Book Review: Animal Farm

It is a timeless classic. It is a portrayal of Russian historical personalities in the form of animals in a farm. It is about how the revolutions happen but the purpose is short lived as the hunger for power kicks in.

Animals in a farm coming together and rebelling against the dominant farm owner with a purpose to lead an idealistic life of treating all animals equally is the story theme. While they find success in their rebellion, aftermath life of the animals living in peace and harmony is short lived. The purpose is soon lost as one of the leaders of the rebellion, a pig named Napoleon, becomes power hungry and takes control of the farm by force and tactics. He manipulates the commandments all animals agreed to follow to suit his best interests. New order emerges and inequality comes back.

What makes this story interesting is the narration of animal characters resembling human like personalities and how the platform for a rebellion was prepared and purpose is lost. George Orwell has simplified the historical events in Russia to create this story and characters of Animal Farm. But even if we keep this Russia background aside, this book makes a quick and entertaining read. The impact can last for many days, probably a reason for this book to be in print for the last 100 years.

Opinion: Reading habit in children: Is it reducing?

Pose this question to any parents, they immediately agree without giving it a thought. And would add on how the new generation kids & young adults are glued to TV and gaming. Is it really so? But the formal studies and data suggests otherwise. Of course, research does not rule out that preferences of young have changed and electronics media is getting a prominence. But it shows that there is significant improvement in readership, both in absolute terms and percentage (%) terms. How so? Who and what is right?

The numbers of readers is going up because literacy figures are improving in India. Social awareness and many of the Govt. programs have ensured that all (well, almost) get primary education. Thanks to child labor laws. School dropouts have seen an impressive reduction over years. With that background, these students putting hands on a comic book will add to readership figures of the research study. So, the macro picture says, more are receiving education, so there are more young readers on average and absolute terms as well. There is a significant improvement at the bottom of pyramid and they understand the importance of education. But as we move up the layers, experiences begin to differ.

Any well to do family (who are well above poverty line and have sufficient spending power) will provide a different perspective to it. The grandparents in these families observe that, their grandchildren spend less time in reading (non-text books) in comparison to how much they or their children were spending when they were of their age. This observation is consistent across all geographies of India irrespective of language or religion.

So what changed? I think it is just the choices or alternatives available to reading brought this change. If Television was made available in every house some fifty years ago, it would have brought the similar impact then as well. Multimedia always scores above reading in conveying the content. Reading needs effort and attention but you can watch a video even when you are tired and you can say it is relaxing. See, now we know it is not the issue of younger generation. It is the instinct of a human being, preferring to be a social animal. A human naturally prefers to listen and watch others and appreciates other human beings in action, so a movie becomes a mass media having a wider reach than books. Human beings express emotions many a times without saying a single word, through body-language/gestures. And when talking variation in tone & pitch convey lot more than what the person says verbally. These can be captured in multimedia formats, but in books it would take many pages to describe them in detail. Tolstoy did a fine job of writing what was going on Anna’s mind in his novel Anna Karenia. It would take readers many days to months of reading to read the entire novel, but movies made based on the novel reached more people than same novel, even though it is hard to give complete justice to the masterpiece novel. Even in the times when movies were luxury, there were drama/plays doing that job.

Let us come back to main theme. Is readership getting reduced in the younger generation? No, it would only get better. But the quality of reading or number of hours spent in reading per child reducing? Probably, yes. But not for bad reasons. The new generation reads less because they have alternatives. Chota Bheem on TV appeals more to them than reading Amar Chitra Katha or a Phantom comic. It is fine. But is this engaging in effortless activities diminishes imagination or creative skills in the young? May be yes, but let us not conclude without looking into facts and figures. Let us discuss it sometime later.

Opinion: Consumption story in India: A dark cloud or a silver lining?

Retail space in India observed a meteoric growth in the last decade. It created new billionaires in the likes of Kishore Biyani and made many multinationals open stores here. Spending long hours in the malls during weekends became part of life. Feeling depressed? Go shopping. So wrote newspapers. Shopping became favorite time pass for housewives more than ever. Everyone opened their purses and spent. From buying clothes to having pizza’s for lunch and traveling to faraway destinations during holidays. Consumption looked like an unstoppable for train, almost.

 Consumption growth was lot higher than income growth for a longer period. But we are noticing signs of it slowing down now. Car makers reported sales dropping Year on Year basis from January to July in 2013. Mall operators are complaining that incoming crowd is increasing but it is not tuning into sales. New companies entering into retail space are reducing in the middle of intensifying competition. Few retail chains are up for outright sale. So what changed so quickly, is it a temporary phenomenon? When do we see uptick again?

Well, before looking into what changed, let us look into what were the growth drivers behind consumption during the last decade. India’s per capita income rose by 6.7% during 2004-2012 (Source: The Financial Express; Link: http://www.financialexpress.com/news/indias-per-capita-income-rose-by-6.7-during-20042012/1159884). But the retail stores were clocking a much higher revenue growth rates during the same period. Some of them doubled their revenue in 3-4 years period. How consumption growth was higher than income growth? Following factors would have helped.

