Can Mahindra Lifespace Keep Up the Momentum?

Mahindra Lifespace Developers Ltd's (MLDL) (BSE: 532313, NSE: MAHLIFE) first quarter results, year-on-year, has improved though on a small base, but sequentially it has not only been the second consecutive dip, but the dip has become quite marked now with sales dipping by 30% and net profit dipping by 40%.

The debate whether Indian realty will be dominated by realty-only companies like DLF or Unitech, or by diversified conglomerates like Tatas, Mahindras, or the Godrejs would continue. The first round definitely belonged to the pure play realtors, thanks to their larger-than-life IPOs during the last real estate boom, that even while hurting retail investors, ended up elevating their promoters to world’s billionaire lists. At the same time, the realty forays of large industrial houses like the Tatas and the Godrejs haven’t been up to the mark. But all these while, this relatively small realty firm from the top-ten business house of the Mahindras had been gaining significant ground.

Until now, Mahindra Lifespace has been relying largely on mix-use development, but it is increasingly becoming a challenging model. For example, almost all of the profits for the June quarter has come from residential segment with commercial / office space continuing to be lackluster. This may be one reason why MLDL is now also acting like a normal developer of standalone condominiums.

To start with, Mahindra Lifespace Developers was not a very inspiring player in the industry. But it got its opportunity in 2000-01 when noted real estate player Gesco Corporation, belonging to GE Shipping Group, turned to its help to ward off a hostile takeover bid by the Dalmias. Thus was born Mahindra Gesco, the forerunner of today’s Mahindra Lifespace Developers Ltd (MLDL). Great Eastern’s Sheths eventually sold off their entire stake to M&M who proved their commitment to the business by assigning none other than Anand Mahindra as Chairman and M&M Executive Director Arun Nanda as Vice Chairman.

In the metro cities that Mahindra Lifespace operates, up to 5 lakh sq ft of residential and commercial space is going to be available in the next six months, worsening the already existing oversupply situation. MLDL may be affected by this development over the next two quarters.

Ever since 2003, the firm has not dipped in sales or profits, except for a brief dip in net during the last recession, but even then putting up an impressive sales growth. FY 2010 has been especially good with sales nearly doubling over the previous year and gross profit more than doubling. Confident that MLDL is now a credible growth story, Anand Mahindra has entrusted Chairmanship to Nanda and executive leadership to MD & CEO Anita Arjundas.

But for Mahindra Lifespace it is still a long way to go before they can mount a threat to leading players like DLF or Unitech. Apart from standalone projects, MLDL’s portfolio of Mahindra World Cities (MWC) – two of which are already operational in Chennai & Jaipur – is a definite edge over competition, as this is a model that can be replicated in many Indian states. No wonder MLDL is now recognized as one of the fastest growing real estate developers.

Coupled with a penchant for more transparent systems – for which it won a CRISIL award – and Arun Nanda’s contrarian vision of thinking also from the customers’ shoes is sure to take this Mahindra group company to a better positioning. Market is already recognizing this potential and has effected a year-to-date price-performance of over 62%, a time frame in which industry peers DLF slipped by 10% & Unitech rose by only 3%.

However, despite having a big corporate brand as promoter and despite having impressive and large-scale projects, Mahindra Lifespace hasn’t been able to break into the Top-10 league of developers, by way of sales or market cap. This may be due to a very conservative strategy that includes a low capital base of Rs. 50 crore and practically zero leverage. It is not clear when nvestors can expect a jumpstart from such a too-safe strategy.

Puravankara - Invest, Exit, or Wait?

Helped by strong Q1 numbers year-on-year, the Puravankara scrip (BSE: 532891, NSE: PURVA) has registered a year-to-date price performance of around 30%. At a price-earnings multiple of less than 16 and price-to-book ratio of around 1.75%, Puravankara is also trading attractively relative to some of its real estate peers.

But the Q1 jump doesn't come across as stable enough as it was on a low base, and moreover, both sales and profits have dipped sequentially compared with the March quarter. Also troubling investors is the fact that Puravankara had once slid from highs of Rs. 535 to lows of Rs. 25.60 - a loss of 95% - within a period of two years, exhibiting high volatility.

Also, despite the turnaround in FY'10, Purva is yet to reach the income and profit levels of FY'08. The future will depend on whether the Group's twin strategies to turnaround will hold in the coming quarters.

When the real estate bubble blew up in 2008, it didn’t spare anyone. Bangalore headquartered Puravankara Projects which got listed in 2007 was no exception.

One of the leading developers of South India, then expanding from its home-base of Bangalore to other southern hubs like Chennai, Coimbatore, & Cochin, Purva was caught off-guard. Demand for luxury offerings like the ones from Puravankara dried up. While sales slipped by more than 20% in 2008-09, net profit declined by more than 35%.

The same was reflected in capital markets – a bit too much, may be. From the highs of Rs. 535 the stock started a slide that didn’t stop until Rs. 25.60, dragged down by the economic crisis and its aftermath.

Then came the months of consolidation not only for Puravankara, but for the entire industry. Everyone from DLF to Unitech to HDIL to Omaxe to Puravankara were charting their future course. The Group’s billionaire promoter Ravi Puravankara decided to do a contrarian play.

As someone who started in Mumbai real estate straight from college, at the age of 19, the now 56-year old developer knew that this round of bust was not like any of the previous ones he had gone through and survived. With help from long-term confidantes and Directors in Puravankara Board like Nani R Choksey and Ravi Ramu, not to mention US educated son Ashish Puravankara, he scripted a turnaround strategy that most of the developers would have shied away from.

