KKR Credit Quality

http://www.forbesindia.com/article/work-in-progress/kkrs-dice-with-debt/55421/1

The above article is a must read and very enlightening to understand the crisis of credit that is plaguing the Indian economy. the more pertinent question to be understood here; should we be blaming our public sector banks for the mess they are in due to bad loan crisis. When the internationally managed PE fund is bungling its small book of portfolio of India in which there are barely 30 accounts. or is it the other way around, that if KKR is willing to lend to AA rated accounts at 15%, it is understandable that the account is about to default on all its limits and loans.

While the most worrying element is the frauds, which are widely prevalent in Indian corporate sector and which are apparently visible on the face of it. It leads to serious introspection of the fact that what and how KKR (it applies to all types of lenders) is undertaking due diligence of the financial and legal, that they completely ignore the red flags; which are all pervasive and compulsive on some of its business accounts. If KKR cannot avoid fraud, after paying tens of millions of rupees for due-dilligence to some of the finest Chartered Accountants and lawyers in the country, what is it that the lenders are looking in the corporate to fund. KKR is only used as an example as they are known as the baddest sharks in the water, when it comes to scouring deals in the market.

On the other end of the spectrum, we are only taking the case of Kwality Ltd. and CG Power and Industrial Solutions Ltd. Kwality Ltd. generated turnover of Rs. 6724 Crores for FY18 with Net Profit of Rs. 71 Crores and it had grown from Rs. 5269 Crores with Net Profit of Rs. 140 Crores. Kwality Ltd. manufactures or processes, milk, dahi, chaach, cream and ready to drink milk products.

I don’t know or wish to discuss, what is the level of financial due-diligence that had undergone the Kwality Ltd. account by KKR but lets not get subjective about the process. But before conducting the financial due-diligence, perhaps they could have done market due-diligence to understand at how many outlets and through how many distributors, Kwality Ltd. is selling its milk products. If Kwality Ltd. is only selling milk in the market with turnover of Rs. 6700 Crores, it was moving 134 Crores litres of milk (taking milk price at Rs. 50 per litre) in the financial year. A commodity which is perishable with shelf life of less than 24 hours. The logistics required to move such huge amount of quantity of milk everyday, which is typically done in the morning or the evening. The processing required for the same to bring consistency with turnaround time of less than 6 hours. I certainly doubt the processing capability in terms of production.

Even if any accountant had tried to talk to Kwality Ltd. competitors in the market, they would have understood the capability of Kwality Ltd. in terms of procuring, processing and selling milk. i had never seen Kwality Ltd. milk sold in the markets. two or three years back, after KKR gave them money, the only thing they sold in the market was Akshay Kumar hoardings with unique packaging. But nobody knows on which shops, those glitzy packets were sold. It was far and wide marketing reach program of Akshay Kumar posing with Kwailty Ltd. milk and packaged products with no products on the shelves.

Kwality Ltd. has debtors of more than 3 months amounting to Rs. 1700 Crores in FY18. which milk processing company can afford debtors of 3 months. Milk is sold on cash by the companies to the shopkeepers or chains. They may compromise on margins but no credit. For frozen products, I can understand they have to extend credit but milk related products help rein in profits and not the turnover. Milk generally contributes to the turnover of milk processing companies and milk related processed foods help bring in better profitability.

Kwality Ltd. is a cat and mouse game in which KKR also got whipped. But what I don’t understand for the amount of resources they put in underwriting a transaction; they didn’t verify the marketing composition of the Company. Now Kwality Ltd. proudly puts the top link to CIRP (Corporate Insolvency Resolution Process) on its website. Kwality Ltd. market capital is Rs. 37 Crores with price ranging from Rs. 1 - 2 from their life high of close to Rs. 4000 Crores, two years back.

Can lenders avoid such companies, who have no products to sell in the market? Certainly if they do detailed marketing survey of how, why, where the companies products are sold. Kwality Ltd. was perhaps not even processing the fraction of what their numbers claim.