1.   Pent-up demand: The rich class in India had spending power but had very few options in acquiring finer things in life. If we take example of Sports Utility vehicles, there existed an unmet demand.  But there were no wide range of SUV available here in India ten years ago. Import duties for an SUV like Hummer were prohibitive. As the products in this segment started coming in, like Mahindra’s Scorpio, they saw unprecedented success.                                                                      
2. Easy access of credit and EMI: The middle-class India always had desires to acquire goods which will better their lifestyle but had a limitation in their upfront spending. This opportunity was unlocked by spot distribution of loans at the shops and easy payments through EMI, the term which was not well known before. When the consumers walked into retail shop and found that the latest refrigerator they wanted to own is available on easy installments, they went ahead in acquiring it many months ahead of what they had planned earlier. So they not only spent their savings on hand but borrowed from their future earnings as well.                                                   
3. Reaching the semi-urban & rural market: Majority of India’s population lives in rural area. Even though demand for luxury goods was non-existent there, but the necessary goods were not in easy reach for middle class consumer. Traveling to towns to buy them would mean additional costs and efforts. In the last decade this gap was widely filled. You can find a Hero motors showroom in a town having less than 50,000 populations these days. But it was not the case a decade ago. Maruti gets significant sales from towns which are not part of top 20 towns of India. As they expanded, their sales also grew linearly and for market leaders, it was exponential growth.                                                                                                                                
4. Rise of high income jobs & trickle-down effect: Thanks to boom in IT & Pharma sector which became new employment generators for booming India. Top 5 IT companies employ more than 10 lakh engineers in India whose starting pay is higher than what their parents earned during their retirement time. One high paying job in this sector, almost created 3 jobs in the service sector in the form of services provided by banks, hotels, transportation, housing, education, healthcare etc. These globe-trotting engineers were also messiah of globalization. The set new trends in consumption, creating a new segment of consumer class.

So, the run in consumption too, like all good things in life had come to a pause. Higher interest rates, stubborn inflation, global economic slowdown, local Govt.’s inaction had an impact on India’s economy. GDP growth rates have reduced, so is consumption. But all is not bad to bring things to a halt. This too shall pass. But the drivers of consumption would be different. First movers had an advantage in serving the pent-up demand during the last decade. But that does not work again as consumers are aware of the choices they have now. Here is what I think will be the drivers of next wave of consumption.

A.  Affordability: A basic digital camera is now available for Rs. 5,000 while the same was costing at least Rs. 10,000 few years ago. This kind of driving down in the prices with innovations in technology, supply chain optimization and passing the benefit to end customers will make products affordable to larger consumer base. This would break the relationship between income growths of consumers to the kind of goods or services they consume.

B.  E-commerce: Flipkart is here. The biggest market place of the world, Amazon, has also arrived. e-Bay is seeing consistent growth in user base. E-commerce is set to make it big, at least in the urban India. I wonder when I see the books I ordered reaching me 1-2 days in Bangalore even though their inventory base is Delhi, Mumbai or Kolkata. My wife buys the designer sarees from sellers based in Surat without having to stepping out of the comforts of the home. Of course, touch and feel experience is missing but consumer has more options than ever. The inventory these e-commerce platforms offer are unmatched by local malls. So whatever you want, you can buy it without going around the world, like in the past years. Consumer is king, as always. E-commerce is another enabler for that.

C.  Younger generation joining the workforce: Unlike Europe or Japan which have a major share of citizens enjoying their pension than paying income tax, India has a majority of population who are in their twenties and getting ready to join the workforce. They would take up the per capita income growth to double digits in the years ahead. They would create a virgin market, both in electronic goods and fashion & lifestyle market, rejecting all the influences of former generations.

D.  More people moving out of poverty: The trickle-down effect of economy will continue, may be at a higher pace, as witnessed in the history of developing economies as they turned developed nations. That would put more people who are living on the edge of poverty line into middle class that would fuel the consumption.

Caveat to this expectation is a recession for prolonged times leading to job losses, and causing destruction in quality of life. But as an optimist, I see the next wave of consumption beginning in a year’s time.

A trading opportunity in Wipro as it gets back to Nifty index

NSE has announced that Software services exporter Wipro Ltd will replace Reliance Infrastructure Ltd in the National Stock Exchange's 50-stock index, or Nifty effective September 27. (Source: Economic Times, Link: http://articles.economictimes.indiatimes.com/2013-08-28/news/41538702_1_reliance-infrastructure-ltd-wipro-ltd-nse)

This would lead to similar adjustment in many mutual funds and ETF’s which are bench marked to Nifty index. So there lies an opportunity to go long in Wipro. But at what levels to enter and how long to hold?