Under Chairman Ravi’s vision, the Group acknowledged the difficulty in the market, and bet on two emerging trends – one being the need to create a new brand for affordable housing, and the second to gradually adjust to the fact that home sales were moving from launch dates to ready-to-occupy dates.

Today, both strategies have paid off quite handsomely. While Puravankara’s affordable brand Provident Housing is one of a handful of successful experiments in this direction, their decision not to launch any new projects until the supply is more or less depleted has helped them turn around.

The second strategy helped them focus their whole energy on executing already launched projects, and more than it drove sales of ready-to-occupy apartments, it helped the firm regain the trust of its customers as a developer who didn’t let the downturn affect project completion. In February 2010, Chairman Ravi took a decisive step in further professionalizing the entire operation by inducting former Executive Director of Sobha Developers, Jackbastian K Nazareth as Puravankara’s Chief Operating Officer.

Despite no new project launches under the Purva brand, the Group staged a growth of over 13% in sales and over 22% in gross profit for FY10.

The Group had recently broken its self-imposed holidays for new projects and come up with a reasonable project, Purva Skywood in Bangalore. Learning from the market lows of 2008-09, Skywood is created as a need-based product and not an aspirational one.

This is just the start as the Group has a target of 12 million sq ft for Puravankara and 6 million sq ft for Provident for the current year. Investors are also warming up again to the stock, which has witnessed a year-to-date price performance of 27% against peers like HDIL’s 8%, and industry leader DLF’s -10%.

Still, there is long room to appreciate as the Group which is the 7th largest in India by both sales and profits, is only 12th in market cap. The debt is now down to Rs. 800 crore and the firm enjoys a high promoter holding of 89.96%.

Many investors will be looking forward to next two quarters' numbers to ascertain whether the turnaround is holding.

Coal India IPO Nearer - Are There Any Unique Prospects for Investors?

India’s largest and the world’s third largest IPO is coming, with some estimates putting the final size at Rs. 17,000 crore. With an operating margin of 30%, cash reserves of over Rs. 39,000 crore, quite reasonable offer valuations, and an ambition to grow quantitatively and qualitatively despite its already world-dominating production, nobody is doubting whether Coal India’s IPO would be a success. Sriprakash Jaiswal, Minister of State for Coal, and Partha S Bhattacharyya, Chairman of Coal India, are steeering this IPO well, but investors will also be looking at the kind of capital market stewardship Coal India will accord its scrip, post-listing. If CIL can achieve this investor confidence, this public issue can set records in subscription.

Ever wonder why PSU banks are all-time favourites among discerning investors – both retail & institutional investors - despite most of them trading in the sub-100 and sub-500 price ranges? It is just because they were offered to the public at reasonable valuations, and from those levels, most of them have at least tripled in value within a few years time.

ALSO READ: Coal India IPO - Assessing Coal India's Management Expertise
ALSO READ: Coal India IPO - 10 Investor Questions Answered

And ever wonder why some of the big brand names of India Inc have failed to enthuse the investing public? Again, it was a case of valuation, with many private sector giants in power & real estate sector offering their shares at astronomical valuations, but with no follow-up by way of actual performance in income or profits.

Now, when Coal India Ltd goes for its IPO in the second-half of October, the good news is that it will be on reasonable valuations, probably on a price-earnings ratio of 17-18. CIL scrip’s book value will also be high due to its capital intensive operations, and together, these valuations present a reasonable case for the investing public as Coal India has some unique potential.

Unlike the power sector, which has the growth potential but relatively low and steady margins, Coal India is an organization that has succeeded in creating an operating profit margin of 30%. The growth projections are good with an aim to double its turnover within a timeframe of 3 to 5 years. Though technically not a monopoly, Coal India enjoys a head-start in this sector, as well as the patronage from Government due to its demonstrated growth curve.

The strength of Coal India’s financial health will be clear from just one metric. Normally, companies go for their IPO to enter a higher orbit of capex and/or correct the debt-equity ratio. CIL doesn’t need an IPO for either of these objectives. Not that it is not having a sizeable capex plan. But it can fund the Rs. 10,000 crore plan very well on its own as it is sitting on cash reserves of over Rs. 39,000 crores.

Because of this crucial difference, Coal India is not issuing any fresh equity on its part, and the whole of the issue – which can even be upwards of Rs. 17,000 crore - is just a divestment by the only promoter, Government of India. This prevents equity dilution, which is a big plus for the newly entering investors.

Coal India will have only a 10% public float, which in itself can make the scrip dearer and enjoy progressively higher valuation over time. The Government’s recent corrective stance that PSUs won’t come under the compulsory 25% public holding norm has also come as a blessing for CIL, as this will ensure that the public float will remain 10% for long, until the company plans for an FPO, that too with fresh equity. In fact, the company will have only 9% as free float for now effectively, as 1% of the issue will be reserved for Coal India employees as ESOP, which will obviously have a lock-in clause.

Even more importantly, factors like the low float, the huge reserves, & the significant ESOP signal that Coal India will be free to deploy tools like a bonus issue in the coming quarters or years to reward all stakeholders.

With the IPO and listing, Coal India is also entering some of the notable national and international compilations. Inclusion in Fortune 500 and Maharatnas are just two examples, where the listing clause was preventing CIL’s inclusion. The company will also be the largest publicly held employer in India after the IPO.

