Bottom-line: What happens if everyone makes a run at Tether, withdrawing all their Tether at once? What happens…if Tether goes bust?

Is Tether a Ponzi scheme?

Before I talk about Tether, I want to give you a quick example of how a bank works - I think it will set the right context to understand how Tether works.

Imagine that you deposit INR 50K in a savings account with a bank. The bank pays you a steady interest on that deposit of 4-6%. You don’t need all the money at once, so majority of that sits with the bank for long periods of time.

The bank uses this behavior to their advantage. They use the depositors’ money & give out loans to individuals/businesses in need of credit & earn interest of around 8-12% on such loans. [more in case of risky/unsecured loans]

The ‘spread’ also known as ‘net interest margin’ - is the difference between the rate of interest banks earn on the loans they give out minus the rate of interest they pay out to depositors

A very lucrative business isn’t it? You’re using money which isn’t yours & earning a profit from it.

However, it isn’t always this rosy. In a market downturn, businesses fail. They aren’t able to honor their loan commitments & fail on their loan repayments. The bank does what it can to recover the money [selling off collaterals etc.] & when it is certain they can’t get the money back, they write off the loan from their books.

In some cases [insert 2008 financial crisis], the situation gets OUT OF CONTROL & so many loans ‘go bad’ that the banks do not have enough money to pay back their depositors - which is what we call a liquidity crunch.

In that scenario, either someone [mostly the country’s Government using taxpayers’ money] bails them out by infusing additional capital into the bank OR the bank is simply allowed to fail. In the latter case, all hell breaks lose. Depositors make a run on the bank trying to get their money back.

People start to panic & start withdrawing their money from other banks putting the entire banking system under pressure. Without enough credit, banks aren’t able to disperse loans to businesses & the entire credit cycle stops. Stock prices start to tumble as liquidity slows down. And, you can watch the movie ‘The Big Short’ to visualize what happens next.

You’re probably thinking - ‘Yeah, I know how a bank works. What’s your point? And, how is this possibly connected to Tether?’

Well, Tether Holdings Ltd., the company which mints & issues stablecoins called ‘Tether’ into circulation is quite similar to a bank - with certain differences.

When you buy a Tether, you’re in effect depositing real money with Tether. You deposit your money with the crypto-exchange which in turn transfers that money to Tether Holdings in exchange for Tethers.

In an ideal world, when you deposit your money with a crypto-exchange & buy a cryptocurrency - that money would be given by the crypto-exchange to a bank to hold it in a fiduciary capacity. But the problem is, banks don’t want to do business with these exchanges.

So what do the exchanges do? They choose stablecoin providers to fill the void. They allow investors to buy cryptos using stablecoins. Investors buy Tether, deposit their money with Tether Holdings Ltd & use that Tether to buy the likes of Bitcoin/Ethereum etc.

Now, Tether Holdings doesn’t pay you any interest for the money that you’ve given them to buy Tether. Plus, it isn’t a bank & is not covered by any banking regulation - so it doesn’t have to disclose what it does with the money that is lying with it. Tether Holdings could literally spend that money on buying a football team & we’d never know.

It is rumored that Tether used that money to buy a lot of risky debt from Chinese real estate players. If the bet played out, the people running Tether would make a sizable profit - but if things went south, the only people to lose would be the crypto-investors who had parked their money with Tether Holdings Ltd., not knowing the underlying risks.

Even banks, which work in an extremely regulated environment can go bust [in extreme situations]. And here is Tether Holdings Ltd., unregulated - holding $69B dollars in real money, claiming that it is maintaining a 1:1 peg [if you’re to believe a report published by an accounting firm in the Bahamas], meanwhile everything you read about the company reeks of suspicion.

So - what if Tether is a big Ponzi scheme?

Before we answer that question - let’s take a look at some of the other facts that had come to light during the New York Attorney General’s investigation.

The Bitfinex Connection

Bitfinex is a cryptocurrency exchange - a place where you can buy & sell cryptos. The company which owns Bitfinex is iFinex Inc.

Guess who owns Tether Holdings Ltd?

Yep, you guessed it right. It’s iFinex

This connection is important because Bitfinex has had it’s share of misfortunes since incorporation. It’s been hacked several times in the past, losing customer money.

And a couple of years back, Bitfinex found itself in a really sticky situation. Here’s what happened.

We’ve established that traditional banks don’t want to be involved with crypto exchanges. Bitfinex found a way around this. It partnered with Crypto Capital Corp. (a payments processor based in Panama) to deal with withdrawals & other transactions on the platform.

However, one fine day - Crypto Capital refused to send money back to Bitfinex. Crypto Capital said that their accounts were seized by regulators in the US, UK & Poland. (Why were the accounts seized? You can read the full story here)

How much money are we talking about here? A WHOOPING $850 million.

Bitfinex was caught in a vice. It had to pay back customers making the withdrawals. And if Bitfinex couldn’t pay back - these customers (your normal crypto investor) would panic, leading to a massive sell off - which would lead to more withdrawal requests & the vicious circle would be complete.

Giancarlo Devasini, the guy who owns Bitfinex & who is also the CFO at Tether Holdings Ltd had a master plan. He thought - ‘Wait a minute….why don’t we use the funds lying with us at Tether to plug the holes at Bitfinex? Who’s going to find out anyway?’

And voila! Close to $800 million was transferred from Tether Holding to Bitfinex & all Tether did was tweak it’s website to read:

“Every Tether is always 100% backed by our reserves, which include traditional currency and cash equivalents and, from time to time, may include other assets and receivables from loans made by Tether to third parties, which may include affiliated entities.”

I tip my hat to Letitia James - who is New York’s Attorney General & her office for uncovering this for the world to see.

What is a Ponzi scheme?

Simply put, it’s an investing scam where investors are promised an exorbitant rate of return with little to no risk. All they have to do is - invest & stay invested

When the early investors are paid a handsome return, the word spreads attracting more people to invest in this scheme.

The people who run the scheme simple use the funds from new investors to pay back to the earlier investors & this goes on until the flow of new money dries up - hence exposing the devil at play.

Evaluating the above, in literal terms - Tether isn’t a Ponzi scheme, since it’s not really paying back any ‘returns’ to the people who invest in Cryptocurrencies. It merely acts as a fiduciary (at least it’s supposed to) holding money on behalf of the investors until they want to withdraw it.

But - just like Anmol Gandhi mentioned on the podcast, 90% of all cryptocurrencies in circulation today might be a scam. Including Tether. No one knows where it’s parking it’s money. There are rumors of it parking substantial amounts of money in Chinese real estate CPs to make large profits. Or funding Bitfinex helping the exchange to stay afloat & cover it’s losses. Or pushing the prices of Bitcoin by using pump & dump schemes

Tether could be one of the biggest scams of this decade. It’s modus operandi being simple: ‘Issue new digital tokens, raise more real money & pay back the people who want their money back’

The only problem here - is that Tether is systematically important for the entire cryptosphere. You’ve got over $70BILLION plus Tethers in circulation. Someday, people are going to want their money back - and what happens the day Tether defaults?

History, will repeat itself.

A stablecoin is different from other coins like Bitcoin, Ethereum etc. So, let’s first understand what stablecoins are & how they work - before we answer the question ‘Where is Tether keeping the $69B dollars that it’s supposed to keep as reserves?’

Stablecoins : What are they & what purpose do they serve?

A stablecoin - in the simplest terms, is a cryptocurrency. But, it doesn’t [and shouldn’t] fluctuate as much as other cryptos out there because it’s pegged to a stable reserve like the US$ or Gold. However some of them are pegged to other cryptocurrencies, so not all stablecoins are ‘stable’

For eg. Tether is pegged to the US $. And theoretically - 1 Tether = 1 USD

So why do we need a stablecoin? What purpose is it serving in the grand scheme of things?

Let’s say you want to buy Bitcoins worth INR 10K. You deposit money in one of the cryptocurrency exchanges (like CoinDCX) and you hit ‘Buy’. Boom - you got Bitcoins in your crypto wallet. Easy stuff.