CG Power and Industrial Solutions Ltd. is another case study to understand. CG Power manufactures transformers, which are so essential for the power distribution in India, a power hungry country, with our energy needs still not largely met. CG Power is the only Indian company with that capability. They compete with international companies like Alstom and its likes, whose products cost at least 2x the CG’s equivalent products.

CG Power is the fundamental piece in the power distribution infrastructure of India. Now the company is under investigation for fraud allegations. With the fundamentals intact, it may not be the case of NCLT for IBC. But KKR was generous in writing cheques to CG Power.

CG Power fundamentally does not have larger problems that are ailing companies like Kwality Ltd. CG Power is part of Thapar Group, whose Group had investments exceeding Rs. 25000 Crores or Rs. 50000 Crores. But then all its other operating and cash generating companies are closing, shutting down and not to mention have defaulted on their loans.

CG Power was only plagued by the fact that it was the part of the group in which it only remained the performing from half a dozen large assets owned by the group. CG Power is a failure of legal due-diligence to understand, how and why the money was lent to CG Power and Thapar Group and how loosely bankers had tied CG Power in the fine print for some of the other assets of the group. CG Power possessed the joint and several liability of the group, if yes, then perhaps its management should have been changed as soon as the other assets were closed or shutting down.

I am pretty sure, KKR lawyers would have sought detailed clarifications from the existing bankers of the CG Power about their security and the charge they carried on CG Power, resulting from giving money to CG Power or Thapar Group. With the structured transaction that KKR undertakes, they must have taken proper clarification from the Banks. How CG Power international web of operations was spread across the globe, they were in best position to understand the structure of the CG Power (Indian and Global) business better than any Indian banker as they don’t understand the complicated route via which international banks offer products and solutions to corporates like CG Power.

Now we can always blame the market or the various cycles, which operate the market. But the fact remains, it is a systematic failure of the accountants and lawyers, which owe the primary responsibility of helping the banker/lender understand the company and its operations. They can always meet the promoters and the management for informal chats on how they are gaming the system, with which they have built their castle in the air, which can so easily be wiped in a single storm.

Good sound companies are built with the cushion to survive the storms (like CG Power), of course, in bad market conditions, everybody possess the likelihood of going under the weather like currently even our economy is. But CG Power is a casualty of the bungling’s in the group, so that had to be studied properly for all the surprises we are yet to hear.

Moreover never ever lend to a promoter, who does not value his own shares. A lot of promoters treat their own shares as an expensive paper but if they themselves do not respect their paper; perhaps we should be avoiding them at all costs. They do not deserve a single penny of the bankers/lenders or certainly the public.

For lenders, it is the good case of incompetence at how they fail to understand the businesses in which they are taking exposure. Kwality Ltd. Is the classic case, which exposes us to all the perils that lender should understand in order to avoid tripping on to the landmine, where they visualize gold.

BUDGET - 2010

Budget definitely takes much of the news and newspaper section leaving little room for abused, drugged, raped, abducted and murdered Indians. Such is the phenomena or the euphoria created around the Budget. Over the past few years, Budget just became an annual exercise esp. in this era of coalition politics, when the Govts’ purposely kept the important decisions outside the preview of the Budget and made it merely a Profit & Loss Statement than an Annual Report.

The only Budget that financial pundits remember or would like to think are 1991 Manmohan Singh Budget, 1998 PC Budget and of course, Yashwant Sinha from BJP had been the cynosure for drawing flak from all the six corners of India. The lackluster annual exercise by Pranabda during last year, the analysts and experts had not built any hopes. Will this Budget be remembered for the staged walk out by the Opposition from Lok Sabha, perhaps first or something else? I really liked the fiery style of Sushma Swaraj and her command over Hindi and the way she made her points. As the saying goes, success honours you and destroys you at the same time. She is currently redressing to the later part of the saying. The Opposition walked over one rupee rise in oil prices. It will add to the woes of the inflationary pressures. But then market expected to rise by few rupees, so it was still a breather. Moreover the Govt. should always be thinking in favour of OMCs (Oil Marketing Companies).