Internationally, Coal India has been gathering much attention as not only this globe’s third largest IPO after two Chinese banks, but for some good performance in their core segment, as well as in managing human resources. Recently Coal India and its Chairman Partha S Bhattacharyya won a couple of Asian HR awards at Singapore. World’s largest coal producer is also planning for strategic tie-ups with American, Australian, & Chinese mines to better its output quality and increase its dominance. In India too, the company got a shot in its arm when the Cabinet decided in its favour on the go/no-go area debate proposed by the environmental ministry. In some ways the decision was ethically sound, as CIL has often demonstrated concern for the environment, their massive afforestation program being one.

The world is taking note of this IPO for one more reason. Coal India has been able to succeed so far despite suffering from geographically poorer quality coal, and the mandate to provide almost 50% subsidy compared with international coal prices. In a scenario where its coal quality improves due to international tie-ups and investment in a new washing facility starts delivering, as well as more deliveries becoming non-subsidized, Coal India stands to have a significantly better profit margin in the years to come.

The main thing investors will watch out for is the kind of stewardship for the CIL scrip in the capital markets, post listing. If Coal India can deliver on that front by meeting stringent analyst requirements, as well as ensure value multiplication for its investors quarter-to-quarter, fiscal-to-fiscal, as much as it performs in ensuring its actual growth, there is no reason why this can’t be one of the most significant wealth creation stories that public can safely participate in. Indications of such stewardship are already coming in with plans on to have high-profile anchor investors for the IPO, a step that will be taken by a PSU for the first time.

Manappuram - Overrated or Underrated?

On first looks, Manappuram scrip (BSE: 531213, NSE: MANAPPURAM) is defying gravity, trading not only well above the industry average valuation, but even ahead of several heavyweights in the NBFC sector. But on a closer look, there are several factors like the strength of its core gold loan business, its guidance-revising growth momentum, and Chairman VP Nandakumar’s confidence-boosting stewardship in the capital markets, that make it almost underrated.

Also Read on Manappuram:
Manappuram at All Time High - How to Invest Here Now?
Manappuram Improves Further on Higher Growth, Lower Expenses
Manappuram’s Gold Loan Business - Risky or Rewarding?
Manappuram - Overrated or Underrated?  
Can Manappuram Keep Growing at 60%?


Manappuram General Finance & Leasing now ranks as the 9th largest NBFC by assets, 8th largest by sales, and 5th largest by profits, in the capital markets segment of ‘Finance – Leasing & Hire Purchase’. But when it comes to price-performance, Manappuram edges out several heavyweights including Bajaj Auto Finance, M&M Financial Services, Cholamandalam, Sundaram, & even a sector leader like Shriram Transport Finance.

The Manappuram scrip has had a year-to-date price performance of around 250%, so much so that its market cap is now just below Rs. 4000 crore, and it has only Shriram Transport and M&M Financial ahead of it, in market cap. In fact, there were reports that in one of the recent bullish days, Manappuram had become a billion dollar company, even if it was for a brief time.

But now the question facing Manappuram is whether its scrip is overvalued or undervalued. After a recent bonus and stock-split, the scrip is trading well above the industry average price-earnings multiple. While the sector’s average P/E is around 21, Manappuram is trading upwards of 26. Though an above average valuation multiple signals strength, the question is whether Manappuram can exhibit a price-performance matching last fiscal’s, going forward.

The problem is compounded by the fact that though the segment’s average is 21, many heavyweights are still available much cheaper than even this level. For example, Shriram Transport Finance, Mahindra & Mahindra Financial, Shriram City Union, Sundaram Finance, & Bajaj Auto Finance are all trading at P/E multiples ranging between just 12 to 19, making them safer investment destinations than Manappuram, on at least first looks.

At the same time, Manappuram is showing indications of attracting even better multiples. What is behind this seeming anomaly?

For one, it is the business Manappuram is in. Loans against gold is the most secure of all loans, with extremely low non performing loans (NPLs) as these small-ticket advances are easily repayable, and moreover, nobody wants to lose even a gram of pledged gold in the Indian scenario. There is also no concept as non performing assets (NPAs) in the gold loan business, as not only are the loans fully secured, but readily recoverable due to the high liquidity of gold as against other pledges like real estate or auto. The tiny percentage of existing NPAs in gold loans is due to forged gold or theft, which is practically a non-issue due to advanced screening and locker systems.

Secondly, thanks to the ongoing bull run in gold, gold loans enjoy the unique advantage of asset appreciation that makes them flexible to offer constant loan-to-value upgrades, and this has been a sizeable contributor to Manappuram’s revenues and profits last year.

The growth momentum that Manappuram continues to exhibit in 2010-11 till date is remarkable despite already growing income by 289% and profits by 395% in 2009-10. During the June quarter, profits has jumped by over 324% year-on-year. The firm has roped in five heavyweight brand ambassadors – Akshay Kumar, Vikram, Mohanlal, Venkatesh, & Puneet Rajkumar – and kick-started a Rs. 100 crore annual advertising campaign explaining the gold loan concept.

The stewardship exhibited by Manappuram Chairman VP Nandakumar in the capital markets is also remarkable. His recent strategy to infuse Rs. 100 crore to up promoter-stake to 43% through a preferential issue came as a big confidence builder as it was done at near 52-Week high levels. Nandakumar has also hinted at revised guidance for the year, with the yearly targets likely to be achieved by the second quarter itself, by September. This makes Manappuram's forward P/E for FY'12 and beyond quite attractive.

The stock has soared since taking these positive steps, and there is market buzz that some of the high-profile US institutional investors who earlier exited the stock with multi-bagger returns are now contemplating a return.

