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The Art Of Unlocking Value In A Business

Monday, March 21, 2016
By Clifton Desilva

Let me start with examples of two colleagues. Both had sprawling but dilapidated bungalows in a plush location in Mumbai where the values of the properties were worth more than hundred crores. On several occasions they were approached by builders to buy out the property and on all the occasions they rejected the offers citing reasons that the properties were ancestral and therefore a sentimental value was attached to the them while in the meanwhile they continued to live simple lives where they were unable to fend for their daily needs.

 A few years later they were once again approached by the developers, but based on compulsion rather than choice one of them agreed to hand over the developmental rights to the builder while the other continued to maintain his sentimental stance. The person in question who surrendered his rights received an amount of Rs 100 crores and after investing the amount at the rate of 12% pa received a monthly income of Rs 1 crore, while the other person despite possessing the lucrative asset was earning a monthly income of a mere Rs 15,000 per month finding it difficult to make both ends meet.

After some time both of them died; one like a king and the other like a pauper. In other words one was a rich man in his life while the other was a rich man in his grave. This process is known as unlocking of value. (Here value does not get destroyed) This instance is not an isolated case and experience reveals that there are several instances where due to various reasons value is never unlocked.

There are several successful companies which have been built over the years with hard work, passion, sacrifice and dedication, but the next generation does not seem keen to carry on the business, but instead prefer to migrate to other countries. Unfortunately these owners due to lack of succession in the business are forced to go into the scaling down mode initially and the  shut down mode subsequently.

Value thus created instead over the years, instead of being unlocked gets destroyed. There are several successful companies that have been built over the years and as and when the main promoter retires or is no more, the value that has been created is completely destroyed. Instead, if the value was unlocked through the listing mode the promoter would have had huge wealth at his disposal.

Also listing allows a promoter to sell the business, if and when required, or invite a strategic investor who can bring in value to the Company. The promoters of Ranbaxy sold  to Diachi of Japan for $ 4.6billion.

Another fear that is expressed is loss of control in the event of listing, which is a myth. The listing rules provide for a dilution of only 25% and the balance 75% is held by the promoter. Most successful companies are managed with promoter holdings of less than 50%. There are around 6000 companies listed on the Exchange, but over the last several years there have been no instances of hostile takeovers despite several managements running the companies with low holdings.

There are several managements of established companies that run their outfits with holdings of less than 30% like Mahindra and Mahindra, Dr. Reddy Lab, etc. Infosys was run with promoter holdings off less than 30%. The promoters of MRF have a holding of a mere 27% and control a company with a turnover of Rs 14000 crore and a market price of Rs 35,000.  At the same time it is better to be a 75% owner in a market cap of Rs 100 crore where your value would amount to Rs 75 crore, rather than being a 100% owner in company with a market cap of Rs 1 crore where your 100%.

The present market cap of Reliance Industries is around 3, 00,000 crore and with Mukesh Ambani holding around 48%, his net worth is around Rs 1, 44,000 crore making him the richest person in the country. In the event Reliance Industries did not choose the listing route it may have continued to remain a small company as no company can grow exponentially on its own funds.

The Godrej group was at some point of time reluctant to list their companies, but subsequently saw the logic and listed their companies and in the process unlocked huge values and the present market cap of the Godrej group is around Rs 60,0000 crores. Tata consultancy (TCS) too, took a long time to list, but subsequently got listed at an issue price of Rs 850 and today is quoting at Rs 10,000,( prior to bonus issues) a growth of 12 times over a 10 year period. The market cap of TCS is around Rs 5, 00,000 crores.

Even the recent IPO’s on the main board have unlocked huge values for the promoters. Some of the recent IPO’s reveal the value unlocked post listing. (Net worth pre IPO and market cap post IPO)  Quick Heal Tech from Rs 337cr to Rs 1584 cr, Team Lease Services from Rs160 cr to Rs 1865 cr, Precision Camshafts from Rs 231cr to Rs 1437 cr, Narayana Hrudalaya from Rs 764cr to Rs 5740 cr,  Dr Lal- Path Lab from Rs 383cr to  Rs 6933 cr, S.H Kelkar from Rs 538 cr to Rs 3400  and Coffee Café Day from Rs 456 cr to Rs 4635 cr.

The scene on the international front is similar where companies through the listing mode have unlocked huge values that have been created.The market cap of Apple is Rs 35 lakh crore, Google Rs 31 lakh crore. Microsoft Rs 25 lakh crore. Amazon Rs 15 lakh crore, Facebook Rs 18 lakh crore to name a few.

