Info Edge India ltd and Network 18 media & Investments Ltd: Valuation of E-commerce Ventures-Zomato-Part 2nd

For earlier post on this topic, Click Here

Our company BHEL is building a 500 MW power plant in MP. It is a small town of MP. Once our entire team was having a party when one of our Engineer remarked, "we are doing a Great work by building this power plant”. Although his intention was of common welfare but I just shared with them my view. I just asked what great “value” this power plant would bring in the life of the people. What they will do with this power? What Great? They will use fans, lights, AC’s, watch TV, movies, Laptops, Phones. Are these great? Whether these are “Valuable”?

I told him that he was living a life more lavish than Lord Krishna but “this lavish Life” is not valuable to the Lord. Bring a sword to the neck of a Managing Director or CMD, most will tremble with fear and fall on feet. But the Lord is the one who will smile at the face of the Death. Whether we assign any value to the fearlessness and bravery?  What PE ratio we will give to a company which is making people brave? So we realize that value is Subjective. Lord will assign great value to bravery and we are happy watching Lord in a TV Serial. But objective consideration is that a business should provide value to the society at large to attract decent Valuations.

So the game of valuations is just a play of getting the value added by a business. And we are on our quest to understand the value added by most of our e commerce startups and whether that value will sustain.

As we know that E-commerce ventures are valued in a different way like on the basis of numbers of users of the product/service or reviews generated if portal is a discovery platform. Although these valuation metrics look very unconvincing to a common man having firsthand knowledge of the investing world. But these are not out of the context. I have given a brief example of newspaper vendor of a small town in part-1 of this post. Let us delve further.

Dynamics of Normal Business

Take a normal car selling company which has sold 1000 cars. Now one new customer buys a car. Will it change anything for old customers? Will it bring future or more business for the company? NO. Same is the case for a Steel company. The components of these types of businesses are not linked with each other. Person A buying a new car means nothing to B already having the same car. C will not give any value to the fact that he should BUY X car as A and B are having the same. He may choose the X after his analysis but nothing is contributed by the fact that A and B are using the same.

Dynamics of E-commerce Ventures

Now watch a telephonic company (assume a single one in a city) having 10000 customers, if one new person subscribed to its services, it will change the equation for everyone. Old user may get benefited to increased network and Telephone Company’s business will become more valuable as new person and so many others now communicate with each other, resulting in much more incremental revenue for the company.

E-bay gets more sellers of products because it is having biggest numbers of buyers. Every new seller will make things better for existing buyers and new buyers will make things better for existing sellers. Although new buyers are not beneficial for existing buyers but for existing sellers, so value addition here is diagonal.

Now move to Microsoft windows, new users make it more valuable because application developers will make new applications based on windows platform since more users are having it on their PC's/Laptops. So Application developers have more chances of making money if they make their application softwares based on Windows.

Naukri.com works in the same way. More job seekers come to it as it is having one of the largest recruiters registered. More recruiters will join it as it is having biggest numbers of job seekers, so as advertisers. Naukri.com is in unique position as it is having three components of business process, Job seekers, Recruiters and Advertisers. It can monetize all of three although it is subsidizing Job seekers so as to get more from other Two.

                                                 Network Effect

So these businesses have one unique trait associated with them-Network Effect. They can benefit from network effect. Network effect emerges where one new user makes the business more valuable to existing users (either horizontal or vertical). Network effects are more profound and visible in E-commerce ventures although they were present earlier also. Like in Video Games, Video game developers will create games only for platforms that have a critical mass of players; because developers need a large enough customer base to recover their upfront programming costs. In turn, players favor platforms with a greater variety of games. 

Wikipedia is another example of Network effects where more entries are made in it as it is having more users and more users use it because it is having one of the largest entries.

Facebook derives the benefits of Network effects. Now suppose there are thousands of social network platforms available and people are using them equally. So no platform will be valuable…it will not get any investment and business as it is lacking the scale and it will not grow at all. But it never happens in real life, people shift their platform to the one which is having largest users as through it they can connect with more of their friends and make new friends. Network effect comes into existence on its own. So in E-commerce ventures you will always see one or two players having the entire share divided between them. Although existing players cannot relax on Network effect as there are forces which can disrupt an existing network…more on these later.

So no doubt, E-commerce ventures are valued on the basis of number of users as these can bring into play the Network effects which can multiply the revenue in the future when they are done away with their user acquisition phase. E-commerce ventures will spend handfuls on user acquisition initially and when they have critical mass then they start monetizing the entire network. And it can really become very big.

Zomato is just trying to be in a place to harvest the benefits of Network effects. So it is growing at breathtaking speed. It has acquired companies all over the world from Italy, UK, Australia to USA. Latest one was Urbanspoon from USA. Although USA was not the reason for acquisition as Urbanspoon was not the biggest in USA but it was in Australia and Canada. Yelp is the biggest in USA and Zomato has to make itself more useful and relevant if it wants to compete with Yelp.