Manappuram also enjoys the unique distinction of being the only listed company with gold loans as its mainstay. Until recently, there was not even a single listed NBFC competing with Manappuram, though it has changed with the entry of Shriram City Union / Shriram Transport Finance combine into the gold loan business. Still, gold loan is not Shriram’s core competence or mainstay.

It is in this background that Manappuram’s valuations make sense. In a sector where SKS Microfinance can command a P/E valuation of over 35, and Cholamandalam can demand a multiple of over 60, there is no reason why Manappuram should be regarded as overrated at current levels of around 26.

Lavasa IPO: Can Too-Big Be Too-Good for Investors?

The project and the parentage are fine. But will they be enough for HCC to have a smooth sail for their Rs. 2000 crore Lavasa IPO is the crucial question. Investors will be looking at the commendable upsides like the project scale, as well as the potential downsides that are unique and complex when such a city-project goes for its IPO.

For the first time in the country’s capital market history, a city is going for its IPO. And needless to say, Lavasa’s upcoming IPO is throwing up some unique attractions as well as challenges for the prospective investors.

At 100 sq kms, Lavasa is roughly the size of Allahabad, Jodhpur, Rajkot, Coimbatore or Kochi. But if these cities took hundreds, if not thousands, of years to develop, Lavasa’s ambition is to grow to such scales within two decades.

This kind of a lofty objective is quite good in the capital markets, as this kind of vision is what separates leaders from laggards, especially in project oriented sectors like capital goods, power, infrastructure, and real estate.

However, there is also the case of Lavasa being a bit too big. Lavasa Corporation Ltd, now a subsidiary of Hindustan Construction Ltd (BSE: 500185 NSE: HCC), runs the risk of being regarded as a single project company having all the related downsides, much like how Jaypee Infratech was assessed recently post-listing, resulting in a truer price-discovery.

Skeptics for the project have always been there, but Lavasa Corporation Ltd completed the first phase almost on schedule in 2010, comprising over 1000 villas and 500 apartments in its residential section. However, what is complete is nothing compared with not only the works to be completed, but the works yet to be started. Dasve, one of the three towns in the first phase, is the already operational town.

The whole development is spread across four phases, with the second phase getting completed in 2014, the third in 2017, and the final phase in 2021. Just 3 hours from Mumbai, and 40 minutes from Pune, Lavasa has been designed on a philosophy of live-work-learn-play within walkable distances, and is coming up as 12 towns spread across 7 valleys.

What this execution challenge boils down is whether Lavasa Corporation can more or less proceed as per their plans. One look at parent HCC’s performance throws up a few doubts.

Despite clocking a turnover of Rs. 3500 crore, HCC has followed a strategy of a low equity base, and a high debt-equity ratio. That may be fine many years after the IPO, as in HCC’s case now, but for a company going in for IPO like Lavasa, this kind of strategy comes across as troubling. A query sent to Lavasa regarding their debt-equity ratio remained unanswered at the time of publishing.

Lavasa’s economic drivers will be five service industries – research, tourism, education, sports, & healthcare, and this first planned hill city post-Independence has already tied up with majors in each of these sectors who are constructing impressive facilities here. Some of these names include Apollo in healthcare; Christ University, Symbiosis, & Educomp in education; Accor, Mercure, Novotel, & ITC’s Fortune Hotels in hospitality; and Manchester City and Hockey Australia for Sports Academies.

But with many core services and manufacturing industries missing like BPO, financial services, telecom, automotive etc., it remains to be seen whether Lavasa’s ambition to be a true economic self-sustainer will work out even in the long term. The city has promised inclusiveness to all possible earning brackets, but similar promises from other builders earlier haven’t often worked out.

Master planned by USA’s largest architectural- engineering firm HOK, which has to its credit developments like Dubai Marina and Apple’s campus, Lavasa has already become a major tourist attraction due to its exotic aesthetics. Merging seamlessly with the scenic mountains of Sahyadri and the waterscapes of Mose River and Dam, the massive development tries to be as environment friendly as possible.

However the risks emanating from socio-political and environmental factors, given the controversies regarding the amendments to Hill Station policy, that enabled the realization of a project like Lavasa, and demand for formal enquiries can spring surprises.

The moving force behind Lavasa, Hindustan Construction Company (HCC), is the seventh largest listed civil construction company in India by turnover. HCC, founded in 1926, has to its credit landmark public projects like India’s longest sea bridge, the Bandra-Worli Sealink in Mumbai (in 2009); India’s largest rail coach factory at Kapurthala in Punjab (1988); India’s largest water treatment plant at Bhandup in Mumbai (1983); India’s first steel plant in Bhilai (1971); and the world’s longest barrage at Farakka, in West Bengal. Since getting listed in 1990, HCC has been a star performer in the bourses with its original Rs. 10 face valued share estimated to have crossed Rs. 10,000 in value after two bonuses and one split.

However, during the last year, HCC has almost turned into a laggard in its sector in the capital markets. The HCC scrip has had only a below average year-to-date price-performance of around 30%, even at this time while HCC plans for the Lavasa IPO, and even after a bonus run-up. In this scenario, many investors are likely to be sceptic of HCC’s recent stewardship in the capital markets.

On the upside, when HCC takes Lavasa through its IPO to raise over Rs. 2000 crore, there are several factors too that will encourage investors to subscribe, like the equity holding of eight banks including Bank of India, ICICI Bank, & Axis Bank, as well as other financial institutions in Lavasa. However, investors are likely to look at their lock-in periods, or whether they will sell out through the IPO or post listing.

However, one of the main positives for this IPO would be ironically historical, and likely to be missed by many in the new generation. HCC and Lavasa are from the house of Walchand Hirachand, which has played a unique role in the development of modern India.