What we don’t see is what happens in the background. Here’s an example:

1. You deposit real money with a crypto exchange

2. You enter into a transaction to buy Bitcoins worth X amount

3. Your real money first gets converted into stablecoins (like Tether or USDC). For eg. $100 gets converted into 100 Tether

4. The stablecoins are then used to buy the actual Bitcoin

5. X amount of Bitcoin appears in your crypto wallet

The same process repeats itself when you want to ‘sell’ a cryptocurrency. Alternatively, you can directly buy stablecoins first & then use them to buy other cryptos.

One reason why Tether gained popularity, is because banks didn’t want to deal with crypto-exchanges, leaving a void. And that’s where companies that issue stablecoins chipped in. People could convert their money into stablecoins & then use them to trade in several cryptos

Moral: Stablecoins are an integral part of the crypto eco-system and if something were to go wrong with these stablecoins - it could disrupt the entire ecosystem, which itself is quite bubble-ly

Which brings me to my next question & probably the most important question:

Where is Tether keeping it’s money?

Like I explained above, Tether is supposed to keep a 1:1 peg with the US$. So, if $69B dollars worth of Tethers are in circulation, the company which issues Tether (i.e. Tether Holdings Ltd.) should have $69B dollars in REAL MONEY locked away as reserves in their bank accounts or parked in other risk free liquid investments.

QQ. Do they?

Here is where things get interesting. And quite controversial.

This Bloomberg Report, talks about where exactly is Tether keeping it’s money. And mind you this money doesn’t belong to Tether. It belongs to the investors who are buying stablecoins/other cryptocurrencies.

Tether Holdings Ltd. works almost like a bank. They issue Tether to Crypto exchanges & get real money in return. Theoretically, they’re supposed to keep this real money in a secure location, like a liquid fund - earning a little yield, keeping a 1:1 peg. But when there’s so much money involved, people get greedy. And that’s what might have happened here.

The Bloomberg report highlights how Tether could be involved in making a series of risky bets & the very real possibility of non compliance with the 1:1 peg. It’s all rumors & we cannot comment how true the report is, but you see the problem right?

If the rumors are true - this could be one of the biggest scams of the decade. A company takes real money from you & gives you a digital token. It then uses that money to do whatever it wants to do with it & when you came back asking for your money to be returned - well, it’s too late. [Clue: Read about SQUID]

Anyways, I think I took a little detour there. Coming back to the question, do we know the breakup of Tether’s reserves? Let’s take a look.

As per an accounting firm based in the Bahamas - $30B of it’s holdings are invested in commercial papers [which are quite illiquid].

What about the rest? No one knows where it is. Or whether it still exists. Tether’s website doesn’t give a breakdown. And the accounting firm (yes, the one based in Bahamas) has given an attestation report claiming that Tether does maintain the reserves to back its coin.

Can we believe this attestation report? In which commercial papers are the $30B parked? Why has no one heard from the CEO/CFO of Tether Holdings? What happens if Tether doesn’t have the reserves to back it’s coin?

There are a lot of open questions. Extremely controversial. And the answer is - we don’t really know, because Tether Holdings Ltd. doesn’t disclose such information.

Tether Holdings reeks of red flags & below are some on the top of my head.

#RedFlag 1: Can we trust the attestation reports given by the accounting firm?

I don’t think so. One, it’s based in the Bahamas. Two, this attestation report can easily be fudged. Three, you’d expect the attestation report to contain a detailed breakdown of the reserves - well, it doesn’t. Looks very shady to begin with.

#RedFlag 2: $30B in Commercial Papers - where is this invested? How risky are they?

The debt market is a close knit community. Everyone knows who’s buying what. But surprisingly - no one knows about Tether. No one has done any business with them. But doesn’t the attestation report say they have $30B parked in CPs?

One theory, is that Tether has bought commercial papers issued by Chinese real estate players. There is a rumor floating that Tether might be connected in financing the debt laden Evergrande Group.

Chinese real estate is in a dump - with real estate bonds down by > 40%. If the rumors are true, the value of these commercial papers might be a helluva lot less. Plus, commercial papers in general are not very liquid. And, Tether might not be able to get the money back when it wants to.

#RedFlag3: Where’s the Goddamn CEO?

J.L. Van der Velde is the official CEO of Tether Holdings Ltd. But no one has ever heard him talk in an interview or at a crypto conference. He’s practically off the grid.

Giancarlo Devasini - the CFO is an Italian plastic surgeon who previously founded an electronic business. He too, stays away from the limelight.

If you check how many people work in the company, only a handful names pop out on LinkedIn. I mean, this is a company that holds $69B in real money, taken from actual people who want to buy Cryptos & it has only a dozen employees? Mindboggling.

#RedFlag4: Legal suit by NY Attorney General1

If the above red flags weren’t enough - there’s also a suit ongoing against the company, wherein the New York Attorney General has highlighted the fact that Tether has deceived it’s clients and the markets by overstating their reserves.

Tether has agreed to pay $18.5 million without admitting any wrongdoing. But the suit is evidence of what we’re trying to prove here.

What stops Tether Holdings from printing more Tether coins?

Nothing.

There’s no limit to the number of Tethers that can be issued. There’s no regulation which stops Tether Holdings Ltd from issuing new Tether coins. I mean, by this time next year, they could have $200B dollars worth of Tethers in circulation & no one would bat an eye.

When people want to cash out, Tether can issue more coins - accumulate more real money & keep inflating the bubble - as long as enough people believe in the ecosystem.

However, all bubbles burst. And when this one does, it will send shockwaves into the heart of the global financial markets. And, you should be ready with a bag of cash - to capitalize.

Enter: E-commerce Rules

Unfair trade practices. Consumer grievances. Price manipulations. These rules covered a lot of ground to protect consumer interests & were introduced to keep these e-commerce behemoths in check.

But now - just one year later, new changes are proposed - some of which are quite massive in terms of their impact on the functioning of e-commerce platforms & the sellers on these platforms.

#Rule 1: No Flash Sales

One of the biggest revenue drivers for these e-commerce platforms - are exclusive events like ‘Prime Day’, ‘Great Indian Festival’ etc. - which offer various products at massive discounts & generate insane sales volumes.

What if these platforms couldn’t engage in these events anymore?

As per these proposed amendments - NO FLASH SALES would be allowed on e-commerce platforms.

A ‘Flash Sale’ is when an e-commerce entity fraudulently adopts tactics to increase the sale of a particular seller or a group of sellers - by offering discounts, reduced prices & offers.

So, if Amazon sets up a special offer to sell a particular brand of Mi phones at a discount - is that a flash sale? If Flipkart offers a limited period offer on the sale of ‘Bose’ earphones - is that a flash sale?

That is exactly where the problem lies. Currently the definition of a flash sale is so broad - that is covers all sales drives essentially, which defeats the purpose of e-commerce. We believe that the definition of flash sales needs to be narrowed down & be more precise.

A blanket ban on all kinds of flash sales could have a significant economic impact - as it could reduce consumer spending drastically & might cause ripple effects across segments.

#Rule 2: Fall back liability

Imagine you ordered an original Rolex watch [hypothetically] from Amazon. A couple days later you received the package & you found out that the watch was counterfeit.

You registered a compliant with Amazon - which in turn connected you directly to the seller to rectify this situation. However, your bad luck that the seller turned out to be a fraud. You wanted your money back - but you couldn’t hold Amazon liable [as per current rules].

This might change with the introduction of ‘fall back liability’

Fall back liability means the ‘liability’ of an e-commerce entity [Amazon/Flipkart], where the seller fails to deliver goods/services to the consumer due to negligent conduct - which causes a loss to the seller.

We believe this is one of the better amendments which would force e-commerce entities to enforce stricter controls to ensure that sellers comply with all the rules laid down - leading to better grievance resolution.

Apart from these two rules mentioned above - other rules were also proposed to be introduced such as:

1. Not allowing E-commerce platforms to manipulative search results to benefit a particular seller.

2. Not allowing E-commerce platforms to collect information about consumers - without the express consent of consumers.

3. Associated entities/related parties of the e-commerce entity wouldn’t be allowed to enlist on the e-commerce entities’ platform. For eg. Cloudtail/Appario Retail wouldn’t be allowed to sell on Amazon’s platform if these rules come into effect.