Yelp is valued around $ 2 billion (around 13000 cr) down from $ 4 billion a year ago, after the news of its sale by promoters spread out. It is having around 150 million users every month. However unlike Zomato whose content is self generated, content of Yelp is generated by users and it is not restricted to food alone. Its turnover is around 2500 crores with NP around 250 cr in 2014. So Zomato with its superior content has all the might to compete with Yelp.

Zomato is present in 22 countries now, 43 offices worldwide, with around 1100 staffers from 65 nationalities. So it should focus on growing its existing business and monetizing the content. After it has gained some muscle mass, it should think of competing with Yelp which would require huge resources.

Its promoter Deepinder Goyal is a proud Punjabi, belongs to Mukatsar about 50 Km away from my hometown Bathinda. Punjabis are fighters and aggressive by nature. And so one thing that makes Zomato a class apart from other Indian companies is its aggressive tone. I have never seen any Indian company which is so aggressive. It is shaping its global dreams with killing instincts. In 2014, Zomato spent between $1 and 3 million for acquisitions in the Czech Republic, Slovakia, Poland, Italy and Turkey, but the biggest catch was Urban Spoon, with operations in the US, Canada and Australia for $ 55 million. Zomato is clearly going for the kill to reap the benefits of network effects.

Zomato has everything which can make it relish the network effects. First is its unique set of high quality content which is very difficult for any rival to replicate in short time and this is also working as a huge entry barrier apart from network effects.

Zomat’s most critical content is not user generated but it is aggregated firsthand. While starting afresh in the new city, one person is assigned in each city to collect data about the restaurants and clubs around the city. So they meet the owners, take the pictures of menus, Location, Food and other relevant data which is feed into a questionnaire having around 50-60 variables.  There is a centralized team which processes and cross-checks the data to confirm the validity. The data is then processed to be put up on the website. There is a separate team for advertising, which sells the website to the restaurant owners and attracts them to advertise with Zomato. 95% of the revenues are earned from advertisements from the local restaurants, while the rest can be attributed to event ticketing and restaurant booking.

Users can post reviews after visiting a restaurants, but only after passing some strict criteria. Zomato has algorithm and other technical expertise in hand to filter out the fake reviews which further improve the credibility of reviews. Restaurants can place their ads on the page; ads are appeared relevant to the search made by a user on the basis of locality and choice of foods. Restaurant owners are given a Dashboard page to see the traffic coming to them from Zomato and revenue getting generated. They can track the number of calls being made through Zomato, they can check the number of map views they got, the number of menu views they got. They can actually take a lot of metrics.

Restaurants placing their ads on Zomato are a perfect example of Targeted advertising which is a dream for any marketer. It is something I feel will change the dynamics of advertising industry where only 5% of the ads reach to the targeted audience which is highly expensive.

After the acquisition of Urbanspoon, its restaurant coverage has increased from about 300000 restaurants to more than 1 million restaurants across the globe and traffic is around 80 million per month. 

It is covering around 500 cities across the globe. This number is going to rise at an astounding rate in the future and these are not small numbers either. 

So now Zomato can afford to monetize its content. Apart from advertising, Zomato is focusing big on Order booking , table reservation, Payments all from Zomato platform. It wants to be relevant from Place discovery to final payment to a user. It has even tied up with Uber in india where a user can book a taxi from Zomato platform to the restaurant. 

Zomato has already acquired NexTable a US based restaurant reservations and table management Platform which competes against the Priceline's Opentable and SeatMe from Yelp.

Consumers will be able to search for a place to eat, check out recommendations and reviews from others, and then book a table there. Zomato can make revenues both on advertising on the search platform, as well as by taking a cut on reservations that it successfully makes for those establishments.

With this, Zomato is becoming more like Naukri.com with multiple revenue generating model. NexTable has developed a technology that lets restaurants update their data on the platform from smartphones and tablets, which makes a lot of sense considering the mobile nature of many of these businesses.

Acquisition of MaplePOS-a Potential Game changer for Zomato In Food ordering Business

In apr-15, Zomato acquired MaplePOS. It is developed by Delhi based MapleGraph, MaplePos offers restaurants features such as menu and inventory management, and has a built-in payment solution to accept debit and credit card payments. It is the first product based acquisition by Zomato. Food ordering is a big business, of 100000 crores in india and 30 lac crore globally. So Zomato can integrate this with its Data set and can offer more B2B solutions to restaurants and this can provide a recurring source of revenue for transactions on the cloud based platform.

Zomato is offering this with new name Zomato Base with features like modules for menu, inventory, recipe and customer relationship management, data analytics, electronic receipts, offline transaction support, payment gateway integration and a stealth feature which Zomato claims will change the way restaurants go about their business. As it is moving into food ordering and reservation services so technology is a must for smooth handling of the transactions and high end user experience. MaplePOS provides just that.