Founder Seth Walchand Hirachand Doshi had founded quite a few organizations apart from HCC. In 1919 he got into shipping and some years later would start Scindia Shipyard. Today, you know it as the nationalized Hindustan Shipyard Ltd. In 1939, Walchand Hirachand would start the country’s first aircraft manufacturing facility, Hindustan Aircraft. Today, you know it as the nationalized Hindustan Aeronautics Ltd. In 1939 itself, Hirachand would start the country’s first car manufacturing facility, Premier Automobiles Ltd., which later produced cars in a tie-up with Fiat, and would go on to become one of the country’s largest carmakers for many decades.

That is why Walchand Hirachand is known as the Father of the Indian Transportation Industry, and a commemorative stamp was released on him by Prime Minister Dr. Manmohan Singh in 2004.

But there are also critics who take this as a track-record of doing things too early, too fast, and too massively that resulted in the Group losing two firms to the public sector, whereas Premier Automobiles was virtually wiped off by newer competitive entrants.

HCC’s Chairman & Managing Director Ajit Gulabchand is the scion of this business family who strives to take forward their pioneering, larger-than-life vision. Since taking over the reins in 1983, Ajit Gulabchand has taken the Group to dizzying heights like Rs. 3500 crore turnover and Rs. 4250 crore in market capitalization, not to mention the takeover of Swiss construction giant Karl Steiner AG, which even while increasing debt, elevated the image of the Group.



If and when Lavasa is finally listed, it will fall under the capital markets segment of Civil Construction (which includes HCC) that has a P/E of less than 25, or in the segment of Real Estate that has an average valuation of 35. Investors will be keenly watching this positioning. A query sent to Lavasa regarding this positioning remained unanswered at the time of publishing.

If Lavasa is willing to leave reasonable money on the table for its investors, and if the vision for this city full materializes over the years, and if Lavasa continues to show concern for the neighbouring villages, there is no reason why this IPO of a city can’t be a good bet. But needless to say, this is a long story that requires patience from investors before they can see the climax.

India Inflation Run Proves Economics No Substitute for Efficiency

The great inflation debate may have ended in Parliament, but not for the nation that send this Parliament to Delhi. After almost a year of shifting promises on controlling prices, the FM came up with a wisdom that signals helplessness. He finally justified inflation.

The Opposition on its part continued to succeed in putting the Government in a spot, even while failing to come up with constructive 1-2-3 steps in taming the price rise.

The stark reality is that nobody at the top - on both sides - has a clue on the continuing price rise, especially in food materials. The reason is quite apparent. All are expecting these little tinkering with repo and reverse repo to work wonders. They would have worked if India was a textbook. In reality, no nation works like a textbook, and India has repeatedly proven to be an extreme oddity in economics.

And at this crucial difference ends the expertise of not only our politicians, not only our economists, and even our econo-politicians like Dr. Manmohan Singh, Pranab Mukherjee, P Chidambaram, or Arun Jaitley. They are applying and re-applying whatever they have learnt and gained from past experience, and sitting smug on the belief that their fiscal and monetary policies would deliver.

Even worse, each side is readily seeing the picture they want to see, and either justifying, or criticizing the other.

For example, Pranab Mukherjee highlighted the demand side of the inflation equation citing a recent NCAER study. According to this study, in FY'02, the low-income households were 34.6%, middle-income households were 58%, and high-income households were 7.3%. But within the next 8 years, a revolution of sorts has taken place, with the low-income households dipping significantly to 17.9%, middle-income households rising to 61.6%, and high-income households surging to 20.5%. This has obviously resulted in higher consumption of a wider variety of food materials, and the country's food production is yet to cope up with this surge.

Nobody, even from the Opposition is disputing these numbers, which is a pleasant side-effect of growing at near double-digits for a few years.

But Arun Jaitley has an equally engrossing number. He points to the low inflation levels maintained in comparable high-growth economies like China, Brazil, & Indonesia. Nobody can dare to dispute Jaitley on that, as a few of these economies are still managing food inflation at around 3%.

But the sad point is that within these intense debates two crucial factors are overlooked.

One is the long-term effects of populist measures and the second is the foolishness of focusing only on economics as against efficiency. Take NREGA for example. In paper it was perfect. Even in practice it was perfect for many quarters. But nobody had really factored in the demand surge it would ultimately create.

Does this mean it should be scrapped altogether? Not at all, as long as it is not a cash-for-free program. Payments should be against productive work, and only then it can compensate for the liquidity that NREGA pumps into the system.

The same is true of the microfinance revolution happening across the country. The first microfinance IPO, of SKS Microfinance, is over, and another dozen IPOs are waiting in the wings. Microfinancing is perfect if it funds only means of livelihood, but it can be the worst subprime scenario financiers can create if the funding gets diverted to buy appliances and luxuries.

That much for the demand side of the inflation equation. Both strategies can't be faulted at all as it benefits the most economically deserving segments.

But what about the inflation that Governments have purposefully created, down the years?

Take a look at the way minimum support prices for rice and wheat have shot up during the last 10 years, and anyone will appreciate why this round of inflation was a tragedy just waiting to happen. Instead of improving the quantity and quality of agriculture, the only tweaking that was done to promote agricultural productivity was regular boosts to MSPs. The surge on this front was done with no regard to then prevailing inflation-levels, and finally these surges came back to haunt by way of uncontrolled inflation.

It was as foolish as providing petrol and LPG subsidies for decades, and then trying to correct it overnight, thereby driving inflation further.