4. Sellers would be required to appoint a grievance officer - which in our opinion doesn’t make a lot of sense - given this would be detrimental to the growth of smaller sellers increasing admin costs.

Conclusion

E-commerce is expected to be a $200B market in India by 2026. It’s been one of the few sectors untouched by the pandemic, keeping the economy afloat.

These are still proposed amendments - and which rules are actually notified remains to be seen. However, a careful evaluation of its economic impact must be made.

For eg. the definition of flash sales must be narrowed down & be more specific. In the case of ‘fall back liability’ - what would be the liability of the e-commerce entities must be defined.

We’ll keep tabs on how the ball rolls.

It’s IPO provided a great exit for Blackstone which diluted 50% of its total holdings in Sona Comstar - earning a RoI of 8.8x.

As is the case with most of the IPOs - the VCs & PEs of the world are the ones that really get to eat the cake & the retail investors are left with a cherry on top.

But, let’s not go down that rabbit hole.

Let’s try to answer the question - ‘Is Sona Comstar a good long term investment?’

History

The company was incorporated in 1995 as a JV with Mitsubishi - originally named as ‘Sona Okegawa Precisions Forgings Limited’ - led by it’s promoter Surinder Kapur who has been instrumental in the development of the Indian auto components industry.

In 2008, they acquired Thyssenkrupp’s forging business ‘BLW’ - because the company was criticized of being too conservative. The irony is, that this acquisition put a lot of strain on the cash flows of the company and at one point in 2008 - they were on the brink of bankruptcy. But, they managed to weather the storm.

2016 - was a BIG year in the company’s history because they bagged the priced jewel - Tesla as a customer. (this isn’t confirmed in the prospectus - but industry sources believe that they indeed have Tesla as a client)

Tesla was facing issues with it’s ‘differential assembly’ & came to Sona Comstar for a solution. Sona invested in this line of business specifically to cater to Tesla & the investment paid off really well - a masterstroke, from the company’s management.

Parameter #1: Growth of the Industry [Score 9/10]

One of the reasons why a lot of investors are excited in Sona Comstar - is it’s link with the EV space. The company derives 40% of it’s revenue from the EV category.

As per the company’s prospectus - 2 Wheeler EV sales in India is projected to grow at a CAGR of 74%. [which is absolutely massive!]

To put things into perspective, in FY21 only 1.5 lac ‘2 Wheeler EVs’ were sold in India. This, is projected to rise to 2 MILLION units in FY26 & if the company can capitalize on this growth - sky is the limit.

EV, is one of the fastest growing industries right now & the world is moving towards E-mobility.

Parameter #2: Competition & Risks [Score 7/10]

a. Competition

The company operates in the auto ancillary industry - which is dominated by players like MotherSon Sumi, Bosch & Bharat Forge to name a few.

On the global front, it faces competition from players like Valeo, BorgWarner - which are 10x the size of Sona Comstar & would be in a better position to grab opportunities in this space.

Competition is bound to heat up in the EV market & established players will also look to grab a piece of this growing pie. It’ll be interesting to see if the company can maintain it’s competitive edge in the future.

b. Risks

One of the risks for the company - is customer concentration. It derives 80% of it’s revenues from the top 10 customers.

However, this is a feature of the auto components industry, where a few customers contribute heavily to the topline.

Another risk - is that the industry itself is cyclical in nature & demand keeps fluctuating - which makes it difficult to forecast production & could lead to money being blocked in excess inventory.

Parameter #3: Advantages of the Company [Score 8/10]

One of the biggest advantage I believe - is management’s ability to grab opportunities at the right time.

Case in point - ‘differential assembly’ - which wasn’t a business segment before 2016 & currently contributes 17% to the topline.

The company also has long standing relationships with it’s clients & auto components manufacturing is a sticky business. Once you get a customer - they tend to stay. They have clients like Maruti Suzuki, Mahindra, Escorts etc, with more than a decade of relationship.

Plus, having Tesla as a customer is a BIG DEAL and as Tesla grows so does Sona Comstar. It’s association with the EV space - is a definite green light.

They have a good product mix in the ‘starters & bevel gears’ market and the company has been able to grow their market share consistently.

Parameter #4: Financials [Score 7/10]

For an auto components maker - the financials look pretty decent.

The company has been able to maintain an EBITDA margin of 28% - consistently for the previous 4 years - which is almost double compared to it’s peers and it also indicates that it’s products fetch high margins.

They have a healthy RoCE (‘return on capital employed’) - which shows that the management has been smart in rotating it’s capital. Revenue & net profits however, have not grown exponentially & have witnessed relatively stable growth YoY.

One of the things to look out for - is the high amount of Inventory & Receivables on the books - which is classic for a components manufacturer. But, because they have long standing partnerships - I am quite confident that high inventory wouldn’t be a BIG risk.

Parameter #5: Valuations [Score 5/10]

The pre-IPO P/E of the company was 74 - which is nothing short of exorbitant. And, the P/E has only gone up, since the company’s stock has increased by more than 50% from it’s IPO price of INR 291.

Take any valuation parameter - P/E ratio, P/BV ratio or the EV/EBITDA ratio, the company’s valuation is higher across all the ratios - compared to it’s established peers in this space.

The markets have discounted all the future growth it seems - and the company needs to grow it’s topline & bottomline exponentially to justify these valuations.

Verdict: Keep the company on your watchlist - since the company is a play on the EV story. It’s a stable business with sticky customers, a good product mix & a healthy EBIDTA margin - but at the current valuations, look a tad bit expensive.

#1 Alok Industries

Alok Industries operates in the primary stages of the textile ecosystem (i.e. weaving & yarn manufacturing) exporting about 26% of their production to 90 different countries.

This company, is one of the classic examples of what happens when you over-invest & over-produce in the textiles industry.

Why did Alok Industries fail?

It started in 2004, when the company’s management decided to rapidly expand their operations - investing > INR 100Bn over a span of 9 years to build their spinning, weaving & garmenting units.

Most of this money was borrowed & carried a pretty high rate of interest.

Expansion is great if you can increase your topline at the same time. The opposite happened for Alok. Revenues didn’t increase. Interest payments kept rising.

To add fuel to the fire, Alok Industries also diversified in the real estate biz - which requires HUGE upfront investment & has long payback periods.

Ultimately, in 2017 - RBI identified Alok Industries as one of the companies in need of insolvency proceedings. The company, was declared bankrupt.

Restructuring + Roping in Reliance Industries

Luckily for Alok Industries, Reliance Industries (RIL) & JM Financials’ ARC arm submitted a INR 5000 crore plan to revive the company.

RIL infused INR 500 crore as equity & acquired a 37% stake in the company. And once the name of Mukesh Ambani got associated with the company - what happened next was no surprise.

In early 2020 - the stock skyrocketed generating a >800% return in a few months - with no real change in the fundamental business.

Power, is power ~ Cersei Lannister

Financials & Stock Performance

Revenue increased YoY in FY21 [on the back of a lower base] - however it reported a net loss of INR 56Bn, a staggering number. The company also has a negative networth which is one of the biggest red flags for me while analyzing stocks.

The stock itself has been on a rollercoaster ride - touching a peak of 58 in July 2020 & is currently down more than 50%, trading at 26 in June 2021.

At this point, I’m not sure what the bull case for Alok Industries is.

#2 Trident

One of the most sustainable textile company in India - Trident has diversified into various lines of business like paper, chemicals, energy - with the major contributor being home textiles.

Trident’s Business

Trident started as a chemicals & fertilizer biz back in 1985 & slowly pivoted to paper, yarn & terry towels in 1990.

Rajinder Gupta, the founder of Trident - has preached the philosophy of ‘responsible manufacturing’ & he put his money where his mouth was.

For eg. Trident uses only agriculture residue to make paper - no trees are cut in the process. And, the power generated during paper production is diverted into it’s terry towel plant - saving both energy & costs.

