadra borrowed money from DLF and then used that money to buy properties from DLF among other things. (You can access the press release here). The market value of these properties has increased considerably since Vadra bought them.
According to a tweet on the Twitter handle of news channel NDTV, DLF has said that their dealings with Vadra have been completely transparent. Vadra on his part had explained his relationship with DLF to the Economic Times in March 2011. “I have a good understanding with DLF. Our children are friends, we are friends. They are seasoned businessmen. They are not daft. They are educated, sensible people and are reasonable and shrewd in their business. They don’t need me to enhance them. They’ve existed for years,” Vadra had said. (You can read the complete story here).
On the face of it this might look like a completely normal business transaction between two different businessmen. But the latest annual report and the analyst presentation made DLF throw up some interesting questions nevertheless.
As per an analyst presentation (dated August 6, 2012) made by DLF, the gross debt of the company stands at a whopping Rs 25,060 crore as on June 30, 2012. At the end of March 31, 2012, the gross debt had stood at Rs 25,066 crore. (You can access it here).
The annual report of DLF points out “the company’s borrowings from banks and others have a effective weighted average rate of 12.38% p.a. calculated using the interest rates effective as on March 31, 2012 for the respective borrowings.”
So what this means is that the company had debt outstanding of Rs 25,066 crore as on March 31, 2012, and was paying an interest of 12.38% on that debt. The debt outstanding as on June 30, 2012, had not changed much and was at Rs 25,060 crore. It is fair to assume that over a period of three months the interest rate on the debt outstanding wouldn’t have changed significantly.
What is also interesting is that during 2011-2012(i.e. the period between April 1, 2011 and March 31, 2012) the sales of the company stood at Rs 4582.67 crore. This means that the debt of the company is nearly 5.5 times its annual sales, which is extremely high.
The question that DLF needs to answer is that why is a company which has such huge debt outstanding and is paying an interest of 12.38% per year on it, giving out interest free loans? Also it seems to have been having trouble in bringing down its outstanding debt. The outstanding debt between March and June 2012, has gone down by only Rs 6 crore.
The company has been trying to bring down the debt by selling investments that it had made over the last few years. It recently sold a plot that it owned in Lower Parel in Central Mumbai to Lodha Developers for Rs 2,750 crore. The company has been trying to sell several of its other investments over the last few years.
The high debt level has been a huge concern for the analysts who track the company. As Sandipan Palan analyst with Motilal Oswal wrote in a recent report “DLF’s high debt has been a key concern for investors; however, we believe leverage(which means debt in simple English) of Rs 16,000-17,000 crore would be a sustainable level for the company.”
So here is a company which analysts believe should be cutting down on its debt by around Rs 9,000 crore, and it has been giving out interest free loans to an individual with zero or very little experience in running a real estate business. DLF needs to tell us in some detail the “business” reasoning behind this decision.
Another interesting point that comes out while going through the annual report of the company is that it has 65 non current investments. The annual report of DLF points out that “Investments are classified as non-current or current based on management’s intention at the time of purchase. Investments that are readily realisable and intended to be held for not more than a year are classified as current investments. All other investments are classified as non-current investments.”
Of the 65 non current investments only two are joint ventures. One of these joint ventures is with Skylight Hospitality Private Limited, a company owned by Vadra and his mother Maureen. Skylight owns a 50% stake in Saket Courtyard Hospitality Private Limited, which runs the Hilton Garden Inn Hotel in Saket, New Delhi. This is the only operational hotel of the company.
When it comes to making non-current investments joint ventures are not a favoured form of investing with DLF, given that only two out of its 65 non current investment are joint ventures.
The venture with Skylight is very small by DLF standards. In the annual report of the company the book value of the joint venture is put at just Rs 5.6 crore. Also why would a company as big as DLF is enter into a joint venture for a four star hotel with an individual who has absolutely no or very little prior experience in running a hotel? This is something that needs to be answered. A recent report in the Daily News and Analysis seems to suggest that the hotel run by this joint venture is on the block. (You can read the story here).
The entire Congress party has come to the rescue of Robert Vadra and tried to project the deals between Vadra and DLF as normal business transactions. One senior leader even went to the extent of saying “doesn’t Vadra have a right to occupation?” Yes, Vadra has the right to an occupation and so does DLF. But there are too many unanswered questions here that need to be answered.