The argument that rising MSPs benefited farmers is not without merit, but in the new agricultural market where giant corporations and commodity futures reign, it can be easily seen that the major beneficiaries were not the poor farmers.

It goes to the merit of the Left Front that they remain the only voice against agricultural futures. What was originally a hedge tool for producers against environmental uncertainities has been abused by the filthy rich traders and politicians who have never set foot on a farm, and make millions by the mouse.

Otherwise, what can explain the absurd hike and fall of sugar recently?

Last but not least is the inefficiencies and corruption prevailing in the system. The PDS is in shambles, and there is no agreement regarding the hundreds of thousands of tons of food grains left to rot in our public godowns, maybe due to poor logistics, but more probable due to myopic vision and rampant corruption.

Sharad Pawar feels rotting foodgrains is a matter of shame. Shame for whom?

Good economics can pump in 1,85,000 crore to avoid going bankrupt. Good economics can suck back almost half of it through 3G auctions. But to believe that good economics can be a substitute for efficiency is foolishness to the core.

Joyalukkas IPO - Will it be a Good Investment Opportunity?

Seasonal Magazine interviews Joy Alukkas, Founder & Chairman, Joyalukkas Group, and Rolf W Schneebeli Chief Executive Officer of the Group, in connection with their planned IPO.

Close your eyes and imagine the most profitable business you have seen. Readily, gold and diamonds come to your mind. Now, if you are an investor, close your eyes and imagine the most profitable business to invest into. Why are gold and diamonds not turning up now? Because, the country’s capital markets still doesn’t have a listed large cap jeweller that is into pure retail. Now Joyalukkas aims to fill this precious gap, with an IPO of its branded and value-added Indian operations. Recently, Joyalukkas has been selected as a Superbrand in UAE. Founder & Chairman Joy Alukkas is planning the IPO much like his larger-than-life showrooms, but on reasonable valuations that will leave money on the table for its investors, as it aims to double itself from 21 to 40 showrooms and from Rs. 1825 to Rs. 3000 crore sales in a year’s time.

India’s listed universe has over 110 sectors officially, everything from ‘Abrasives’ to ‘Vanaspati’. Still, it is not enough to contain an upcoming IPO. That is what is riddling Joy Alukkas, the entrepreneur behind Joyalukkas, one of the largest jewellery retail chains in the world with 80 showrooms now. One look at BSE’s concerned sector – ‘Diamond Cutting / Precious Metals / Jewellery’ – is enough to convince any one of this problem. While meeting Joy Alukkas for this story at his Indian headquarters in Kochi – a scenic affair from where he can watch the sea always so that he never forgets the need to think big - we suggest alternative sectors. How about the catch-all ‘Miscellaneous’ sector that is home to Tanishq? “No Joyalukkas is quite different from Tanishq”, says Joy. “Titan is into so many things other than jewellery like watches, eyewear, gifts etc and besides that, theirs is a pure franchise model.”

Then we point him to the recently listed Thangamayil Jewellery which comes under the sector ‘Diamond Cutting / Precious Metals / Jewellery’ itself and his face lights up, signaling that this is something that had already crossed his mind. “True, they run a pure retail operation, but the problem is that there is no comparison with us on scale.” He seems to have a point, because in FY’10, Thangamayil did around 500 crore, which is not bad at all, occupying the 10th spot among the 26 listed players, but still it is not comparable to Joyalukkas’ worldwide sale of around Rs. 3700 core.

But, of course, all of the Group is not being offered under the planned IPO. Only the Group’s flagship company in India, Joyalukkas India Pvt. Ltd., that is responsible for all of the Indian operations, will be going for the IPO now. But even this company is estimated to have an annual turnover of Rs. 2500 to 3000 crore. At such a scale, Joyalukkas when listed will be ahead of most of the listed players, that is, ahead of even heavyweights like Asian Star, Shrenuj, Suashish, & Renaissance.

But Joy Alukkas is not concerned with comparisons, as much as he is about the basis of comparisons. “It is like the proverbial apples-with-oranges comparison. Where is the brand in these smaller or bigger companies that you mention? All of them are large-sized but unbranded bulk operators for whom gold is a commodity business.” Indeed, the listed jewellery space is now dominated by exporters to US & Europe, and investors are really spoilt for choices if export business is what they are looking at.

But gold exports, especially to Western markets have a problem. Business booms when gold is affordable, and withers when gold booms. Americans and Europeans turn to silver in a big way when gold prices go through the roof. Even diamonds can be crafted in silver for Westerners. That is why 17 out of the 25 jewellery scrips lost money for investors during the last six months, with top player Rajesh Exports losing more than 11% of investors’ money, and the next bigger player Suraj barely scraping through to make a tiny profit for its investors.

And know what these biggies are planning to tackle the export slump? For some, the strategy is beefing up domestic sales, and for others it is planning to begin domestic sales for the first time. That is where Joyalukkas already has a reasonable edge. Almost all of their turnover is coming from the 21 showrooms spread across the country. The Group recently opened its first showroom in Bangalore, and in the inimitable Joyalukkas style, it is a four-floor 40,000 sq ft affair which is Karnataka’s biggest and the Group’s second-biggest, after their Chennai Showroom which is also the country’s largest jewellery showroom.

With a sharp focus now on the resurgent diamond sector, Joyalukkas tries not to miss the pulse of the customers, as, for many of them diamonds are now more attractive due to the gold boom.