Trident makes most of it’s money from the sale of terry towels & has international clients like Walmart, JC Penny, TJ Maxx in it’s hat.

It has a world class manufacturing plant in Budhni (see picture) - spread over 800+ acres, uses one of the most advanced technology & has best in class manufacturing processes. The plant is vertically integrated - it converts cotton to yarn & yarn to towels/sheeting.

Financials & Stock Performance

Revenue growth for the past 5 years has been flat - with marginal revenue decline witnessed in FY20 & FY21 due to COVID-19. The net margins are also quite low.

One positive, is the falling debt to equity ratio - the company has been consistently reducing their debts.

The company needs to venture into new product lines to reduce the dependency on terry towels to unlock the next phase of their growth in my opinion.

The stock has performed reasonably well in the past 5 years - registering absolute gains of >200% & is currently trading at a P/E of 27 [slightly higher than the Industry P/E of 18].

In my opinion, this stock definitely deserves a place on your watchlist.

Which other company would you like us to cover? Let us know in the comments section below!

#1 Raymond

Raymond is a name that needs no introduction in India.

Incorporated in 1925, Raymond started as a woolen mill & today it’s a diversified group with its feet dipped into Textiles & Apparels, FMCG, Realty, Engineering & Prophylactics.

Growth Drivers

One of the biggest growth drivers for Raymond has been the brand positioning & the way it is perceived by it’s customers. It has witnessed growth in both international & domestic markets.

Another factor working for Raymond is India’s rising per capita income & the average age of the population being around 26-28 years - which would increase the demand for premium suiting & apparels.

Raymond boasts brands like Park Avenue, ColorPlus, Parx - catering to various segments of the apparel market.

Potential Threats?

Threat #1: Remote Working

The biggest threat for Raymond & premium fashion brands - is the uptick in remote working due to the pandemic.

Remote working is here to stay even after the pandemic is over & this will reduce demand for premium apparels. Why would you buy a branded suit if you’re going to be working from home?

Threat #2: The Singhania Family Feud

Another red flag is the family feud in the Singhania family - which does not cast a good shadow over the company.

Vijaypath Singhania, the man who helped Raymond achieve remarkable success over the years - had gifted control of Raymond Limited in 2015 to his son - Gautam Singhania.

However, things took a drastic turn when Vijaypath was unceremoniously ousted from the company - which started a father-son tussle that would continue for years.

Will this feud have any adverse impact on the company in the future? We don’t know - but it’s something that investors should keep in mind before getting into the company.

Financials & Stock Performance

COVID-19 has not been kind to the textiles industry & Raymond was no exception.

Revenue dropped by [almost] 50% in FY21. Net margins were low & the company incurred a net loss in FY21.

The stock performance over the past 5 years has not been that great either. The stock hit a high of 1100 in April 2018 & is trading around 417 as of today.

Can Raymond bounce back from here? The next few quarters might give us a good hint.

#2 Page Industries

Page Industries, is a company which has disrupted & transformed the innerwear market in India.

Incorporated in 1994 by Sunder Genomal, it is the exclusive licensee of the Jockey brand in India. [Yes, Page Industries doesn’t own the brand]

Growth Drivers

The business of Page is often overlooked due to it’s skyrocketing share price over the years but it’s worth noting that it has been the fastest growing apparel company in India with Jockey being the largest selling apparel brand in India.

Jockey is available in 66,000 outlets in India & captures 9% of the Indian innerwear market - which still leaves a lot of room for growth.

One other positive is that overtime, Page Industries has pivoted Jockey from being only an innerwear brand to a well rounded apparel brand with diverse product offerings.

Potential Threats

Threat #1: Competition

Growing competition in the innerwear market is one of the biggest threats for the company.

You’ve got existing players like Rupa, Dollar, Dixcy and new entrants like Van Heusen, U.S. Polo, Tommy Hilfiger - companies which have a lot of brand equity to leverage.

To put things into context, Tommy Hilfiger reached revenues of INR 200 Cr in just two years of operations - while it took Page Industries 14 years to hit that target.

As competition heats up, pricing power would reduce & Page Industries would have to constantly innovate to increase/sustain it’s market share.

Threat #2 : Revenue Concentration

Another threat is the concentration of revenue from the brand ‘Jockey’. Although Page Industries has also licensed the UK swimwear brand ‘Speedo’ - majority of it’s revenues are derived from ‘Jockey’.

Let’s say if Jockey goes through a period of bad PR OR the exclusivity of the license is removed and other competitors are given rights to sell under the brand ‘Jockey’ [although the possibility of that happening is quite remote] - Page Industries would be significantly impacted.

Financials & Stock Performance

Unlike Raymond Limited, Page Industries’ revenues were flat for FY21. Net margins were moderate & at a P/E of 96 times - it’s definitely a very expensive stock to own.

A couple of positives - the company is debt free & has a RoCE of 48%, indicating that the management have been judicious allocators of capital.

The stock performance over the past 5 years hasn’t been very impressive. However - if you track the performance from 2007 - when the company listed on the stock exchanges, it has registered an absolute gain of approx. 9000% - cementing Page Industries as one of the darlings of Dalal Street.

Such, is the power of long term investing.

Can it replicate such success in the future? The road ahead doesn’t look very smooth - but that hasn’t stopped Sunder Genomal before.

Which stock would you like us to cover next? Let us know in the comments section!

#1 The Textiles Industry

A. Industry Characteristics

One of the most important things before analyzing a company, is to understand the ‘industry’ in which it operates.

For eg. Let’s say you want to invest in SpiceJet. Before you do that, you need to understand how the Airline industry works. Once you dig deep - you’ll understand that it’s pretty difficult to make money in the airlines biz. Even Warren Buffett - the Oracle of Omaha, got his fingers burnt in airline stocks.

Also, when you study the industry - you find out who the market leaders are. Which companies have a competitive edge. It helps you make a better investing decision.

A few things that characterize the textiles business - is heavy capital investment. You need to put a lot of money upfront to set up your manufacturing capabilities. The payback period is also quite long - as it takes time to streamline your operations and to scale your business.

Plus, it’s a cyclical business. The demand fluctuates throughout the year - with peak demand witnessed during the festive seasons. So, businesses have to be very smart about Inventory management & reducing dead stock.

Therefore, to be successful in the textiles industry, businesses have to be great allocators of capital. If you over-invest or over-produce, you can put yourself in a very dangerous situation.

B. Market Potential

The Textile industry contributes nearly 12% of India’s total export earnings and directly employs 45 million people in textile manufacturing activities.

Exports in textiles & apparels are projected to reach $300bn by FY25 and to facilitate this the GoI proposed a scheme for setting up mega textile parks in the country in the next 3 years - to become globally competitive, attract more FDIs into the sector & boost employment.

Also, this is an industry ripe for disruption. A lot of innovative concepts are making way into the Indian landscape & companies that innovate and iterate their business models could find themselves in a position to capitalize on this opportunity.

#2 The Ecosystem

Do you ever wonder how the t-shirt you are wearing right now was made? What happens after cotton is plucked to turn it into a piece of cloth?

Here’s what happens behind the scenes:

First, the cotton fibers are converted into a yarn - through a process known as ‘spinning’.

Next, the yarn goes through a process called ‘sizing’ which increases the durability & the strength of the yarn.

Third, the yarn is converted into fabric either by ‘weaving’ or ‘knitting’. There are various ways to convert a yarn into fabric - and the method used usually depends on the end application of the fabric.

Fourth, the fabric is dyed or printed. For eg. a plain black T-shirt has been dyed, whereas a bedsheet is probably printed.

The final step - is designing and converting the fabric into different shapes. It can be a T-shirt, or a table cloth. That’s where the ‘fashion designer’ comes into play.

As you can see, the textile ecosystem is HUGE - with hundreds of companies operating in each part of the eco-system.

#3 Why Companies get listed?

Now, this discussion was a little off topic - given that the episode was on the Textile Industry & it’s eco-system & the reasoning behind a company getting listed is generic in nature - but we decided to cover some ground on it anyways.