Zomato is going to launch this POS service globally within few months, so it will be a big game changer for it. Imagine a waiter tapping a menu card on a tablet that beeps an order into the front office machine that processes the order, deducts a payment against a credit card or prints out a bill.

The machine would be designed by Indian engineers but made in China. The plan is to help eateries run everything from customer intelligence to inventory management from an Android app and a matching machine.

I am yet to study the more updates and details regarding this, but will update as and whenever I get these.

It has already launched its food ordering application Zomato Order, which is a different application from Zomato restaurant discovery. It has kept it separate probably to unclutter the application and lightweight apps; although both are inter linked.

Online food ordering is going to be a bigger market, already Foodpanda and Tinyowl are expanding big. Dominos Pizza gets around 40% of its business through online ordering. Although Zomato is late in entering, but it is already having huge data base of restaurants and unmatchable sales force which go to every listed restaurant quarterly to take note of product updates. Integrating these restaurants into other schemas like food ordering and reservations are very easy and can be ramped up quickly.

So all in all, I feel it has passed the first phase of foundation and now ready to go ahead with monetization. How much it will generate is just a matter of time; nothing more.

Keeping alive the Network Effect-Being Relevant

Now we are at the most critical part. Survival. There is a belief in the investment circles that network effect is almost impossible to break. But there are some things which are relevant only in theory. Although they are still used in practical world by majority and most of the times this following by majority transforms something mediocre into outstanding…another case of network effect. Like valuation of companies and businesses by 10 year Discounted Cash Flow model. I always find it irrelevant. In today’s fast pace world, which is changing too fast; Relevancy whether technological or commercial is becoming more important than everything. Who can assess the cash flows of a business for 10 years with even 50% of certainty!!

These are just textbook models relevant mainly for theoretical and conceptual framework.

So network effects are somewhat overhyped in touting as a sole killing force in creating a giant E-commerce business. But that is not the case always. Burrp was the leader when Zomato was just a baby, today Burrp is nowhere. It vanished as it stopped being Relevant to the needs of users and competition.

Same thing happened with Orkut when Facebook untangled its huge web and emerged as the new standard in social networking. So then Facebook started to enjoy the Network Effects. And today in the wake of Twitter, Instagram and Linkedin, Facebook is trying hard to be Relevant to its users. Although Twitter and Instagram borrowed their concept from Facebook. Twitter “instant status” and Instagram “Photo Sharing”.

But there is more to the story of Orkut than Irrelevancy. In my view, Google underestimated the power of social networking and so it did not paid much attention to transform Orkut into something superior. Had orkut been the brainchild of someone like Mark Zuckerberg, it would have been alive. Then Orkut might have gone for IPO and would have raised funds for growth like Facebook Did.

According to the textbooks, eBay should own the Chinese market. In 2004 it acquired the largest local online-trading company, EachNet, which enjoyed an 85% market share at the time. EBay’s CEO, Meg Whitman, had witnessed the power of network effects in the company’s U.S. business and was confident to own the Chinese market too.

Things turned out rather differently. Taobao, a Chinese upstart owned by the Alibaba Group, completely displaced eBay within a few years.

When eBay first entered the Chinese market, e-commerce was in its infancy. At the time, technical equipment such as motherboards made up the bulk of online auction purchases, and EachNet, the company that eBay acquired, appealed mostly to technically sophisticated customers. Thanks to strong network effects, eBay’s platform became an increasingly attractive place to buy tech products.

Taobao’s Chinese executives recognized that the company couldn’t compete head-on with eBay in the existing market. So instead they focused on an emerging segment of online auction customers—people on the hunt for clothing and consumer products. Although eBay had a leading position in terms of overall market share, its share of the new segment—which would come to dominate e-commerce in China—was far less imposing. What’s more, eBay’s strong position with techies was no help at all in attracting fashion-focused customers, who were more interested in whether other fashionistas used the site.

Mistakenly assuming that the company had purchased its way to market leadership, eBay’s executives committed a series of strategic errors, ones they might have avoided if they had realized the threat Taobao actually presented. For example, eBay was slow to offer an integrated payment solution, and it insisted on charging customers significant transaction fees. Had its network advantage been real, the model would have made sense—the company with the strongest network effects can typically get away with higher charges (or lower quality). But eBay was not dominant in the emerging consumer market—the mutual attraction between fashionistas and techies was weak—and so its model didn’t fly. In 2006 eBay shut down its business in China. (HBR, Case Study-Apr-2014 Issue)

So network Effects alone cannot sustain the success, but there is no denying that if network effects are properly backed by Relevancy efforts than it becomes a potent force. Amazon is a testimony to this.

It is really getting lengthy here. I want to write more on the Disrupting potential of competition in network effect….but some other times.

I feel Zomato has its eyes wide open and is not sleeping on the cushion of Network Effect. In fact it is focusing big on its relevancy efforts.