 In fact the setting up of the SME Platform is a boon to entrepreneurs in the SME Sector as without the SME Platform, they would never have had the opportunity to list and unlock value as listing on the main board is out of the purview of the SME sector in view of the high cost and stringent entry barriers. So it becomes the best place for entrepreneurs to unlock value.

The requirements on main exchanges are a profit of Rs 15 crores in 3 out of 5 years. Therefore over a three year period the minimum profits should amount to Rs 45 crores. In order to earn a profit of Rs 45 crores an amount of Rs 15 cores would have been paid by way of tax. The issue expenses too would amount to another Rs 5 crores, accounting for cash out flow of Rs 20 crores.

On the other hand listing on the SME Platform would cost less than 10% of the main board expenses and there are no minimum profit requirements and what is the greatest single advantage is that after two years of listing, the company listed on the SME Platform can migrate to the main board at virtually no cost. It is thus a backdoor entry to the main board at a very low cost. As of now on the BSE SME Platform there are 125 companies of which 16 have migrated to the main board.

The SME Platform in India has a huge potential waiting to be unleashed. Currently there are around 5 core SMEs and even if 0.5% get listed on the SME Platform, the total number of companies listed on the SME Platform could be a mind boggling 2,50,000, which could surpass the main boards. The total number of companies listed on the BSE is 5800, while on the NSE it is 1700. One of the success stories on the SME Platform is of Ashapura Intimates Fashion Ltd which had a pre IPO net worth of Rs 16 crore and currently has a net worth of over Rs 500 crore.

The world over, some of the SME Platforms have performed well. The current market capitalization of the BSE SME is around Rs 7000 crores with huge potential ahead. The market cap of Chinext (China) is around Rs 43,00,000 crores, AIM (UK) is around Rs 7,41,000 crores., GEM (Hongkong) Rs 2,68,000 crore, MOTHERS( Japan) Rs 2.06,000 crore. Catalist (Singapore) Rs 47,000 crore. NASDAQ also started as an SME Platform and has a market cap of $ 11 billion..

We are all aware that in future technology and branding will play a very important role and companies that are behind in technology will be eased out. Therefore to survive in future technology and branding will be two key issues. Technology as well as branding has huge initial costs and most of the companies in the SME sector may find it difficult to incur these costs making them obsolete over a period of time. Funding will be the key issue,and borrowing is not easy from banks, so is pumping in own funds. It is only through public participation on premium funds that a company can grow and the only route is through listing. The SME Platform which was set up in mid 2012 is a boon to entrepreneurs to take advantage off, thanks to the ease of listing as well as compliance to catapult their companies in the new technological and disruptive eco system.

In the current environment the rate of obsolescence is quite high; a few examples are Typewriters (Remington Rand). Radios, (Bush) Transistors, (Philips ) Telegrams,(Post offices) Fax Rolls (Denmur Fax Rolls) Fax Machines, (Global Tele) Calculators (FACT,) Film Rolls, Cameras (Kodak), B&W TV sets,(Crown TV, EC TV, Dynora TV), Inland Greeting Cards etc. (Archies, ITC). Today we are in an era of disruptive technology and traditional models are feeling the heat.

Whatsapp is offering calls to a billion active users. It already carries 30 billion messages a day against 20 billion done by all telecom operators put together. Whatapp's neither owns any telecom network and nor has sunk in billions into acquiring spectrum assets. It runs its entire business with just 40 engineers. Airbnb emerges as the largest hotel chain in the world, without owning a single hotel room. Amazon was well ahead of Best Buy and Wal-Mart in terms of transactions. We have a new world of disruptors that do not own any asset, but own the customers. It is the gatekeepers who are winning the game now with their new platforms. From automobiles to telecom to retail, technology led upstarts are gradually edging out traditional business models.

Therefore entrepreneurs especially in the SME sector have to accept the fact that we are in the midst of a disruptive ecosystem where traditional models are getting irrelevant and in order to survive the onslaught it is necessary either to adapt to the new environment where the costs in technology would be high. The only answer is listing which would provide companies with the necessary funds to get relevant or have the option to exit thus unlocking value that has been created.

(The author is a highly respected name in the investment circuit and is Director, Altina Securities Pvt. Ltd.)

Therefore entrepreneurs especially in the SME sector have to accept the fact that we are in the midst of a disruptive ecosystem where traditional models are getting irrelevant and in order to survive the onslaught it is necessary either to adapt to the new environment where the costs in technology would be high. The only answer is listing which would provide companies with the necessary funds to get relevant or have the option to exit thus unlocking value that has been created.

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