So, why do companies get listed?

1. Raise Capital

   That is the essence of why companies list on the stock exchanges. You can’t take a bank loan every time you want to expand your business - so, you open the gates to your company & raise money from the public (i.e. FIIs, DIIs, QIBs, Retail investors etc.)

   However, raising capital may not be the primary objective of a company getting listed. Giving the existing investors a [sweet] exit is also one of the reasons why companies go public.

   We’ve also seen a recent phenomenon, where companies go for something called as a ‘direct listing’ - where no new shares are offered to the public. Instead, the company is listed on the stock exchanges & it gives the existing shareholders the liquidity to sell their shares to the public ‘directly’ on the stock exchange.

2. Increase Credibility

   One other reason that companies get listed, is to increase the credibility of the company itself.

   A listed company needs to be more accountable & transparent with it’s operations, has to release quarterly earning reports, answer investor questions, follow additional compliances of the market regulators.

   ---

Are you someone interested in fashion or textiles? Do follow Aman’s podcast TexWired

In recent weeks, there was a meltdown in the Crypto world - with all major cryptos taking a big hit on the back of China banning banks/payment firms from processing or entering into services related to cryptocurrency transactions.

In this episode we spoke about some lesser known Cryptocurrencies and their use cases.

#1 Cardano (ADA)

Cardano is a decentralized blockchain and it’s token is called ADA, which uses the Proof of Stake mechanism (PoS).

[Check out what’s the difference between Proof of Stake vs Proof of Work in this article]

Cardano was founded by the co-founder of Ethereum (Charles Hoskinson) and it was created to serve as an alternative to Ethereum.

It also powers ‘smart contracts’ - which in simple terms is a ‘program’ or a ‘transaction protocol’ which automatically executes T&Cs of an agreement/contract. No human element is required.

The organizations behind Cardano have released 3 products:

1. Atala PRISM

2. Atala SCAN

3. Atala Trace

Atala PRISM is marketed as an Identity Management Tool that can be used to provide access to services. For eg. it can be used to verify credentials to open a bank account or to verify eligibility for government aid.

Atala SCAN & Atala Trace are being used to trace a product’s journey through a supply chain.

Cardano has the potential as per some analysts - to become the next Bitcoin.

#2 Ripple (XRP)

Ripple has a simple objective - to make cross border transactions easy. It is building a payments and exchange network (RippleNet) on it’s blockchain (XRPL)

It wants to connect banks, payment providers and digital asset exchanges, enabling faster and cost-efficient global payments.

Ripple’s blockchain (XRPL) is open source - meaning that anyone can contribute and improve the code.

Also, it doesn’t use the Proof of Work mechanism - and doesn’t rely on the process of mining to verify transactions. It has it’s own customized consensus algorithm (called RPCA)

The RippleNet offers 3 products to banks/financial institutions:

1. xRapid

2. xCurrent

3. xVia

xRapid is a liquidity solution that uses the XRP cryptocurrency as a bridge between multiple fiat currencies, xCurrent allows cost effective real time payments between financial institutions & xVia allows integration of RippleNet participants.

Ripple, can be considered as THE cryptocurrency for global payment solutions to banks/FIs - and it’s potential, is massive!

#3 VeChain

VeChain powers ‘Blockchain as a Service or BAAS’ and is designed to be used by both small & big businesses.

VeChain’s public blockchain is called the VeChainThor - and it provides real world blockchain solutions ranging from supply chain management, anti-counterfeiting, tracking carbon emissions & decentralized voting - to name a few.

The VeChainThor blockchain uses the Proof of Authority mechanism to validate transactions - which gives the power to a few selected nodes in the blockchain. Also, VeChain app users don’t need to hold any crypto to perform transactions - which makes the UX really convenient.

VeChain has two tokens:

1. VET (VeChain Token) which is used to make financial transactions on the blockchain & trades on digital asset exchanges.

2. VTHO (VeThor Token) which is a ‘energy token’ used to conduct transactions - however this token doesn’t trade & can’t be used for market speculation.

Enterprises are increasingly adopting ‘Blockchain as a Service’ for various use cases and as its applications grow - so will VeChain.

#4 Polkadot (DOT)

Now, we’ve seen how every Cryptocurrency has it’s own Blockchain - which records the transactions and powers other use cases. And, this got me wondering - can Blockchains of different Cryptos be linked together?

That’s exactly what Polkadot is doing.

It connects different blockchains, allowing them to communicate with one another - which could lead to exchange of data and open up a lot of different applications.

Imagine if Bitcoin’s blockchain could interact and exchange information/data with Ethereum’s blockchain - a lot of cross chain applications, products & services could be built.

#5 COTI

COTI is one of those crypto networks that wants to become the ultimate powergrid of payments.

It has an application called COTI pay - which can process payments both online & offline - powering debit cards, credit cards, payments in fiat currency and cryptocurrency. COTI will issue its own credit & debit cards.

It also lets other businesses create ‘stable coins’ - which isn’t affected by the Crypto market. For eg. Amazon could create its own ‘stable coin’ for it’s customers to transact in - there’s a lot of potential in this ecosystem.

To end the episode, we spoke about certain risks of putting your money into Cryptocurrencies - and how you should abstain from using your emergency funds/savings to invest in Cryptos.

But, something entirely different transpired. People started ‘investing’ in Cryptocurrencies like Bitcoin, Ethereum & most recently Dogecoin - with the sole purpose of getting rich quick.

In this episode, we spoke about the reasons for the meteoric rise of Cryptocurrencies, about some key terminologies & the recent Coinbase IPO and how it has the potential to widen the reach of Cryptos.

The Rise of Cryptocurrencies

I am a traditional investor, I have grown up reading books like ‘Intelligent Investor’ - and the importance of fundamentals while investing. However, in the past two years - I have witnessed a ‘currency’ going up by more than 6000%, and I wasn’t able to wrap my head around it.

Take Bitcoin. It doesn’t pay you any interest or dividends. It doesn’t make profits. It’s a currency [for god’s sake] & the entire purpose of a currency is to be stable in value.

So, why have these shot up so spectacularly?

There are a few factors responsible for pushing Cryptocurrencies into the stratosphere:

1. Increased acceptance of Cryptos [you can buy a Tesla with a Bitcoin now!]

2. Rebellion against Centralized authorities

3. FOMO [Fear of Missing Out]

Can cryptocurrencies like Bitcoin, Dogecoin & Ethereum keep rising in value? I wish I knew the answer.

In this episode, we also demystified certain jargons used in the Crypto world - and if you’re looking to make an entry into this space, it is essential you understand these technical terms.

#Jargon No.1 - Blockchain

What is a Blockchain?

In simple words, it is a database. It’s a ledger, which records all the transactions that happen in cryptocurrencies. Each cryptocurrency has its own blockchain, on which transactions in that particular crypto are recorded.

For eg. Let’s say you buy a Tesla for 20 Bitcoins. When you pay Tesla, this transaction - is recorded on the blockchain. And, here’s the thing - a transaction once recorded on a blockchain - cannot be deleted.

And, what makes this technology really interesting - is the verification process.

Normally, when you transact in money - it is verified by the bank & that’s it. Once the bank verifies your transaction - it is executed.

In the case of Cryptocurrencies, the transaction needs to be verified by multiple people (known as miners) and unless >50% of them approve the transaction, it is not executed. [However, different blockchains have different verification rules]

And, there are 3 different verification mechanisms on the Blockchain:

• Proof of Work

• Proof of Stake

• Proof of Authority

#Jargon No. 2 - Proof of Work [PoW]

Proof of Work, is the most widely used verification process. Because, Bitcoin uses PoW.

How does it work?

When a transaction happens, it is sent to multiple miners for verification. To complete the transaction, these miners have to solve a complex puzzle - which requires a lot of computing power. For solving the puzzle & verifying the transaction, the miners get a reward [in the form of cryptocurrency].

The reason why PoW is not sustainable - is because it forces miners to compete for computing power & use vast amounts of energy. As transactions increase, more energy will be required & it might be a serious threat to the environment going forward.

