The Medici Effect: On Innovation

On Innovation

Innovations are most commonly found at intersections. If innovation is chance driven, combining two unrelated subjects, exponentially increases the chance of new innovative associations (which makes for radical innovation rather than incremental innovation)

How to increase chance of innovation by leveraging intersections?

1. Consciously combine unrelated concepts
2. Work with people with diverse experiences

Effective Brainstorming

Contrary to popular thinking, 'N' people brainstorming together come up with lesser number of ideas than 'N' people thinking individually. This happens due to 'blocking' (In groups, peoples' short term associations get blocked by others)


Source: The Medici Effect

FT MBA Ranking- IIM-A Ranked 11th and ISB ranked 13th

Indian B Schools are making it big at the world stage. IIM-A has been ranked 11th and ISB has been ranked 13th in the global survey of leading B Schools. What is fantastic is that ISB is only 10 years old institute (when it figured in the top 20 it was only 6 years old) and IIM-A's PGPX program (for which the ranking applied) is only 4 years old.

While there are numerous areas where these schools can improve, one cannot doubt that these schools do attract quality students and in turn they provide superb learning environment including world class faculty.

Maybe an Indian school in top 10 next year. Cheers to that!

11th Five Year Plan - Plan Versus Actual Spending On Education

In one of my earlier posts, I had pointed out a 5x increase in allocation for education for the 11th five year plan (2007-2012), by the Government of India. This was a welcome change for a sector that had been severely lagging, despite everyone wanting to do something about it. With a progressive education minister, one hoped that things would improve and improve fast. However, while there is definite action, the pace still leaves much to be desired. Many of the bills introduced are still languishing, for a reasons best left unsaid on this blog. Perhaps a telling graphic is the one below, which plots the Planned outlay vs Actual expenditure for the 11th five year plan. The fourth year is coming to an end and has let a huge gap to be filled in the last year.

1. Of the total plan outlay of  Rs 273 K Crore, only 28% i.e. Rs 87 K Crore was spent in the first 3 year (2007-2010)
2. Planned expenditure by Central government during FY11 (as per budget) is another Rs 42 K Crore. 
3. Assuming all of this money is spent as planned, this leaves a gap of 186 K Crore for the 5th year, i.e. in FY12. This amounts to 58% of the total 5 year outlay, is almost one and a half times the spending in the first 4 years and more than four times the Planned expenditure for FY11. 

Government has ambitious plans for increasing reach of education in India.  It is aiming for universal education at the school level and for increasing the gross enrollment ratio to 30% for higher education by 2020 (vs 12% currently). One can already see that they are going to keep pushing these targets back. Many in the government hope that private sector would pick up the slack. However no one in the government is ready to provide clarity on allowing For-Profit Education. Philanthropy, the only legal model of private education currently, alone would not fill the gap.

Precommitment

Pre-commitment can be a pretty useful tool. What is there was a device that allowed you to precommit to you doing what you want to do and then made sure that you tried your best to do the same. It would for example stop you from eating a double fudge chocolate ice cream when you are trying to get back in shape or in the financial world, make you stick to your sell the stock when the price falls 10% or rises to reach your goal. We would not have traders turning into long term investors.

Such a device would not let you fall for short term rewards and sacrifice long term gains. I for example would get up sharp at 7:30 am (time of my first alarm) instead of 9 am every day (20 minutes past the second alarm on my smart phone). Image, my smart phone would get up and spray water on my at 7:35 if I am still in bed. Or a bed which starts to fold up and roll into the wall. Imagine the possibilities with precommitment

Those who saw CAT 2010 'results' are unethical?

Ridiculous!

The above word does not even begin to describe the CAT Convener Prof Himanshu Rai's statement calling the students who saw their results through legitimately logging into the CAT website before the officially announced date for declaration of results.

Instead of saying 'Mea Culpa' he says the following "This has shown them in a bad light as people. They are certainly not the kind of people IIMs would like to have in their institutes and definitely not the kind of leaders we are looking forward to make in the future,"

I mean, not only are IIM's not accepting that they goofed up (...again, after last year's fiasco) and admit that they are poor managers of IT systems but are accusing the young curious minds. If at all the guys who first saw the results may have been more curious and nervous about their results, while many of the others who heard about it and logged would have done to to find out if IIM's were that stupid. Many of those who apply to IIM's are from the IT industry. This is the second decade of the 21st century. Even kids know that confidential information is to be put securely on a website.

This is like you give a gold coin to a person and then call the police and say he is a thief. Or imagine, a large company is bidding for a tender and 'accidently' mails out the quote to all its competitors and then accuses them of unethical behavior for quoting lower.  Why? You were not supposed to receive a letter.Even, If you received were not supposed to open it. Even if you opened it you were not supposed to read it. Did you not see the letter was marked "confidential" . Now that you saw the number you should have bowed out and not quoted. Not only this you should have sent back a cheque for a million dollars as penalty for corporate espionage and be disqualified from all future tenders. 