So Info Edge should not be valued at present on the basis of valuation given to Zomato in the last funding round which valued it around 5000 cr. Zomato has just completed the investment phase so it is better to wait to realize its earning potential. If Zomato can reap what it has sown till date, it will be an Indian Giant in the making.

So now we have the conceptual framework of valuing E-commerce ventures. I wanted to cover and assess the strength of ventures like BookMyShow, Moneycontrol and Firstpost etc. These are all part of Network 18 media and investments which is now owned by Reliance Industries ltd. I never have the faith in any of the reliance group stocks whether it is belonging to Mukesh or Anil Ambani. I don't think that they can ever place shareholders ahead of their personal gains. So Reliance is the major negative for Network 18...that's why i am giving it a miss here and may be forever.

(Views are personal and should not be taken as a recommendation for buying or selling a stock. Stock markets are inherently risky so kindly do your Due Diligence before investing)

Venky's India Ltd-Q1-Result Update

For old study on Venky's, Click Here

Results are great. Further improvements in raw material prices with low inflation coupled with normal monsoon may result in even better results in the future. Scope of growth and expansion is always there.

So just hold it. Chicken is just marinated...Enjoy the full Barbecue.

Venky's Quarter June-15 Results ( In Cr )
	Q1-2015-16	Q1-2014-15	Var%
Turnover	558	441	26.53%
Operating Exp	522	429
Operating Profit	36	11	227.27%
Net profit	15.82	1.58	901.27%

(Views are personal and should not be taken as a recommendation for buying or selling a stock. Stock markets are inherently risky so kindly do your Due Diligence before investing)

Specialty Restaurants Ltd: For the Special Ones who loves Food

Starbucks is not just a Coffee chain in USA….it is not something out of normal life. In fact its owners always wanted it to be a part of people’s life. And they have indeed made it a 3^rd most important place in anybody’s life after home and office. It has become a place where people come and absorb the atmosphere and leave afresh. Starbuck coffee is like a staple food for an ordinary American.

This is the meaning of a restaurant/Coffee House etc…these are not for selling food items. You come and leave with full stomach. It is much more than this…it is an experience, it relaxes your senses, you absorb the style quotient. But it is for a price not cheap….and so we Indian realize that we are yet to experience this style and intoxication. Because we were not having money earlier.

USA is a house for around 100 global restaurant and fast food chains which have multibillion revenues. Compare this to india and we have none. We are not having a local chain which have pan india presence leave out the dominance. We have heard the names of global giants Mcdonalds, Domino’s Pizza, KFC which are expanding like anything. Nothing Indian is on the scene. But leave Pizz and pasta, and we Indian do not like anything of Italian cuisine. So as is the case with Japanese (Sushi) and Chinese … we find most foods of these flat. This is true for any person from any country…he can try something sometimes but he will not cross his own cuisine.

So, we Indians have no chance of leaving our tasty creamy food because you won’t find like it anywhere. It is unique. But for us food was always homemade, mainly because so many of us could not afford to high quality food outside our homes.

All in all, I strongly feel that we are very near to have big ethnic Indian food chains. Biggest of Indian food chains are having revenues of 300 cr to 500 cr which is too  low for such a big country. Specialty Restaurants Ltd which is having around 120 restaurants all over india is one such company which can become a big player. It is having all the ingredients in place and after some time, the recipe will be there to relish. Its quality of food is awesome, service is top quality, rates are very reasonable. It is paying attention to every finer detail for making its food out of the world. Like for its Mainland China restaurants, which serves the authentic Chinese foods, import most of spices from china itself. It is the only one with Chinese food in india which tastes like real Chinese food. It is having Chinese cooks.

Mainland china is 57% of its total revenue, Oh Calcutta is 10%...so it has rightly focused on ethnic Indian cuisine now with Sigree , Machaan and Sigree Global Grill which serve the some of the best classical north and west Indian foods. It is having difficult times for past 1-2 years mainly because of high food inflation as due to low demand it was not raising the prices in its restaurants. It is also focusing on reducing its costs like local sourcing of most of the spices for Chinese food chain. 

But with inflation slowing and economic growth returning, it can surprise with the results. It can grow bigger as it is having nil debt with funds from IPO still lying in the books. Turnover is around 300 cr which is low. I am placing my bet on the scale of operation which is possible in india.

I have entered at 144/- in it and now it is at 160/-. I will post another analysis on this with more details but those who believe in the notion “A balance diet is a big piece of Tandoori Chicken in each hand” can invest in it for a long time.

(Views are personal and should not be taken as a recommendation for buying or selling a stock. Stock markets are inherently risky so kindly do your Due Diligence before investing)

Info Edge India ltd and Network 18 media & Investments Ltd: Dotcom Bubble was Created not Happened!!