Which brings us to our next verification mechanism….

#Jargon No. 3 - Proof of Stake [PoS]

Proof of Stake, is slightly different than PoW - because in a PoS, the miners are selected based on the ‘stake’ they have in a Cryptocurrency.

The miner with a higher stake, has a higher probability of being selected to validate the transaction [and earn more rewards in the process]

So, it doesn’t matter if a miner has a 100 Supercomputers - if they don’t have a ‘stake’ in the system - they will not get selected.

Ethereum, is one of the Cryptocurrencies using the PoS to verify transactions on it’s Blockchain.

#Jargon No. 4 - Proof of Authority [PoA]

Proof of Authority, doesn’t require computational power or a stake in the system. In PoA, miners are selected arbitrarily as trustworthy entities. And, only those trusted miners can verify and validate transactions on a Blockchain.

The purpose of PoA, is to streamline & reduce the transaction time. [Why? Because a transaction made in Bitcoin takes 10 minutes!]

#Jargon No. 5 - Decentralized

This is a word which is tossed around a lot.

‘Cryptocurrencies & Blockchains are decentralized in nature…’ - but what do you mean by that?

It means, that there is no single [central] authority - which approves transactions. Every transaction has to be approved by multiple miners & only when the miners reach a common consensus - the transaction is added to the Blockchain.

The entire purpose of Cryptocurrencies & the Blockchain technology - is to disrupt centralized control. To distribute the concentration of power. And, this is one of the reasons which makes it such an exciting technology.

We also talk about the…

‘The Coinbase Effect’

A couple of weeks back, Coinbase - a platform where you can buy & sell Cryptocurrencies, listed on the NASDAQ stock exchange. [It was a direct listing]

The IPO had a stellar listing and at some point the company was worth more than $100B in Market Cap. The listing also jacked up the prices of majority of Cryptocurrencies.

The reason why it is such a big deal is because Coinbase’s IPO, is expected to boost the credibility of crypto trading & widen the reach of Cryptocurrencies. A lot of people [including me] thought that this was a fad, and eventually people would forget about Cryptos. But with this IPO, the game has only begun.

The potential for Coinbase, as a business model looks really solid as well - as more people adopt transacting in Cryptos.

Coinbase had a Q1 ‘net income’ of $800 million which was more than the combined net income of the previous FY, which is quite impressive to say the least.

No wonder that investors like Cathie Wood - have been consistently increasing their stake in Coinbase - irrespective of how steep the valuations look like!

Let us know your feedback/questions - in the comments section.

Why do we need these rules?

Big Tech and OTT are indispensable today. Global lockdowns and an all new WFH culture have given an even greater boost to digitization. We are also witnessing regulators tightening the noose around entities in these domains to prevent monopolization in the market.

There are concerns over user privacy and potentially anti-competitive behavior. India is no exception. There had long been demands to regulate OTTs and social media.

What are the changes notified for Social Media Companies?

1. Giving an explicit power to an intermediary to ‘take down’ unlawful content

An intermediary is an entity on which users upload or share content. The intermediary hosts the content, which it does not itself create, modify or initiate transmission of.

Intermediaries are only held liable for unlawful content hosted by them if they don’t remove it even after receiving an order by a court or government authority. Once they receive such an order, they are deemed to have “actual knowledge” of the unlawful content.

Indian law was so far silent on whether an entity can itself remove unlawful content without such an order. Experts were divided on whether platforms could claim to be intermediaries if they exercised such discretion.

This no longer remains a grey area. The 2021 Rules clarify that an entity will continue to remain an intermediary even if it voluntarily removes unlawful content in the absence of a court or government order. This is in line with the evolving regulatory landscape of various jurisdictions, which seek to ensure that Big Tech players monitor content.

2. Appointment of Chief Compliance Officer, Nodal Officer & Grievance Officers

The Rules also prescribe stringent compliance requirements for significant social media intermediaries.

They have to mandatorily appoint a Chief Compliance Officer (CCO) who will be held liable if the Company violates these IT Rules. [Yikes!]

They also have appoint a Nodal Officer for 24x7 coordination with legal authorities & a Grievance officer who will address complaints received against the Company.

All of these officers have to be appointed in India & for social media companies like Signal/Telegram - this will lead to an increased administrative cost - because they don’t have significant operations in India.

3. Tracing the ‘First Originator of Content’

The rules also make it necessary for intermediaries in the nature of messaging apps to trace the ‘original source’ of information - in case of a Government/Court order - which might require breaking end to end encryption.

The rules however, didn’t instruct as to how exactly these Companies would trace the information & how it would be aligned with the end to end encryption rules in place.

What are the changes notified for Digital News & OTT platforms?

These rules are also applicable to publishers/intermediaries of news and current affairs content, publishers/intermediaries of online curated content.

It includes films, television programmes, serials, podcasts and such information. Thus this very podcast that we’ve recorded for you, or the TV shows that you watch over Netflix and Amazon will have to abide by the IT Rules.

1. Setting up a 3 tier Grievance Redressal System

These IT Rules have introduced a 3 level Grievance Redressal System for taking care of complaints.

At the first level, Digital News & OTT platforms have to appoint a designated grievance officer.

At the second level, is the Oversight Body - which comes into the picture if the Grievance officer is unable to resolve the complaint.

And, above the Oversight Body - in the third level is the Inter Ministerial Committee [a Government body], which can step in as a last resort.

2. Age based Classifications required

Age-based classifications have also been prescribed by the Code and its criteria. We enjoyed looking into this part, particularly.

The Code explains how shows with “darker, pessimistic” themes will receive higher ratings and “age verification mechanisms” will have to be put in place by OTT players. It will be interesting to see how it all plays out in implementation.

What are the Controversies that could arise?

There are several controversial aspects to these rules.

(a) Making the process of taking down content by the intermediaries - might lead to situations where politically insensitive content is posted, and intermediaries might be pressurized to take it down within 36 hours. Freedom of speech, could be affected if that happens.

(b) Tracing the original source of information - in situations of national security, the Government can ask messaging apps to trace the original source of information, breaking end to end encryption. These could lead to privacy concerns & could generate a lot of backlash from the public.

Financial Impact?

We know that increased regulations are never good for business. These additional compliances will increase administrative expenses & also restrict the creativity & flexibility of creating content.

Everyone from Ad agencies, to production houses will be impacted by these rules. Social media companies might see a further dip in Ad revenues - if certain controversial Ads are taken down.

For OTT players - the variety of shows they can stream will have to be evaluated. Age based classification might lead to a reduction in viewers. Inability to produce controversial shows - might not create the same level of excitement among the subscribers.

Interesting times ahead.

What do you think? Are these rules a boon or a bane?

~ Written by Utsav Mukherjee

The issue is a complete ‘Offer for Sale’ of INR 582 crore, with IIFL & the promoters offloading the majority of the shares.

History

Nazara was set up in 1999 by Nitish Mittersain - who was an avid gamer himself. For the first 6 years, the Company was really experimenting with mobile games - and it was in 2005 when they got their first big break.

They landed Sachin Tendulkar as a brand ambassador and they were developing several cricket gaming apps.

In 2009, data prices in India started to drop [relatively]. Internet penetration was picking up. Smartphones were becoming more accessible & a lot more people started playing mobile games.

Nazara introduced a subscription model to gaming, offering a pack of games at INR 99.

But, it was only a few years back that the Company started making aggressive moves. They bought Nodwin Gaming in 2018 [a player in e-Sports in India]. In 2019, they bought Paper Boats Apps Private Limited - a company which had developed a gamified learning app in North America called Kiddopia for children aged between 2-6 years.

We analyzed the Company based on several parameters & assigned a score to each parameter.

Parameter #1: Growth of the Industry [Score 8/10]

The Global Gaming industry was worth around $160B in FY2020. The Indian gaming market is expected to grow at a CAGR of 32.6% to become a $3.5B industry by 2023.

The penetration of gaming in India is still only 30% - so there’s a lot of room for growth.

Sub-categories like e-Sports, Fantasy Sports & e-Learning are also poised for strong growth in the future.