1. Let us look at the timing. Effective date is Sep 27. September series expires on Sep 26. While there is a possibility that funds will begin making changes in September series itself, there is a little chance they may carry it to next series as well. So traders building positions in futures can better opt for October series futures. Traders using option route can build position in September series now but move the positions to October series before a day or two of September expiry.
2.  Levels: Let us take a look at option chain of Wipro. Since we are looking for a support level to enter, we need to look into the Open Interest (OI) build-up in puts. We can observe that significant OI is at 460 strike price. This would be a stronger support level for this series. Any dip below 460 is expected to give a bounce back unless OI reduction is observed. Similarly, to estimate the level of profit booking, we need to look into OI in calls and we can observe significant OI build-up at 500. This would be the level where stock can find good resistance, so an exit point.

Source: NSE Website data as on Sep 06, 2013 

This data can change quickly. And any other macro-economic events impacting the broader market may also affect the expectations. Future traders can buy at-the money put to limit the damage in such an event.

Company Valuation: How do you value Flipkart?

Flipkart's valuation: Will it increase if there is no IPO?

Since Flipkart is a marketplace, it does not own inventory of goods sold on its site. So inventory cannot become part of the book value of Flipkart. That leaves the Brand Value and investments in Technology as its part of valuation.

The customer base and their loyalty would be a pretty impressive figure for Flipkart. But the question is, will it keep growing or find saturation any time soon or see a negative growth with changes in the way of doing business.

For growth to remain to intact, following factors should remain same or get better.

1. Benefits to customers (Discounts, Delivery costs, Minimum purchase price) without impacting operational costs of the firm
2. Sufficient operational profits or new investment to fund growth and the the capital structure shall offer acceptable returns to the investors.

Let us look into those factors in detail.

1. Discounts, Delivery costs and Minimum Purchase Price

If we take a look at their revenue segmentation, books form a major category. Flipkart was almost unchallenged in selling books through online mode with its vast span of books listing and superior service quality. But the arrival of Amazon brings in a tough competitor. For now, free delivery irrespective of purchase amount would become a positive factor for Amazon (when prices match for the product on both websites). But if we assume that Amazon too will have to charge for delivery sooner than later, who will consumers will prefer, Flipkart, Amazon or the neighborhood bookstore? If the book is available off the shelf in a nearby bookstore, is priced less than Rs 500, then why buy them on portal, and wait for couple of days and cough up additional Rs. 50 for delivery? This is when discounts in brick and mortar stores match with the online portals. But the inflation will not let the delivery charges for online stores remain same. What will be the effect if the minimum purchase amount is raised or the delivery charges go up? Will they be able to maintain the sales figures?

India is a price sensitive market, so the customer loyalty can quickly change whenever there are changes in pricing. Whoever prices aggressively will have an upper hand. Let us see how one portal can price it lower than the other portal when the product is sourced from the same supplier? In case of books, a new book will have just one publisher, so the same source of supply. If we assume that online firms (vendors on Flipkart or Amazon or any other site) gets the same purchase price from publisher, then operational excellence will decide who can sell it at a lower price. Operational excellence would mean keeping the costs low by reducing wastes, overheads, optimizing the routes and keeping the firm lean. How lean one firm can get? What are the risks of operating with thin margins? Will investors be happy with those returns? It leads question of capital structure of those firms. Who has funds available at lower cost? The firm having a larger equity base would have an advantage over the firm which has to service the debt or offer higher returns to PE investors.

2. Operational Profit, Capital Structure and RoI

Due to intensity of competition, Flipkart will have to match selling prices with competition; else its revenue growth will slow down. With that acting as a ceiling, margins will be under pressure. It not only has to make profits per transaction but has to offer positive returns on investments. Currently Flipkart is funded by Private Equity (PE) investors. Since the successes of PE funds are measured with their exits, mostly with 5-7 years time span, it will apply to Flipkart also. Unless PE investors have a longer time investment plans for Flipkart, IPO would be the only exit route for current investors. For IPO to be successful, equity markets need to be in good mood. Are the stock markets conducive for IPO? If time is not right, then it will have to go for one more round of funding from PE or generate sufficient operational profits in order to survive. Increasing profits would mean lesser discounts or higher delivery charges to customer which will hit sales figures. Dropping sales would impact the valuation which is done now at higher sales figures and growth rates. 

However no one knows what the future holds, but we can think of three possible scenarios.

Best Scenario:

IPO happens at higher valuation, Flipkart gets good equity base. Amazon reduces its aggression, both Flipkart and Amazon will grow.

Worst case scenario:

IPO gets delayed, and there is no further funding available. Amazon steps up competition making use of its deep pockets. Flipkart will be forced to invest less in growth and start making profits to survive. Valuation drops from current level.

Likely scenario: 

Both Flipkart and Amazon reduce predatory pricing and look at having a balance with profits. They may work out exclusive contracts with suppliers to avoid selling the same product, wherever possible. Brick and mortar stores may find a relief with new operational models and peacefully co-exist. Flipkart's growth rates may reduce and valuation will also find it difficult to go up from here.