American Netflix deals in online streaming of movies and video content. Is it a very complex business? No, it is as simple as watching movies. But Netflix is a Giant. Its market value is $49 billion (around 3 lac crore), Revenue is $ 5.5 billion with NP of $ 267 Million. It is trading at a massive PE ratio of 250. Its NP is lower mainly because of huge investments being made for global expansion and acquiring licensing rights for new data which will only add to the bottom line once it is over with its investment phase. It is having subscribers base for its streaming business of 62 million worldwide, with around 40 million in USA and 23 Million global. Apart from licensed content, it creates exclusive content which only add to its brand image. As per latest estimates it will cross around 180 million subscribers worldwide by 2020.

Just imagine, its profit growth with this kind of numbers. Even if I take its minimum plan of $7 pm (around 500 per month), total revenue will be around $17 billion. I cannot count its net profit due to lack of data regarding its cost structure, but taking maximum costs as fixed costs for licensing and data delivery costs which are not huge and offer around 10 times profit as compared to price paid to service provider. So I can take 20% NP margins and we’ll have a net profit of $ 4 billion in 2020, which is based on its lowest subscription model NOW, it will of course raise the prices also. And any price increase will mostly transferred into net profit only. So we can take this net profit of $ 4 billion to 7-8 billion and comparing this $ 4 b and $ 7 b with current market cap of $ 49 b does not make current market price too expensive.

It is also in DVD rental business via mail and it developed a patented process to look after this complex business. I will entail more details about Netflix’s technological expertise and edge in delivering the content in some other time.

Welcome to the 2^nd round of DOTCOM! And this time it is not floating like bubble, in fact seriously huge data is flowing through this. Netflix alone account for almost 1/3^rd of total peak network data in USA.

Our previous Dotcom era was destined to be a bubble, huge investments just made it huge. At that time E-commerce growth model was based on slow internet speeds, too high internet data costs, very low numbers of PC leave alone laptops and please don’t talk about smart phones, poor design of websites with little security, online payments system were very doubtful. These were all related to infrastructure which was indeed a big hurdle. But still successful business plans can be built with lowest possible infrastructure if they are planned sensibly and within limits and calculated risks.

But along with irrational money and over enthusiasm of investors, the main culprit was poor business models of those companies, which raised millions-billions of dollars for businesses which were based on unreal astronomical visitors/users of their online services. Every software company was touted as next Microsoft and every college dropout was starting a software company in garages and issuing shares to its employees as salaries who thought they would get millions after selling them. I am enlisting few of them:

Webvan: launched in June 1999, where users can order their groceries online and have them delivered to their homes. Webvan raised around $ 1billion. However its idea was good but it did not pay any heed to slow internet speed, high cost and very low penetration levels. It was dealing in getting goods and storing them in warehouses. Hence it needed huge staff, massive amounts for warehouses, cutting-edge automation and servers to handle orders. Rather than going for slow growth, Webvan invested $1 billion in state-of-the-art warehouses.

So no doubt, it did not witness any such growth and went bankrupt and shut down in July 2001.

Boo.com: founded in 1998, was meant for showing fashion trends and deliver fashion and sports clothing and accessories to customers all over the globe. It spent $42 million on an ad .The site featured an animated assistant called Miss Boo, and the ability to drag clothing onto models, zoom in on items and see them from all angles. Indeed that was a good technological stuff, but in that time of slow internet, less powerful computers…it provided a very bad user experience also because users had to download its software which was not compatible to most of the computers. Costs were way too much, photographing the goods cost $ 200 per item. The site had to maintain versions in multiple languages, and deal with currencies, taxes and shipping for regions all over the world. Clearly the model was unviable and it went bankrupt in 2000.

I have listed these two cases, because we can find similarities of businesses of these with today’s Flipkarts. But as we can see, the main fallacy was not the lack of infrastructure but their business plan which was based on unreal forecasts.  That type of growth is very much possible today with the support of technology. Amazon.com also belongs to the same era…but it survived as it was rational in its spending and dealt mainly with books. This low cost model helped it in building brand strength and when everybody was out of the E-commerce arena after small bouts…it relished and flourished.

You will be amazed to know that during Dotcom bubble, Google was up for sale for $ 1 million but nobody was interested. Today its market value is $ 434 billion!!! You see, people became over fearful and failed to realize that internet and computers were going to change our life just as oil and telephone did.

Info Edge India ltd and Network 18 media and Investments Ltd: I am looking to find any such opportunity in india where underlying idea is scalable. I have shortlisted Info Edge India ltd and Network 18 media and Investments Ltd.

Info edge is the house for Naukri.com, Zomato, 99acres.com, Policybazaar.com, Meritnation.com, Canvera.com.

Network 18 is having whole TV 18 broadcasting business, Investments in BookmyShow, Homeshop18, some of the best portals in india like Moneycontrol.com, its business portal and Firstpost.com, its very unique view based news portal.