Cheap data, high internet penetration & rise in mobile gaming are some key drivers for this Industry. Mobile games like Fortnite, Clash of Clans & PUBG are making billions of dollars in revenue each year from ‘in app purchases’.

Gaming industry, might be one of the top 10 high growth industries out there - and Nazara finds itself in a sweet spot.

Parameter #2: Competition & Risks [Score 7/10]

Nazara doesn’t really have a pure play competition in India. There’s no listed player which is doing what Nazara is doing.

However, in each sub-segment - there are international & domestic competitors.

For eg. In the mobile gaming category, the Company faces competition from companies like Tencent, Microsoft, Sony, Epic Games to name a few.

In the e-Learning segment, the Company faces competition from players like AltSchool, CK12, Dreambox in the North American market. If it wants to venture in the Indian market - it will have to compete with players like BYJU’s and a host of other e-learning startups.

One of the risks for the Company, is the ‘Fantasy Sports’ segment - through which they derive less than 5% of total revenues - but the losses from this sector are pushing pressure on Consolidated EBITDA.

Parameter #3: Advantages of the Company [Score 8/10]

Nazara Technology has cornered the e-Sports market in India with more than 80% market share.

It has key partnerships with global players like ESL, Valve Corporation - which are big names in the e-Sports segment.

They have also started making strategic acquisition - to not be limited to just mobile games, with presence in e-Learning & Fantasy sports.

The diversified revenue mix, is one of the major advantages of the Company. It can bring consumers into different segments and cross sell their product/services.

Also, the fact that Rakesh Jhunjhunwala - is not selling a single share in the Company - shows that he has faith in the Company & that further increases the credibility it commands.

Parameter #4: Financials [Score 7/10]

The Company has a good cash reserve. There is no debt on the books.

They derive a good revenue mix from e-Sports (32%), e-Learning (39%) & Gaming subscription (21%).

The company has incurred losses for FY20 & H1FY21 - on the back of increased spending on advertisement & promotion expenses, to develop more brand awareness.

The next few quarters need to be tracked to see whether the Company can sustain the revenue growth witnessed in FY20 & H1FY21, in part helped by the pandemic.

Parameter #5: Valuations [Score 6/10]

Since the Company is incurring losses, there’s no P/E ratio to track. The adequate valuation parameter therefore would be EV/Sales. [Enterprise Value/Sales]

At the issue price of INR 1101, Nazara is trading at a EV/Sales of 12.7 times - which is quite expensive since the Company is yet to prove itself.

However, if Nazara can grow at a tremendous pace in the next 5 years, and capture the growth in the Indian gaming industry - that ratio could drop substantially & the valuation might be justified.

Conclusion

The future potential for Nazara looks really good - given that it’s operating in a high growth industry. Can it sustain the growth? Will the acquisitions pay off? Will it be able to fend off the Competition?

Those are the questions, you need to keep in mind - if you’re entering this Company for the long term.

We evaluated the Company based on several parameters to see if it can withstand the test of time.

Parameter #1: Growth of the Industry [Score 5/10]

Easy Trip Planners operates in the 'Online Travel market' which is currently an INR 2,625 billion industry. This industry faces a major headwind in the form of COVID-19, and it's expected to contract by 2-3% over the next 3 years.

Over the long term however, there are a few positive shoots to look at. India is expected to be one of the fastest growing destinations for leisure travel. The Government also launched the National Civil Aviation Policy - to make flying affordable to the masses in India.

Parameter #2: Competition & Risks [Score 6/10]

Easy Trip faces competition from players like MakeMyTrip (MMT), Yatra & Cleartrip. In terms of gross booking revenues - MMT has a 50% market share followed by Yatra (9.5%) and Easy Trip Planners (4.6%).

MakeMyTrip bought the Ibibo group in 2017 to strengthen its hotel booking business. It also acquired RedBus as a part of the Ibibo deal. Yatra has acquired several companies like TravelGuru, MagicRooms, BuzzInTown - to increase it's presence in the hotel segment.

Easy Trip Planners ventured into the hotel segment in 2013, however they have failed to make an impact there. They derive 94% of their revenues from airline ticketing - such concentration is the biggest risk for the Company in our opinion.

There is also an infringement suit ongoing against the Company filed by MMT, alleging that Easy Trip's logos/trademark are used in a way which is similar to MMT. Any adverse news on this front, would significantly impact the brand image.

Parameter #3: Advantages of the Company [Score 7/10]

Easy Trip is the only company in this segment which is making a profit since it's Inception. They boast the lowest operating costs. It's an extremely frugal company - with solid financials. Although it's a small player, they have been able to grow their market share consistently.

100% of the Company is owned by the promoters. No FIIs/DIIs. No VCs. Which means they have been completely bootstrapped and grown the business without any external help. Not something you find easily these days.

Parameter #4 : Financials [Score 8/10]

Financials, is where this Company shines. Gross booking revenues increased by 47% YoY. Revenues have grown by 18% YoY. They have witnessed steady profit growth (except in 2018). There is negligible debt on the books. RoCE is around 40% - which shows you that the promoters are great allocators of capital.

However, the next few quarters will answer the question - 'Can Easy Trip continue to produce such good numbers?'

Parameter #5 : Valuations [Score 5/10]

At the issue price of INR 187, Easy Trip is trading at a P/E of around 60 times - which looks very expensive, for an OTA player. The Company has to double it's profit or exponentially grow their market share to justify this valuation - something we don't see happening realistically. Plus, if the Company lists at a 70-80% premium, the P/E would breach the 'insanity' level.

This issue is a complete Offer for Sale, however we believe that the promoters missed a trick here by not raising fresh capital, which could've been deployed to spearhead growth into different OTA verticals like online hotel bookings, bus & railways.

MTAR Technologies is a precision engineering company which was incorporated in 1999. At the time of recording, the issue was oversubscribed by around 10 times & has attracted a lot of pre-IPO interest from anchor & institutional investors.

Parameter #1 : Growth of the Industry

The precision engineering industry is characterized by high levels of capital expenditure, high level of expertise and intricacy. As at 31 March 2020, it's estimated to be a INR 4,098 Billion industry - out of which 50% pertains to the automobile sector.

MTAR operates in the Clean energy, Nuclear energy, Defense and Space sectors which are niches in the precision engineering industry. Nuclear, Defense and Space are going to witness good growth going forward, owing to Government's plan to set up 10 new fleets of nuclear reactors, banning defense imports and also growing private partnerships undertaken by ISRO for satellite launches.

Parameter #2 : Competition

What came as a real surprise to us, was that the Company doesn't really have a pure play competitor. Yes, it does have competition in the form of L&T, Godrej & Boyce and Mahindra Defense - but these companies are large conglomerates. And, for the components that MTAR manufacturers - there's no direct competition.

Parameter #3 : Advantages of the Company

The Company operates in a virtual monopoly, and has long standing partnerships with government companies like ISRO, DRDO, NPCIL. It also caters to Bloom Energy from which it derives 64% of it's revenue.

Any growth in the Clean energy, Nuclear, Defense and Space sectors - could indirectly benefit MTAR. For eg. the GoI recently banned import of 101 Defense items which would now require domestic production. If MTAR can capture a significant portion of those Defense orders, it will be a big win for the Company.

One of the most interesting statistics, was the employee turnover ratio. The average employee duration in MTAR is 15 years - which shows that the Company has been successful in retaining top talent for long periods of time, which is really important if you're working in the precision engineering industry.

Parameter #4 : Disadvantages of the Company

For the Fiscal 2020, the Company derived 84% of it's revenues from just 3 customers. Out of which 64% of the revenues came from Bloom Energy.

Such heavy customer concentration could pose a risk to the Company going forward, if those 3 customers don't perform well. For eg. if things don't work out for Bloom Energy - which makes hydrogen fuel cells - a concept which is still very new - it would directly impact MTAR.

Another factor is the Order book size. The Company has an order book of around INR 340 crores, which is just 1.6 times FY20 revenue. This indicates that they don't really have long standing orders from customers and in event of any downturn, they don't have a robust order pipeline to support revenue growth.