The article was originally published on www.firstpost.com on October 6, 2012. http://www.firstpost.com/business/dlf-borrows-money-at-12-38-lends-free-to-vadra-481727.html#.UG_tdwlmmIs.twitter
(Vivek Kaul is a writer. He can be reached at [email protected]

What Team Anna can learn from Nirma, Sony, Apple and Ford


Vivek Kaul

The decision by Team Anna to form a political party has become the butt of jokes on the internet. A Facebook friend suggested that they name their party, the Char Anna Party and someone else suggested the name Kejriwal Liberal Party for Democracy (KLPD).
The jokes are clearly in a bad taste and reflect the level of cynicism that has seeped into us. Let me paraphrase lines written by my favourite economist John Kenneth Galbraith (borrowed from his book The Affluent Society) to capture this cynicism. “When Indians see someone agitating for change they enquire almost automatically: “What is there for him?” They suspect that the moral crusades of reformers, do-gooders, liberal politicians, and public servants, all their noble protestations notwithstanding are based ultimately on self interest. “What,” they enquire, “is their gimmick?””
The cynicism comes largely from the way things have evolved in the sixty five years of independence where the political parties have taken us for a royal ride. Given this the skepticism that prevails at the decision of Team Anna to form a political party isn’t surprising. Take the case of Justice Markandey Katju, who asked CNN-IBN “Which caste will this political party represent? Because unless you represent one caste, you won’t get votes…Whether you are honest or meritorious nobody bothers. People see your caste or religion. You may thump your chest and say you are very honest but you will get no votes.”
Former Supreme Court justice N. Santosh Hegde said “Personally, am not in favour of Annaji floating a political party and contesting elections, which is an expensive affair and requires huge resources in terms of funds and cadres.”
Some other experts and observers have expressed their pessimism at the chances of success of the political party being launched by Team Anna. Questions are being raised. Where will they get the money to fight elections from? How will they choose their candidates? What if Team Anna candidates win elections and start behaving like other politicians?
All valid questions. But I remain optimistic despite the fact that things look bleak at this moment for Team Anna’s political party.
I look at Team Anna’s political party as a disruptive innovation. Clayton Christensen, a professor of strategy at the Harvard Business School is the man who coined this phrase. He defines it as “These are innovations that transform an existing market or create a new one by introducing simplicity, convenience, accessibility and affordability. It is initially formed in a narrow foothold market that appears unattractive or inconsequential to industry incumbents.”
An excellent example of a home grown disruptive innovation is Nirma detergent. Karsanbhai Patel, who used to work as a chemist in the Geology & Mining Department of the Gujarat government, introduced Nirma detergent in 1969.
He first started selling it at Rs 3.50 per kg. At that point of time Hindustan Lever Ltd’s (now Hindustan Unilever) Surf retailed for Rs 15 per kg. The lowest-priced detergent used to sell at Rs 13.50 per kg. The price point at which Nirma sold made it accessible to consumers, who till then really couldn’t afford the luxury of washing their clothes using a detergent and had to use soap instead.
If Karsanbhai Patel had thought at the very beginning that Hindustan Lever would crush his small detergent, he would have never gotten around launching it. The same applies to Team Anna’s political party as well. They will never know what lies in store for them unless they get around launching the party and running it for the next few years.
Getting back to Nirma, the logical question to ask is who should have introduced a product like Nirma? The answer is Hindustan Lever, the company which through the launch of Surf detergent, pioneered the concept of bucket wash in India. But they did not. Even after the launch of Nirma, for a very long time they continued to ignore Nirma, primarily because the price point at which Nirma sold was too low for Hindustan Lever to even think about. And by the time the MBAs at Hindustan Lever woke up, Nirma had already established itself as a pan-India brand. But, to their credit they were able to launch the ‘Wheel’ brand, which competed with Nirma directly.
At times the biggest players in the market are immune to the opportunity that is waiting to be exploited. A great example is that of Kodak which invented the digital camera but did not commercialize it for a very long time thinking that the digital camera would eat into its photo film business. The company recently filed for bankruptcy.
Ted Turner’s CNN was the first 24-hour news channel. Who should have really seen the opportunity? The BBC. But they remained blind to the opportunity and handed over a big market to CNN on a platter.
Along similar lines, maybe there is an opportunity for a political party in India which fields honest candidates who work towards eradicating corruption and does not work along narrow caste or regional lines. Maybe the Indian voter now wants to go beyond voting along the lines of caste or region. Maybe he did not have an option until now. And now that he has an option he might just want to exercise it.
While there is a huge maybe but the thing is we will never know the answers unless Team Anna’s political party gets around to fighting a few elections.
The other thing that works to the advantage of disruptive innovators is the fact that the major players in the market ignore them initially and do not take them as a big enough force that deserves attention.