I have already invested in Info Edge at 700/- recently. Network 18 I am still studying. But all these are very complex businesses and analyzing these require huge time. So I feel this blog post will take more than one post to cover at least most valuable businesses of both.

E-commerce start ups are unique in many ways from traditional startups; hence it has its own set of rules to value these startups. The most unique fact is the capacity to leverage and grow the business many fold with existing infrastructure setup. With every layer of business growth, most of the incremental revenue goes to the bottom line. So scale is the most important metric and hence these should be valued on the basis of forecast of scale which should be realistic. This realistic forecast is the most difficult part.

But Indian E-commerce startups have one benefit which was not available to their western counterpart and that is experience and data available from western world. Indians can build their business model on the basis of them and chances of failure become very low. Just like our Flipkart which based its business model on Amazon and played a relatively safer game.

But most important test for E-commerce businesses is entry barrier, existence of moat or threat of competition. Moats enjoyed by E-commerce businesses are of different types so as are entry barriers. People say that anybody can build a website and start an E-commerce venture.

Let’s take the example of a Newspaper shop in a small city. It is there for years, giving good service selling plain newspaper. There opens a new shop to sell the same paper with same set of service. How many of us will switch to new shop? Perhaps none. We don’t want to take the risk of taking the experience of a new set of environment, processing it over a long time and then having a conclusion which at best will be equal to our current experience. So why should we take so much pain to have the set of experience. This is the moat.

Take Naukri.com…it is having the 70% share in online job market in india since it was the first of its kind in india when it started. So it is having the largest store of resumes, Job seekers and largest number of employers listed. So every new job seeker will go to it thinking that as it is having the largest number of employers so chances of getting job are high and similarly new employers will go for it to hire new employees thinking that it is having the largest depository of job seekers. This will become a circle, a loop which will absorb more business.

Zomato also enjoys the same…as it was the first of its kind in the world because its huge army go to each restaurant in a city and get the most possible data and pictures regarding menu, prices, location etc. so it has built a huge inventory of data of restaurants which is very difficult to replicate. Because as we know that Zomato is the biggest, so whenever we want to search for a nearby restaurant we’ll go for it as we know that chances of getting a listing is higher with it thanks to its huge inventory of restaurants. That thing will make more restaurants willing to list their data on Zomato.

However good service and strong backend infrastructure is equally important. Just having an online portal will not suffice. Like Flipkart, displaying items and getting order is the easiest part. But order processing, inventory management, stock return management are the most critical parts. Although Flipkart does not follow classical inventory based model in india mainly to counter the FDI in retail norms. So it is operating marketplace model where it works as an agent between a buyer and a seller and it charges for its service.

But this model makes Flipkart having little control over quality, availability, problem solving…and as it provides very little value addition in this process so any big competitor can set a shop against it. Just like Amazon is doing it, it is following inventory based model in india as it is having its own cash. Just remember the crash of Big Bang sale by Flipkart on Oct 6, 2014, a case of having lesser control over the process. We’ll cover this later on.

The important thing is, if Flipkart aims at surviving marketplace model then it should raise its technological expertise to very high standards. It should incorporate unthinkable technological aspects for the shoppers like third party evaluation of the products of different brands and their value for money index. It just cannot be a order processing software…it should make shopping at its portal a memorable experience. It is a technology company.

So an E-commerce venture first of all should add value to a process; either by lowering costs or by substantially reducing/saving the time required or by helping choosing a better product. Unless it pass this first test, the survival is a passé.  Just like Moneycontrol.com, which stands miles above the other financial portals in india. The quality of data, presentation, relevant news, analytic tools, user interface etc is just unmatchable which provides it huge brand equity. I am using it for last ten years and have not even thought of trying/using something else.

In the next part (probably by Tomorrow) we will cover the Zomato and BookMyShow as these are the most important parts which can contribute maximum to a future windfall.

(Views are personal and should not be taken as a recommendation for buying or selling a stock. Stock markets are inherently risky so kindly do your Due Diligence before investing)

Facebook Page for Our Blog

Dear Friends,

Just made a Page for our Blog at Facebook. Address of the page is https://www.facebook.com/oscillationss

Regards

Gurpreet Singh.

Gujarat Borosil Ltd: Sun will Smile on It

For earlier post on Gujarat Borosil: Click here and here

Gujarat Borosil is still under scrutiny and I am buying it very slowly at every fall. But due to current scenario of solar power in india and globally , I feel it is better to wait for some more time to let the things fall in place and in order. However one of our reader Sh Sridhar has posted some interested queries on Gujarat Borosil. I am trying to answer them with this post.

First, let us have a firsthand detail of the solar panel industry. Solar panel is a combination of many components, which are encapsulated and bind together. First quartz sand (silicon) is processed into polysilicon, which is a very energy intensive and costly process. Around $100 million are required for setting up 1000 tonnes polysilicon facility. So no wonder, we have none here in india. Around 70% market share is with top 3 companies from Germany, USA and China. This Polysilicon is used to make ingots and then ultrathin Wafers which are finally used for making a solar cell. This is also a capital intensive process. This process of sand quartz to solar cell accounts for around 60% of total cost of a solar module.