Parameter #5 : Financials

The Financials look pretty good. Even after being in a capital intensive industry, they have managed to keep the Debt to Equity at just 0.1 times. For FY20, the revenue growth was 17% YoY with a net profit margin of around 14%. The return on capital for FY20 was 19% - very impressive given the industry it operates in.

Parameter #6 : Valuations

From a valuations point of view, the Company looks pretty expensive. At a FY20 EPS of 11, and at the issue price of 575 - the Company is priced at a P/E of 52 times. Now, this is an engineering company that we're talking about. It's not going to double it's revenues every year.

Let us know what you think, down in the comments section!

These might be the internet's most searched words in the past month. Why wouldn't it be? The price of Bitcoin has shot up by > 1000% since March 2020. Dogecoin, a cryptocurrency which was created out of a meme - has risen by almost 1400% in the past month or so. Greed, has really overtaken the markets - with people wanting to make easy quick money.

In this episode, we spoke about the following key topics.

Tesla buys Bitcoin

One of the major announcements this week was Tesla coming out and saying that it was going to buy Bitcoin worth $1.5B. That's how much they spend on R&D in a year. Tesla would also start accepting payments in Bitcoin. Now, as exciting as this sounds - it opens up a series of problems.

(i). Bitcoin is extremely volatile

It wouldn't be surprising if 6 months from now, the price of Bitcoin went down by 50%. This could very well happen, if Governments around the world decide to impose stricter regulations on Cryptocurrencies. In that case, the 'investment' made by Tesla - would be worth a hell of a lot less!

This investment of $1.5B is approximately 8% of Tesla's total cash & cash equivalents - which is no small number. If tomorrow Tesla needs that money, and isn't able to encash those Bitcoins at a profit - it could be a very risky bet.

(ii). Bitcoin Payments

Accepting payments in Bitcoins will be equally tricky. Because the price of Bitcoin fluctuates so much, on any given day - the price of a Tesla could vary substantially. The Finance team at Tesla might have to account for the fluctuations in Bitcoin on a daily basis and it would be an accounting nightmare just to execute this in the long term. Plus, the disclosure of Bitcoins on a balance sheet itself would pose certain challenges.

Potential Insider Trading?

On Reddit, someone who claims to be an employee at Tesla alleged that the Company had started buying Bitcoin quite some time back when it was trading around $33,000. The user has not been verified to work at Tesla (yet) - but wouldn't that be convenient?

Elon recently changed his bio to '#Bitcoin' - which alone caused the price to spike by 4-5% in a matter of minutes. He has been backing this currency & although you can't say that he's directly influencing people to buy Bitcoin - it is quite obvious that his tweets has stirred up excitement in this space.

The question here is, does the SEC have any jurisdiction over this? And even if they do, can they legally do anything about it?

The Rise of the Doge

Dogecoin has been on a tear. It's actually more valuable than quite a lot of listed companies out there. The photo of a smirking dog on a coin - who would've thought anything would come out of that?

But tweets from Musk and several other celebrities have sent the Dogecoin flipping high into the stratosphere. Can it sustain this insane run? Only time will tell.

Where are the regulations?

Turns out, there's not much the SEC can do about the rise in these Cryptos. There's no specific law that governs Cryptocurrencies at the moment and conservatively - it might take sometime before anything substantial happens on the regulations front.

Back in India, the GoI is planning to bring a Cryptocurrency bill which would make it illegal to hold any private Cryptos. The draft bill is not yet out, so if you hold any Bitcoins - you still have time to square off your positions.

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The markets were on fire during the Budget week. Sensex was up by more than 4% in a single day and was up by 8% for the week - on the back of a positive budget with no new taxes being introduced. COVID Cess & Capital gains taxes were on the cards, but the Finance Minister didn’t announce any such measures pushing the markets into the stratosphere.

Highlight #1: Bad Banks & Development Financial Institution (DFIs)

The GoI proposes to set up a bad bank which would takeover the NPAs from struggling banks, bundle it up and sell it to AIFs/Funds that invest in stressed assets. Now, how exactly a bad bank would work, is again very ambiguous & would the banks be willing to take a steep haircut to make it work - is something we were scratching our heads over.

It was also proposed to set up a Development Financial Institution (‘DFI’) - earmarking INR 20,000 crore for the specific purpose of Infrastructure lending. Shankesh deep dived into the history of how DFIs came into existence and analyzed whether it makes any sense to set up a new DFI.

Highlight #2: Fiscal Deficit zooming to 9.5%

One of the major talks after the Budget closed, was the fiscal deficit number. Historically, the GoI has kept it in the range of 3-5% - but a 9.5% is GIGANTIC. We discussed the reasons for the increase in the deficit number and how Food Corporation of India plays a big role in moving the needle.

Highlight #3: Capex

This budget, has been all about the GoI spending money - and a lot of that on Infrastructural development. We need better roads & highways. Better railways. A lot of money was also being set aside for the Healthcare sector - given that we are still not entirely out of the pandemic.

On this front, we discussed about execution issues and how Infra spending looks good on paper - but could lead to money being ‘block’ed in bricks and cement if projects don't get completed on time. We do applaud the GoI regardless - because Infra spending is required to push India towards the 'Developed Nation' tag.

Shankesh also spoke about how Capex is the heart of any Budget and the Multiplier effects of the same.

Highlight #4: FDI and Privatization

The Insurance sector was opened to a 74% FDI from the current 49% - subject to safeguards. A few years back, FDI in insurance was raised from the mid 20s to 49% - subject to safeguards, and it didn't really attract a lot of FDI. So, it remains to be seen, whether a 74% FDI can flush this sector with foreign money.

The Government is planning to privatize two banks (the names of which are still unknown to us) and LIC might come out with an IPO in FY22 - which will be (without any competition) - India's biggest IPO in our opinion.

Highlight #5: Direct/Indirect Taxes

Not much activity on this front, however the definition of ULIPs was clarified and it will now be taxed as a Mutual Fund. Depreciation on Goodwill will not be allowed going forward. What stole the show was no new taxes being imposed like COVID cess, Wealth tax on the Ultra rich etc.

All in all, a very progressive budget. The execution, if done right - could really bring a meaningful change in the economy!

You can reach out to us at thebazaarpodcast@gmail.com or hit me up at https://twitter.com/siddybeee

StoveKraft's issue size is INR 413 crore out of which INR 95 crore is a fresh issue which will be used to prepay debt on the books. The rest is Offer for Sale - the major beneficiary of which is Sequoia Capital - the investor getting a sweet exit.

Rishabh & I discussed about the history of the Company and it's brands (Pigeon & Gilma). We spoke about the 2 major segments of the Kitchen appliance industry i.e. Large Kitchen appliances and Small kitchen appliances and the Companies that dominate these segments.

We also covered StoveKraft's fundamentals (which don't look very good) - looking at a huge pile of debt on the books and the fact that it has negative networth. The Company has only started to make profit since 2018 and the margins/return ratios also look very low. We discussed at length certain red flags - like Governance issues & a low capacity utilization.

Did you apply to this IPO? Let us know at thebazaarpodcast@gmail.com or hit me up at https://twitter.com/siddybeee

We analyzed the pros and cons of IRFCL's business and why being in a Monopoly might not be that big of a deal. We also spoke about certain ratios to look at while analyzing the Company and how it's valuation - although cheap, looks justified.

You can reach out to us at thebazaarpodcast@gmail.com or just hit me up at https://twitter.com/siddybeee

I invited Aman (Host of TexWired), and we decoded what the difference is between Hemp & Marijuana. We discussed the different use cases of Hemp and the industries we feel it will disrupt in the foreseeable future. We also touched upon some recent M&A action in the space.

TexWired by Aman

TID's interview of BoHeCo

Next in line is Mrs. Bectors Food Specialities Limited - a lessor known biscuit and bakery company, which has it’s major operations in the Northern part of the country.

Here, I will break down the Company based on several parameters - but first let’s take a look at the history of the Company.

The Story of Mrs. Bector