A whole lot of crap!! Isn't it? Ek chori aur doosra sina jori!

Mr Rai, have some humility at least. Please accept that the IT guys managing the system f**k*d up. You need not even say that IIM professors are bad managers (and know zilch about IT security and managing). Students would still keep applying because IIM's are a great sea of knowledge that students can gain from. Or are we hoping for too much?

Citibank Fraud: FIR against Pandit

MD of Helion Ventures has filed a police complaint against Citibank which names several senior officials of Citibank including Vikram Pandit. Farcical as it may sound, it is sounds like sweet justice to hundreds of small time investors and other customers of these big banks, who in the past have faced harassment at their hands, but were too insignificant to draw attention. 

In Sanjeev Aggarwal, who earlier had founded Daksh, there is a guy with enough clout and credibility to create adequate nuisance value for Citi. One of my friends told me that he was happy about the FIR as Citi had, in the past overcharged his account without informing him, an amount that he could not recover as he gave up after repeated reminders to Citi's customer care. I too had been charged an insurance fee without my knowledge on my Citi Credit Card, a scheme that I had not opted in to, and had to fight tooth and nail to recover the charges. These may be small amounts for Citi but these hurt an ordinary customer just as much. 

For Sanjeev though, it is more than money at stake. For a GP (General Partner) at a private equity firm credibility is supreme. Which LP (Limited Partner) would now give money to a GP, who got conned out of his life savings by a small time private banker. We feel sorry for you Sanjeev and hope you recover your money at least. 

For Citi more than the fraud amount, loss of credibility and delays would hurt them more, especially in the retail segment and needs to take immediate steps to regain customer confidence. 

ROCE and Growth

Long term "sustainable" growth for companies is limited by ROCE (actually ROCE*PloughBack Ratio) of the business. Important implication of this is that high growth companies with moderate ROCEs have to dilute to keep growing at the same high rate

Everonn - Appointment of JJ Irani and Nikhil Gandhi as Directors

Everonn, today, announced the appointment of JJ Irani as Director and non executive chairman and Nikhil Gandhi as director on the board of the company. Here are my thoughts on this

1. Nikhil Gandhi's appointment was expected and should have not effect (he has put in 200 cr into the company)
2. JJ's appointment is a positive development and potentially serves two purposes
    a) Gives an important face lift to corporate governance at Everonn. The company could be planning to raise further capital and JJ's presence would be a big confidence boost for potential investors
    b) Helps to counter NG's influence to push Everonn for benefit of SKIL

Tata Motors- Q2 FY11 Results Update - Buy!!

Tata Motors posted excellent results with revenues up ~35% YoY and profit up to 2223 Cr vs only 22 cr last year in the same quarter. Its seems that the contrarian  investments that the tata group had made during the downturn (Corus by Tata Steel and JLR by Tata Motors) is now paying rich dividends, as the global economy recovers.

These are fantastic results by Tata Motors and much beyond street expectation, despite the fact that Tata Nano is yet to take off. Could lead to serious re-rating of the stock over the next couple of quarters. Won't be surprised if the stock climbs 50%+ in the next one year. Key thing to watch would be how it absorbs commodity  price increases in the next 2 quarters as a result of QE2

Common Wealth Games 2010: Opening ceremony rocks,CWG a hit in the virtual world too

The 19th CWG games got off to a spectacular start yesterday, with the gala opening ceremony. The giant helium balloon was fantastic (despite the $15 million price tag). Hope the rest of the games build on this and and we see records being broken in each of the 17 sporting disciplines and that the focus remains firmly on sports.

Another thing which the games organizers seem to be getting right is their virtual presence. The website is good, but they have a fantastic social presence through facebook and twitter (115K+ people already like it on facebook and twitter account has 5500+ followers) with quick updates (Nigeria won the first gold medal in weightlifting, Australia won their first in swimming)

Obituary: Gurgaon Roads

This post is in loving memory of the Roads in Gurgaon that died prematurely (yet again), due to heavy shelling by the rain gods during the current monsoon season. The same rains have also taken a toll on roads across NCR and other parts of the country.

RIP Gurgaon Roads (2010-2010).


PS: All hail the builders and bureaucrats who would procreate again to give us new roads again next year.

Google Funds Khanacademy

Google is giving Salman Khan, of khanacademy.org, 2 million dollars to further the cause of making education content available online for free.

That is 2 million dollars well spent.


Check it out here http://www.project10tothe100.com/index.html

common wealth games - the reality

delhi would be hosting the common wealth games from the first week of october. After a barrage of controversies and setbacks, hope is that delhi would pull through
What is sad about all this tamasha is that no one is really talking about sport and the human spirit, any such sporting event is meant to celebrate.
Feel outraged and disgusted with not just the politicians and administrators but also with the media, and perhaps more so with the more progressive media
That said, the comments of some of the phoren babas from respective sports commitees, reeked of gross racial bias. It is time we stopped taking s*** from these guys

SAIL in a fix as i-banks race to the bottom to manage its FPO - The Economic Times

Came across the following post on economic times

SAIL in a fix as i-banks race to the bottom to manage its FPO - The Economic Times

The real cost to Sail and eventually the people of India is not the fee that the investment banker would charge but at what price the deal happens.