A great example is the Apple personal computer. As Clayton Christensen told me in an interview I carried out for the Daily News and Analysis (DNA) a few years back “Apple made a wise decision and first sold the personal computer as a toy for children. Children had been non-consumers of computers and did not care that the product was not as good as the existing mainframe and minicomputers. Over time Apple and the other PC companies improved the PC so it could handle more complicated tasks. And ultimately the PC has transformed the market by allowing many people to benefit from its simplicity, affordability, and convenience relative to the minicomputer.”
Before the personal computer was introduced, the biggest computer available was called the minicomputer. “But minicomputers cost well over $200,000, and required an engineering degree to operate. The leading minicomputer company was Digital Equipment Corporation (DEC), which during the 1970s and 1980s, was one of the most admired companies in the world economy,” write Clayton Christensen, Michael B Horn and Curtis W Johnson in Disrupting Class —How Disruptive Innovation Will Change the Way the World Learns.
But even then DEC did not realise the importance of the personal computer. “None of DEC’s customers could even use a personal computer for the first 10 years it was on the market because it wasn’t good enough for the problems they needed to solve. That meant that more carefully DEC listened to its best customers, the less signal they got that the personal computer mattered — because in fact it didn’t — to those customers,” the authors explain.
That DEC could generate a gross profit of $112,500 when selling a minicomputer and $300,000 while selling the much bigger ‘mainframe’ also didn’t help. In comparison, the $800 margin on the personal computer looked quite pale.
Another example is Sony. “In 1955, Sony introduced the first battery-powered, pocket transistor radio. In comparison with the big RCA tabletop radios, the Sony pocket radio was tiny and static laced. But Sony chose to sell to its transistor radio to non-consumers – teenagers who could not afford big tabletop radio. It allowed teenagers to listen to music out of earshot of their parents because it was portable. And although the reception and fidelity weren’t great, it was far better than their alternative, which was no radio at all,” write Christensen, Horn and Johnson. Sony went onto to come up with other great disruptive innovations like the Walkman and the CDMan. But did not see the rise of MP3 players.
The point is that incumbents are so clued in to their business that it is very difficult for them to see the rise of a new category.
So what is the learning here for Team Anna? The learning is that their political party may not take the nation by storm all at once. They might appeal only to a section of the voters initially, probably the urban middle class, like Apple PCs had appealed to children and Sony radios to teenagers. So the Team Anna political party is likely to start off with a limited appeal and if that is the case the bigger political parties will not give them much weight initially. Chances are if they stay true to their cause their popularity might gradually go up over the years, as has been the case with disruptive innovators in business. The fact that political parties might ignore them might turn out to be their biggest strength in the years to come.
Any disruption does not come as an immediate shift. As the authors write, “Disruption rarely arrives as an abrupt shift in reality; for a decade, the personal computer did not affect DEC’s growth or profits.” Similarly, the Team Anna political party isn’t going to take India by storm overnight. It will need time.
Business is littered with examples of companies that did not spot a new opportunity that they should have and allowed smaller entrepreneurial starts up to grow big. The only minicomputer company that successfully made the transition to being a personal computer company was IBM. “They set up a separate organisation in Florida, the mission of which was to create and sell a personal computer as successfully as possible. This organisation had to figure out its own sales channel, it had its own engineers, and it was unencumbered by the existing organization,” said Christensen.
But even IBM wasn’t convinced about the personal computer and that is why it handed over the rights of the operating system to Microsoft on a platter. Even disruptive innovators get disrupted. Microsoft did not see the rise of email and it’s still trying to correct that mistake through the launch of Outlook.com. It didn’t see the rise of search engines either. Nokia did not see the rise of smart phones. Google did not see the rise of social media. And Facebook will not see the rise of something else.
Team Anna is a disruptive innovation which can disrupt the model of the existing political parties in India. There are three things that can happen with this disruptive innovation. The Team Anna political party tries for a few years and doesn’t go anywhere. That doesn’t harm us in anyway. The Team Anna political party fights elections and is able to build a major presence in the country and stays true to its cause. That benefits all of us. The Team Anna political party fights elections and its candidates win. But these candidates and the party turn out to be as corrupt as the other political parties that are already there. While this will be disappointing but then one more corrupt political party is not going to make things more difficult for the citizens of this country in anyway. We are used to it by now.
Given these reasons the Team Anna political party deserves a chance and should not be viewed with the cynicism and skepticism which seems to be cropping up.
(The article originally appeared on www.firstpost.com on August 4,2012. http://www.firstpost.com/politics/what-team-anna-can-learn-from-nirma-sony-apple-and-ford-404843.html)
(Vivek Kaul is a writer and can be reached at [email protected])