                                Polysilicon

Cell manufacturing involves creating the all-important pn-junction, coating and layering. It is an important step in the value chain responsible for about 20% of the total value addition, and it is here where significant technical differentiation is created.

While the largest Indian manufacturer has the cell production capacity of less than half Gigawatt (500MW), the average being less than 100 MW, Chinese manufacturers have the average capacity of morethan 1 GW. This is the combined cell manufacturing capacity of all Indian producers. Even the US has anaverage manufacturing capacity of about half a GW. China’s total annual production is around 40 GW.

Due to this smaller size, Indian cell manufacture companies are unable to reap the benefits of scale of operation. Also during the good times of 2005-2007, when Europe was on a growth phase and Govt were supporting solar power big time by giving high tariff and huge subsidies; all this resulted in huge solar cell manufacturing capacity which was way above demand. So when recession crept in Europe, Governments there discarded their renewable energy bandwagons. This coupled with rise of china resulted in huge global over capacity and prices crashed world over.

Indian opportunist companies, which didn’t have technical and financial clout for solar business, also joined the race somewhere around 2006-2008. But they were just assemblers…they imported everything and then made solar modules (Indian Module capacity is around 2700 MW) of them without any value addition and they were very happy that they would capture the Indian market after initially focusing on export market as they were thinking that with low cost assembling they would be able to penetrate into global arena (poor dreamers). Yes, they added small cell manufacturing capacity also but this was not a very high tech process. But they underestimated Chinese producers who came with a bang and shaken everybody.

So after Global meltdown and death of many western solar producers, Chinese and western producers started dumping their solar panels everywhere in order to capture market share and to recover some of fixed costs. They suffocated tiny Indian producers with their cheap prices. Indian Government is investing big on solar power to stave off the coal crisis and providing power to the farthest corners of india which are far away from the grid. Cheap solar panels from Chinese and western producers brought the cost from 15 Cr per MW to 7 Cr and now it will achieve grid parity soon.

 Indian producers were forcing Indian government to impose anti dumping duties on them as they were dumping their products. Although they were right but Indian government did not approve the same. Indian producers cannot meet the high capacity requirements of solar power producers who are investing big in solar power and so far around 3000 MW capacity has been  created in india. Indian Government has plans of 100000 MW by 2022 and Indian producers are just not capable of supplying this much solar panels. So any imposition of duty will only raise the cost of solar power and will defeat the very purpose of affordable power to all.

Moreover unless we create big capacities for upstream raw materials like Polysilicon in india, we can’t harvest the best out of this whole solar power process. So even if we create huge cell manufacturing capacity, the benefit to Indian economy is minimum as long as we continue to import Polysilicon wafers. This is just the other side of the same coin, at one side we are importing 100% for 50 and on the other we are importing 90% and after adding 10% we are paying 80. This is just wastage of resources.

Indian solar power producers are using Thin film solar panels which are cheaper as compared to Polysilicon solar panels, but they require more land. The term "Thin film solar panels" refers to the fact that these types of solar panels use a much thinner level of photovoltaic material then polysilicon solar panels. Thin film solar cells consist of layers of active materials about 10 nm thick compared with 200- to 300-nm layers for crystalline-silicon cells.

So where land is not a issue, producers are using it. But they are not efficient, with their efficiency is around half of polysilicon cells. So you take into account high land cost, high installation cost per MW due to more panels per MW, Lower efficiency, rapid decrease in power production and all the cost benefits disappear. Against a global average use of 10%, Indians are using it at 60%, which is way high and i think it will come down with more rational policies from the Government.

Now coming to the Glass part of the Game: For crystalline cells, solar glass is used for protection and performance enhancement. In the case of thin films, glass is used as a substrate. Solar cell inside the panel is a very delicate and costly component, so it should be protected from any external shock and dust which can impact its performance badly. Glass is best for this due to its strength, durability and most of all it can allow uninterrupted transmission of solar rays and with some coating can prevent reflection of sun light of its surface. All this is just perfect for solar cell.

Contrary to silicon, india is having all the ingredients available for making high quality solar grade glass starting from raw material to technology. Saint Gobain is doing the same in india. Gujarat Borosil was only Indian company to do the same and it has got all the necessary European certifications for export. Gujarat Borosil manufactures low iron glass all the way from making glass from silica and then curing the iron impurities.

So far it is supplying the glass to Indian cell manufactures (with only 1000 MW capacity!!!) which are just working at only 30-40% capacity (only 300 MW). It is also exporting some of its production.