Group Founder and Chairman Joy Alukkas, is a dynamic second-generation jewellery entrepreneur who successfully spun off this company from the family concern, Thrissur-based Alukkas Jewellery. Under his leadership, the Group has won the coveted Dubai Quality Award from Sheikh Mohammed, Ruler of Dubai. Joyalukkas was recently conferred the coveted Superbrand status in UAE, with Chairman Joy receiving the status from Mike English, Director of Superbrands Middle East.

Joy has recently turned around the company into a more professionally managed setup with former World Gold Council Chief Executive Rolf W Schneebeli inducted as CEO, and Nandakumar T joining as CFO. But Chairman Joy Alukkas remains a hands-on leader scripting the next stage that will see apart from this IPO and possible PE deals, three new large-format showrooms and around 17 smaller format ones, making their Indian network a 40 showroom one. If Joy Alukkas can get his game right in the IPO space with right pricing and right valuation, there is no reason why this shouldn’t be worth considering.

Chairman Joy Alukkas in conversation with Seasonal Magazine:

Joyalukkas is finally planning for an IPO. Can you explain your main motivations?

Well, first of all, let me clarify one point – it is not definite that we will be going for an IPO. What we have announced is that we are looking to raise money from investors, and yes, IPO would be a preferred mode for that. But we will also be open to other modes like PE funds and the like. Now, coming to your question, there are several common motivations for all companies going for an IPO – like finding money for further expansion, expanding visibility in the capital markets and the like. All such motivations are there for Joyalukkas too, plus a few of our own. Prime among them is to take this transparently governed business and brand to the next stage of corporate governance and excellence. We also want to be the first jewellery brand to go public.

But servicing debt has also been one prime motivator these days for IPOs. As a brand that has expanded rapidly, is correcting the debt-equity ratio a motivation for Joyalukkas?

Not really. We may service a part of our debt using IPO proceeds, but that is not the main thing, as we have not run up such a debt in the first place. Some people might mistake that our rapid expansion was being powered solely by debt, but it is not true at all. Our core edge is that despite such expansion, we remain lightweight as we don’t buy showroom properties and we don’t have much manufacturing facilities of our own. Because of these unique factors, our book is very conservative.

How can you be the first jewellery brand, when we have listed players like Rajesh Exports, Gitanjali, or Tanishq?

Well, what I meant was the first retail jewellery brand. Today, if you look at the listed players, almost all of them are mainly exporters or manufacturers, with little or no domestic retail operations. The only exception is Tanishq, but it should be treated separately for three reasons – one, it is a pure franchise operation; two, they do not just jewellery; and three, they are part of the Tata enterprise. I can find only the recently listed Thangamayil Jewellery as a retail player, but then you can’t really compare us with them, size-wise. We will be the first major jewellery brand to go public, and in all probability the only one to go public for a long time.

Why are you not expecting the other players to join in?

It is just a feeling, of course, but it is pretty difficult for a conventional jeweller to go for IPO. The traditional jewellery business, by convention, is not done very transparently with the public or with the taxman. In contrast, we had always done things in black & white with world-class auditing by firms like KPMG for the most part of our existence. This is one edge that our competitors just can’t create overnight.

How do you see the ongoing gold boom? Is this going to last or are we set for a correction?

No boom goes on like that endlessly. We have seen both real estate and stocks correct drastically. Maybe gold may not fall that much due to its current safe haven status. There are several studies that show that gold boom may extend at least for another two years. But all of us – jewellers and customers – must be prepared for minor corrections. The only major risk that can happen is China succeeding in producing massive quantities from its new mines, which is something nobody can predict at this stage.

No manufacturing, no real estate, and no exports mean Joyalukkas is a pure retail operation. How will it translate to a better investment proposition?

Yes, we are pure retail, and we are all about value addition. We have precise design specifications and we have stringent quality controls, and we custom-source from hundreds of manufacturers – big and small – from all over India. Since we are a high-volume buyer, we are able to buy at excellent prices, and sell at attractive prices for our customers. Secondly, all our showrooms are on long-term leases, meaning that we can pay for them from our cash flow, with no high-risk capital investment involved. Being India focused, Joyalukkas is also shielded from downturns in Western markets due to the high gold prices. The end result of all these is that our margins are industry leading, and honestly speaking, I was surprised when I came to know that no player can match our EBITDA margins.

But isn’t Joyalukkas employee intensive? You have one of the largest workforces in the industry.

True, Joyalukkas is home to around 2300 employees. But they are not a liability but an asset as they are dominated by sales professionals who deliver the brand to our customers through our world-class showrooms. Because of such an outlook, I am considering many among them for ESOP, though it is not customary for a pure retail operation. Joyalukkas has excellent HR practices, and pays above average salaries, but still, the cash flow can accommodate all that.

Being a pure retail play, are you planning to diversify into retailing more products, maybe like apparels as you have done in Kerala?

Textiles is definitely something we are bullish about, and we want to take it to the next level by launching the unique concept of Wedding Malls, where everything for the Great Indian Wedding will be available. Initially we are planning three such Malls in Kerala, one each in Kozhikode, Thrissur, & Ernakulam. We also have a target of around 8 textile showrooms in Kerala, and if the going is good will expand it to a pan-India operation with 100 shops. But having said all these, let me also clarify that our mainstay will remain jewellery. As of now, textiles accounts for only Rs. 150 crore in sales.

Recently you launched your Bangalore showroom, which is a large-format one. Is this going to be the practice from now on?

For the metros and big cities, yes, large format is the way to go I think. But we will also launch medium and small format shops in the tier-2 cities in each state, especially in South India. Out of the 20 showrooms we have planned with the IPO proceeds, three will be of large format. But large or small, the brand is such that the footfalls are quite high, which is something that still riddles our competitors.