Kale Accelya Deal Analysis

Kale Accelya Deal Analysis

Accelya is niche BPO player based in Europe. From Accelya's perspective the deal has the following positives.

1. It gives them entry into IT services with a player that knows the airlines space well, allowing them to further penetrate their clients through cross selling
2. They can now offer integrated BPO/IT Services and a stronger value proposition for new customers
3. Gives them scale- The combined entity would be the largest IT/ITES services provider for airline industry
4. Most importantly, it gives them local knowledge and strong base for offering offshore BPO services from India helping them lower their operating costs

While being listed gives them some additional credibility it is not a huge advantage. Although listing costs are not very high in India

Kale's promoters

1. Decent premium price over current price and a large premium over the undisturbed price
2. Continuing employment for Vipul Jain - the current CEO and co promoter(who got 2 cr salary last year and possibly a sweeter/upgraded deal going forward)
3. Promoters get to keep the logistics division and possibly an opportunity to build another logistics focused IT services company. (the slump sale just before the deal also allowed to plug the valuation gap for both parties; as per the company the logistics division had ~4 cr revenue and about ~6 cr loss;This is theory means higher profits for accelya, which wants to remain only in airline space and a positive option value for the promoters )

They could have possibly got higher valuation, but the softer benefits in this deal may have trumped other potential offers

Kale Consultants - Accelya Deal

The promoters have sold their 36% stake in Kale Consultants to Accelya at a price of 172 per share. The deal also ensures that Vipul Jain (co-promoter and CEO) continues in his role. As discussed in my previous post they could have got a higher price, especially with the restructuring (slump sale of their loss making logistics business to promoters)

The deal will trigger a mandatory open offer to acquire at least 20% of the company. It will be interesting to see what the open offer price is as that would determine the total upside to minority investors.

Value Stock - Kale Consultants

Stock Pick - Value Stock

Kale Consultants

This stock is what you call a low downside, high upside stock. Kale consultants has been in the news recently with all the rumors of it being acquired soon (first by wipro, NTT and then by InterGlobe or another European company)

The rumors have since been denied by promoters (check bse company annoncements) but the recent slump sale of one of its loss making divisions could possibly be cleanup before the actual sale.

Kale had  net earnings of 26 crores (EPS of 18.1)  last year with 40 Cr EBITDA and a healthy growth year over year. It has about 40 Cr of cash and no debt. At current market cap of about 200 Cr it has a PE of 7.6 and EV/EBITDA of 4.2 (versus average PE & EV/EBITDA of about 10 and 5.5 respectively for the smaller listed IT companies) which gives it an upside of 30-40% even if there is no control premium or deal does not happen

The slump sale of its logistics division gives it about 6-7 Cr of profit and therefore about 60 cr additional equity value. for a total possible upside of  60-70%

Value Picks - Equity Investing: Empee Distilleries (NSE Symbol - EDL)

Value Picks - Equity Investing

Empee Distilleries  (NSE Symbol - EDL)

• At Rs149 it has a market cap of 281 Crores
• It holds 2.81 Cr shares of Empee Sugars with market value (at CMP 66) of 185 Crores
• Company made a profit of about 12 crores in Q1 FY11  (double that of Q1 in FY10)  and eps of 6.2 Rs per share (non annualized and standalone). 
• It had reveneues of 900 Cr in FY10

Net value attributed to the business appears to be very low. The promoters have been recently increasing their share through open market purchase. Represents an excellent value buy and can be a multibagger especially if the company can improve its profits even marginally and improve investor awareness.

What makes it even more attractive is the high dividend yield.It has announced a dividend of 6 Rs/Share, which gives it an high dividend yield of 4% (tax free) certainly higher than your savings account which gives 3.5% yield (before interest)

Are equity analysts over-optimistic? Implications from past data

Came across the following data in a recent Mckinsey article on long term forecasts vs actual earnings. The implications are interesting

1. Analysts are (at most times) over-optimistic on growth trends and perhaps underestimate the effect of competition (companies don't exactly play tennis against a wall), challenges to scale, change in consumer taste, alternative products etc
2. Follow earning revisions after trend change in actual earnings rather than vice versa (which is their real worth)
3. However, during periods of recovery they get over pessimistic and estimate lower recovery

While this is important point to remember for fund managers who follow their advice, this has important implications for analysts, themsselves (The good ones should know this intuitively)

• Its generally more accurate to be lower than consensus
• It helps to be contrarian

This, of course is aggregate data and would be interesting to perhaps look at the top 5 rated analysts

11th Five Year Plan - Planned Expenditure On Education In India