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.

Legalization

Legalise prostitution if you can't curb it, SC tells Govt.

The Supreme Court Wednesday asked the Centre whether it can legalise prostitution if it is not possible to curb it with punitive measures.

"When you say it is the world's oldest profession and when you are not able to curb it by laws, why don't you legalise it? You can then monitor the trade, rehabilitate and provide of medical aid to those involved in the trade," a bench of Justice Dalveer Bhandari and Justice A K Patnaik told Solicitor General Gopal Subramaniam.

Prostitution is the oldest profession of this world, even SC has reiterated it. Why is it called a profession? One of my friends had said, “If Ved Vatsyayna is referred to as Ved then prostitution can be called as a profession”. It’s difficult to parallel the two. Traditionally it maybe a profession, but within the confines of the law and the society, it is an illegal business. Slavery was first criticized and then abolished as they said you cannot trade human beings. Prostitution is illegal and punishable under IPC (Indian Penal Code) for the one who pays and the one who receives money.

It is not that the Law is not capable to curb this activity. Exploitation of human being is one of the gravest crimes on earth and that too, because of their SEX, demands our urgent attention to the issue. The Law Enforcers are not willing to curb this activity. There is no woman on this Earth who would like to enter this profession by choice. Perhaps there may be few who have no option or may be a convenient way for survival. Add to that the extreme poverty conditions of India. In certain tribal/rural areas, parents are forced to sell one of their daughters to ensure the other children do not die due to hunger. Of course, we cannot justify/argue destroying a person’s life, it is simply unacceptable. Govt. needs to attack the hunger of the poor or maybe the parents. The list of poverty and its consequences are dire in this country.

(A prostitute lifts her skirt)

But then it is an equally popular trade in developed nations, where Govt. even takes the responsibility of the unemployed. Various developed countries have tried to curb this activity by different means, wherein they have worked on the premise that women are victims and we need to show compassion towards their plight. In one of the European country, the legislation says anybody found paying for receiving any favours in sexual activity shall be held punishable, on the same hand it does not talks about wrong doing in the hands of the receiver. It is one of the positive aspects of this Law. But then does this help us in finding the solution? Not really, it may have exacerbated the problems of the sex workers in some other manner.

For every woman engaged/forced into profession, she is supporting more than two human beings on her earnings. Two (human beings) is a conservative figure, it may be her family or the pimp who represents her or police officer who demand bribes from them. Scan through the classifieds of any Mumbai local newspaper, one will know how easy it is to run this business. It is this casualness, which is harming the society. My cab driver took me through the Kamatipura area, the red-light district conditions of Mumbai. Not to mention, the whole area of Grant Road running till Kamatipura is such poverty stricken and it runs a chill in your spine, when you contrast it to Colaba, Nariman Point which are just stone throw away (by Bombay standards) from this area. A child walks upto my window in a moving cab albeit at snail pace and asks, “saab maal chahiye”. I wanted to tell him, you are talking about a human being. Show some respect to your existence, if not them. Within seconds, he markets all types of girls, by their origin, colour, age. I was shouting to my cabdriver, move fast and we are stuck in traffic. Politely I tell him NO, coz there was no point preaching. I was clutching fast to the window handle and rotating it with both hands to push the glass up. Imagine what that child will become when he grows up? I don’t know, if he was pushing for his mother or on behalf of his father (who may be a pimp) or born like that, that even his mother had absolutely no idea what his father might look like.

Supreme Court gave their comments on the PIL filed by an NGO Bachpan Bachao Andolan and the intervention application moved by Childline complaining about large scale child trafficking in the country. We need to save these children and give them their childhood back. SC questions, Why don’t you legalize it?

One of our law faculty had said, “Society exists because of Law”.
Legalizing prostitution will help the society. It is difficult to say, when we should be trying to help the sex workers and flee away from this menace and try to make our society a better place to live, where everybody is respected and not sleeps for few pieces of green paper. Legalizing means we have presumed and submitted that prostitution cannot be eradicated from our society.

But then legalization does have its benefits for the sex workers. They can call themselves as sex workers and not always abused at. It will stop the exploitation. They will be given few rights in their hands which they are now deprived of.

(A street of Kamathipura)

Perhaps the present legal structure needs to be restructured to give them equal rights of a human being or as a citizen of India. The structure at the same time, should probably throw an idea or a path to help the victims who have been forced into this activity to leave this profession and lead a life where sex is not an object or means to earn livelihood. It remains just as an expression of love.