Organizationally, how are the preparations for IPO going on?

Well, we do things well in advance, and have already reconstituted the Board to have management and stock market experts like KP Padmakumar and CJ George with us. The induction of banker, economist, and former World Gold Council Chief Executive Rolf W Schneebeli as our CEO, and finance professional Nandakumar who has handled an IPO as our CFO was also done well in advance.

Despite having operations in 8 countries, why are you opting for the IPO of only the Indian operations?

Yes, as of now, we will go only for the IPO of Joyalukkas India Pvt. Ltd. Showroom wise and turnover wise this company is roughly half of the Group, but, of course, it comprises the full India operations. We decided on such a strategy as both structurally and execution wise, this is the right way for the Group, the brand, as well as its prospective investors. Our overseas operations, headquartered in Dubai, has diverse means of raising funds on its own.

Though it is difficult to pin down a figure now, can you provide some approximations on the issue size, dilution, pricing, and valuation?

Yes, it is quite difficult for figures to come by at this stage, as we have just now only initiated talks with merchant bankers. Still, we hope to have an IPO of around Rs. 600 crore. About the pricing I think I can’t tell anything much at this stage as it will depend on so many factors still to be decided. On the valuation front, we don’t intend to price it on a hefty P/E, but only reasonably, something that befits our industry status. I want our IPO investors to definitely make money within the first year itself. It is very much possible as we are planning to double our showrooms from 21 to 40, as also double our turnover from around 1825 crore to 3000 crore.

If you were to name one USP of the brand that it shares with you the founder, what will it be?

Without doubt, it is thinking big. Our Chennai showroom is India’s largest, and our Bangalore showroom is Karnataka’s largest. We run the largest and fastest growing branded retail jewellery chain. It is an ethos the brand learned from me. I believe in sourcing jewellery at the best-possible prices for our customers, as much as I believe in the larger-than-life shopping experience our showrooms deliver. Even our CSR initiatives like ‘My0.50’ tries to stretch the limits, to go beyond the usual CSR activities, and my personal philanthropic ambition is to build a charitable cancer hospital.

CEO Rolf W Schneebeli in conversation with Seasonal Magazine:

Can you tell us something about your background and how it came to your current role?

Well, I hail from Switzerland, was trained as an economist, worked as a banker for many years, before assuming charge in 1995 as the Chief Executive of World Gold Council’s Middle East & South East Asia operations. That stint continued till 2000, and this was the time that I really got familiar with India. Relationship with Joyalukkas dates back to this stage.

How do you assess the gold market in India?

The way gold industry has flourished in India is nothing but spectacular. When I assumed charge of WGC in 1995 the annual imports was around 300 tonnes, and by the time I left office, it was around 900 tonnes. In other words, gold business just tripled in this country within those five years. And ever since that, and even now, gold business is still growing at an amazing pace.

Do you mean to say that the ongoing gold boom has not much had an impact on consumption? To what do you attribute that?

Exactly, not in this country. This is the phenomenon that makes India a special gold country, and operations like Joyalukkas a high-growth one, going forward. I would attribute this Indian bullishness for gold, irrespective of the prices, to the event driven model of buying gold. Most Indian family events involve gold as ornaments or gift. Coming from Europe, I had trouble realizing this factor during my early years with India. But now I know the power of the Great Indian Wedding on this industry.

Why did you choose to associate with Joyalukkas?

There are several reasons. First of all, despite being an economist, I had fallen in love with gold business during my stint with WGC. Secondly, Joyalukkas has always had a unique business model in this industry, which I had discovered while in WGC. I don’t know whether even the Kerala market realizes this strength of Joyalukkas. To put it in a nutshell, this Group’s strengths are value addition, branding, rapid expansion, and focusing only on retail. There is no reinventing the wheel by dabbling in manufacturing or non-value additive concerns like bulk exports.

How do you view the ongoing gold boom? Will there be corrections in the short-term or long-term?

The boom is going to continue at least for a few years, but not for the reasons that are often portrayed like gold’s safe haven status. The real driver behind gold prices is the quantum of money supply that has hit the world market post 2008. Western governments solved the Lehman crisis and its aftermath in the only possible way, that is by pumping in excessive liquidity. Unfortunately, that was not the best of ways, and now they are struggling to remove a part of it. But sucking out that excess liquidity is practically impossible, and inflationary trends is going to reign, which will also drive up the gold prices. Of course, the rapid rise also gives room for minor corrections in the short-term. But the long trend for gold is definitely up.

How do you view the Indian situation then, and prospects for stocks like Joyalukkas when it is listed?

India is going to be a handful of exceptions to the world scenario, one of the nations that is expected to tame the inflation healthily in the coming quarters and years. You have to thank Dr. Manmohan Singh for that vision. On such a healthy platform, India will again lead in growth, driven by domestic consumption rather than exports. That is why we are bullish on a stock like Joyalukkas. It fits perfectly with the India growth story.

According to you, what are Chairman Joy Alukkas’s strengths?

He is a visionary in this business, so much so that while I was in WGC, the Joyalukkas model of expansion was presented as a case study in India as well as in other emerging markets. Early on, he understood the importance of value addition and rapid expansion. While value addition by way of custom-sourcing from all over India and the world helped in developing the brand, his focus on high volumes ensured that the business is consistently healthy with good cash flow and margins, even while satisfying the widest range of customers.

Are you enjoying your India visits? Where are you based these days?

Definitely. I am impressed with all the progress India has made over the last years. I am now a resident and tax payer in India, but I visit Dubai frequently as my family stays there.