Yes the food inflation and food security is one of the biggest concerns for India of today and will remain tomorrow and not the growth or the GDP. 60% of our economy or India is dependent on agriculture, yet we are not in a pitiable state either. If your battered vehicle cannot give improved mileage, then we reduce the amount of petrol which goes into running the engine. But our Govt. has tried to undertake something better. They have increased the tax slabs for individuals, which in other words, increases the real income in our hands.

But this Budget is perhaps one amongst the best with the caveats, Coalition Govt. and the Financial Crisis. The Govt. has been juggling with the lower demand of products and services, lower exports, rising inflation, rising fiscal deficit and to top it all, they had slashed tax rates, duties, cess’ applicable on sundry and all and sacrificing income, still they are able to lower the fiscal deficit and feed the poor developed or perhaps poorly managed schemes for the poor. I liked the renewed focus on Agriculture to bring something positive in this space. Hope they are able to pull this off. Because in India, all the good things are virtue of our politicians and all the bad things are blamed on the monsoon.

The FM made a point throughout his Budget speech to usher in a process of inclusive growth. The inclusive growth can be achieved by bringing the economy back on growth path with GDP of 9 % per annum and to take the government back on the path of fiscal consolidation.

Private players will be issued Bank Licenses. In 2002, RBI cleared few licenses and now after a long lull they will be issuing licenses. Reliance (non-reliable) Bank, Singh (Religare) Bank, Birla Bank, Modi Bank, India (IndiaBulls) Bank some of the leading financial services/NBFC conglomerates will be vouching for that slot. As a consumer, it will become more harassing to entertain few more useless marketing calls from few more useless service providers. At the same time, I hope something better from these new-age industrialized houses to better the customer experience.

Direct Tax Code, General Sales Tax Regime may become a reality for FY 2011-12.

Markets cheered and roared for Pranabda’s efforts which touched an intra-day high of 350-400 points (2 %) at the conclusion of Budget speech and still managed to close at 175 points (1 %) in positive.

With the hope to leapfrog the growth rate of Indian economy in double digits, Pranabda concluded the Budget 2010-11.

Budget 2009

India’s new Finance minister Mr. Pranab Mukherjee gave a historical budget speech under the guidance of Dr. Manmohan Singh. Critics may have expected more and wanted more. But the fact is it is one of the most balanced budget in last few years. As the economy progresses and gets into the development phase, the Budget is an annual exercise and not phenomena. In current times of coalition Govt., the Govt. deliberately keeps the critical issues off the Budget speech to come for criticism from its allies which can be taken care off during the year. The current brouhaha of the global economy has swept across the bigger and smaller nations, India is one of the few nations in the world whose GDP target has been revised in the upward direction by World Bank. Take notice of it.

As I had mentioned earlier, critics will later laud the efforts of the Indian Govt. to prevent global crisis from reaching the shores of Indian nation. There can always be argument for doing it better probably, but then the way it has been handled is remarkable, it could have gone otherwise.

Industry experts and players are always expecting more and more tax cuts from the Govt. Take the case of IT companies they enjoyed tax holiday for ten years, extended by one year in 2008, extended by another year in 2009, they wanted a straight five year holiday. The industry has taken its share of benefits from the tax holiday. We have Infosys, Wipro, TCS, Mahindra Satyam and couple of other mid-tier IT companies to boast of. The Govt. performed its part. Now let this benefit to be passed on to some other space to create another exceptional story out of India.

After two stimulus packages, they want more tax cuts. Then from where the Govt. is going to meet its expenditure. The revenue has clearly fallen, the fiscal deficit has shot through the roof and even jeopardizing the FRBM Act. But it is not new to India especially in 1990’s revenue target not being met. But the golden moments went to the expenditure which always went way above the targets as if your mistress has taken charge of your purses. We managed to check our expenditure.

Mr. Mukherjee very rightly mentioned, let the global economies recover then we will definitely look how to tackle the issue of revenue and fiscal deficit. We are aware of the same.

I strongly believe with my little knowledge that it is indeed a very balanced Budget in such times of economic globally.

The media questioned Mr. Mukherjee, Sir why did the market went into tizzy when you concluded your Budget speech.
I guess because Markets are inverse function of knowledge.