I am putting by faith on Gujarat Borosil due to some reasons. Like, Some Chinese companies will surely look to shift some of their manufacturing base to india in order to stave off the high import duties imposed on Chinese solar products by USA and European union. By sourcing solar panels from india, Chinese manufacturers can become more competitive in the U.S. and the E.U. The move could lower the duties and related trade-restrictions that they face on its cells and modules that are currently manufactured in China. Earlier this year, the U.S. International Trade Commission approved the imposition of final duties on Chinese and Taiwanese photovoltaic imports, anti-dumping duty of 30%40 and a countervailing duty of 50-60%.

Infact , One Chinese company Trina solar has big plans to invest $500 Million india for creating 2 GW solar manufacturing capacity. Apart from avoiding USA trade restrictions, It can take advantage of low labour cost of india. The hourly labor cost in India for manufacturing averages $0.92, compared with $3.52 in China, according to Boston Consulting Group. Although I think they will only create Cell and Module capacity in india, but Gujarat Borosil can take advantage of this. Due to its integrated production capabilities, it can compete. Actually Glass is a heavy product, it comprises a low value part of a solar panel, but it comprises of 60% of weight of a solar panel. So it is very costly to transport glass to long distances…so I am very doubtful that any company can cater to global markets from a single source. Glass market will be regional. Gujarat and Rajasthan Governments are supporting solar power big time, so Gujarat Borosil will surely capture the major part of this market.

Also, at present indian solar power producers are importing Thin Film solar panels, which use glass as base, hence these can't be imported without glass. but when indian producer will focus more on Crystalline solar panels due to their benefits and life cycle cost advantages, then it will be best for them to import them without glass to reap the benefits of low transportation costs and then encapsulating the panel in Glass in India. This game can be played also by foreign supplier who can create Glass assembling facilities in india to compete with others. There can be another face of this game like any big indian solar panel producer can do the same by importing solar cells and supplying them to solar power producers in india after adding Glass onto them. But it is best if Glass is applied here in India...it will surely save big costs along with breakage during transit.

I am sure Indian Government will make supporting policies for local industry but only when it will be big enough. We will surely see big investments in solar panel manufacturing in india.

I  think Gujarat Borosil is doing right by waiting at the corner. It can enhance its production capability any time when scenario will turn favorable. Its low debt will enable to take debt for any such capacity enhancement. It is recognized globally due to high quality of its products. 

(Views are personal and should not be taken as a recommendation for buying or selling a stock. Stock markets are inherently risky so kindly do your Due Diligence before investing)

TVS Electronics Ltd

Made a small entry in TVS Electronics Ltd around 43.50. i remember when i picked Gati/TCI and other logistic companies 2 years back focusing on coming demand from E-commerce sector when nobody was aware of it. It worked great and all of these turned multibaggers. stock market is all about seeing in the future; that too ahead of others.

Now I am focusing on outsourcing of warranty and after sales services sector. There are crores of Laptops and smart phones in india and number is rising fast. Companies need to invest big in setting dedicated Warranty services units. But they can save huge money by outsourcing these services to third party service providers like Logistics. So I feel this can be a big business in india.

 I bought smartlink sometimes back around 50 on the same theme although it has a great name in networking solutions and other IT hardware products.It is now around 94/- and  with one good quarter can touch 150 as it is having 113/- cash per share in its books as a result of sale of its Digilink brand few years back. It is investing big in setting up distribution channels for its IT and networking products under the brand names of Digisol, Digilite and Warranty service business under Digicare.

Now I find another one..TVS electronics Ltd which is a leader in Dot Matrix printers in india the demand for which is on a decline. So it has set its eye on retail sector and established a great brand in Point of sale devices like cash registers, Scanners, POS terminals, displays and POS systems etc with the brand name INDIPos. One can see these in all retail chains across india and demand of these will only rise with the growth in organized retail. Even small stores are investing in these due to huge savings in time and ease.

TVS-E has a great name in warranty services business in india and it is the authorized partner in india with Xiaomi. This is the business which along with retail POS products will change the fortune of this company.

It achieved turnover of 270 cr in 2014-15, however raw material costs are good at 102 cr which means it is manufacturing significant amount of products in its own units. Interest cost at 7 cr for a debt of around 57 cr is high but with proper planning this can be taken care of as it is working capital debt. Inventory, debtors all looks under control. Profit margins are not that great because of scale of operation and high interest costs which is eating away 90% of operating profits. But all these constraints represent prospects for high growth. I did not get much time for further study into its products and financials…will post second post on it with greater details.

I strongly feel that this sector will see huge growth. But invest with caution as it should be treated as risky although it is from the house of TVS. I always prefer risky stocks from good promoters like we did for NIIT. It is already trading near 50/- after we picked it up at 37/- as market is realizing the strength of its focus on changing its business model with more focus on corporate learning and skill development.

CMP is around 44/-

(Views are personal and should not be taken as a recommendation for buying or selling a stock. Stock markets are inherently risky so kindly do your Due Diligence before investing)