Indigenous Investors Weekly Insights!
Top 3 well curated stories from the stable of Indigenous Investors incase you missed them. These can range from finance to sports, depends on what made the headlines. Stay tuned.
This week we cover the following:
AU SFB stands to benefit as RBI tweaks this norm and frees up Rs 41,000 crores!
Abbot India doubles in last 3 years despite skeptics feel that it’s lost it’s competitive advantage
Vodafone Idea - wired in troubles, seeks more debt to stay relevant in India’s Telecom Market but should you invest your money in the stock?
The victims and the families of Pahalgam Terror attack and the crash of Air India’s London bound flight are still in our thoughts as we write this newsletter. It’s difficult to absorb such information and still lead our lives in a normal way.
Book Recommendation - The Good Indian Employee's Guide to Surviving a Lala Company by Rajiv Gupta
India is a land of family businesses.
The first generation, often referred to as the Patriarch starts a particular trading business or manufacturing unit. For decades, he has given his heart and soul to the business he has built. Chances are high that the Patriarch would have never really taken vacations or some weekend vacation trips while building his business.
In terms of time lines, these businesses would’ve been started around 1960s or 1970s which are now passed on to their second generation and some businesses are also slowly grooming their their generation who wishes to be a part of it.
If you are living in metro cities such as Mumbai, Bangalore, Delhi etc - then it’s a high chance that you will feel I’m referring to some age old custom. Because we people tend to have a sort of a false ego that since we have travelled a few countries in the World, we feel everything has changed.
And since, we have travelled the World and are educated with some professional certificates, we have completely forgotten the very social fabric of the rest of India works on.
Because we see how everyone is working for Google, Apple, EY, or any other MNC based out of USA. There are long and nonsensical conversations on how some children went to Canada, London and other cities are making more money than they would have sitting in India.
Because we just love ‘Abstract Thinking’.
Most people are just glorifying their children being so talented that they are making a name for themselves in foreign land while hiding their own lack of skills in building a business.
So what’s the common denominator?
Because Lala-ji (patriarch or second generation) didn’t take any initiative in professionalising their business. In simple words, change with times. So, it was always better to send the kids abroad while they enjoy their social lives here.
But as you move towards the non-metro part of India, yes there are kids who are studying abroad, but you will still see a lot of second generation or third generation working in their business.
They are trained to believe that this is their destiny and they have to take the empire forward. It’s like a code.
And yet, somehow the business that are being passed on - they don’t grow as much. Some of them shrink to basic survival, while some go extinct (like dinosaurs).
Why does it happen?
A business that is grown with so much blood and sweat suddenly vanishes like it was never there.
It comes down to a few things. But the most common ones are - lack of systems, governance structures and professionalisation of business that need to be competitive with changing times.
Another issue is succession planning for the first generation patriarchs was a little difficult. If they had 2 or more sons, then who will be the CEO was a huge question.
In non-metro parts of India, we’ve seen the business was handed over the to the eldest son, maybe because he had more experience or he was just lucky to be born first. While the younger siblings would always look to de-throne or break away into their own set of businesses.
Some smart Lala-ji’s would create different business streams for their sons. This ensures a timely account for capital allocation, business growth metrics and no unnecessary ego wars happening at home.
Another factor that used to play a very important role in succession planning was the closeness of children to their parents. There are cases where the eldest son is closer the father (the patriarch) but the younger one is closer to the mother. And if it comes to some sort of vote and mother wins, then the younger son becomes the de-facto owner of the business. As a result, the elder son has to yield down to the wishes.
Somehow employees have to bear the brunt.
Since the business family is busy fighting out the succession battle, not enough attention is given to the business or the employee’s own welfare or career advancements.
Not just that, Lala-ji’s are notorious for putting themselves in the position of god and feeling good about the fact that it’s their business skills that ensures their employees eat their meals that day. Otherwise, no one would touch these peasants with a 10 foot pole.
This rubbish still exists. Patriarchs and Lala-ji’s still want their employees to worship them with touch their feet everyday (mentally).
If you are a keen business observer, then you will also see how Lala-ji’s are always late to the meetings. They don’t start any meeting on time, they are busy in social arrangements or some dinners that they MUST be at.
Employees suffer from endless bootlickers in the office to corrupt colleagues who will plant any nonsense in the minds of these Lala-ji’s and as a result there’s a risk of a job loss. That’s why most of these setups don’t grow because the employees themselves don’t feel safe in the ecosystem that the Lala-ji creates.
There comes a day when Lala-ji realises that he is not God anymore. And that day, the business is shut, bankruptcy is declared and assets are sold off.
There are many such cases discussed in the book.
Rajiv Gupta, the author, is a veteran in this space. He has worked closely with the Ambani family during his time at Reliance Industries Ltd.
In a podcast with YouTuber Raj Shamani - Business Masterclass: Secret to Build a Profitable Business in India (click here), Rajiv talks about the execution masterclass of Mukesh Ambani and his prowess lies in attention to detail.
Recently, Rajiv appeared on another podcast with Ranveer Allahbadia titled Big Money Podcast - Step by Step Guide to Start a Business (click here), his insights are profound and gives a new way of thinking to both the patriarchs and the inheritors.
One key part of a successful family business is setting the right expectations and communicating it with them to the next generation.
Gone are the days where only boys would inherit, these days we see a lot of girls inheriting their father’s business and running the show successfully. Even if these girls are married or not, they continue to the run the show at home.
They are not just demanding an equal share, they simply assume that the parents will share their wealth equally and give them equal opportunities to advance in their careers. The cultural and social fabric is changing.
Millennials and Gen Z are not interested in setting up a family business either. They are not even thinking about setting up a business that will outlast them. The game has now slowly changed to Equity as a part of Wealth Creation.
And that is refreshing. But there are still major businesses that are in the Lala-ji format and this book becomes a guide to those who are surviving in such environments and for people like us who would like to stay away from investing in such companies and as a result create wealth.
Do read the book and write your thoughts to us.
Now, let’s look at how the markets performed this week:
A strong performance by the equity markets once the worry about Iran Israel war was over. There’s a high chance that even the trade war will be over by next month and things will be normal.
Story #1: AU SFB stands to benefit as RBI tweaks this norm and frees up Rs 41,000 crores!
The Reserve Bank of India (RBI) has recently revised the priority sector lending (PSL) requirements for Small Finance Banks (SFBs), reducing the target from 75% to 60% of their Adjusted Net Bank Credit (ANBC), effective from FY 2025-26. This change aims to recalibrate the regulatory framework for SFBs.
You can read the news by clicking this link.
Investors have cheered this!
To first understand the impact of this change on AU Small Finance Bank, first let’s understand how the RBI defines Priority Sector Lending (PSL).
The primary objective of PSL is to promote balanced and inclusive economic growth by channeling credit to sectors that support basic needs and development, but may not be adequately served by the conventional banking system.
Sectors Covered
Agriculture and Allied Activities
Micro, Small, and Medium Enterprises (MSMEs)
Export Credit
Education
Housing
Social Infrastructure
Renewable Energy
Weaker Sections and Others
There are also other filters where the Small Finance Banks are supposed to lend a specific percent of their loan book to certain sectors. But it’s not much relevant now.
Because when the RBI brought down the provision from 75% to 60%, effectively Rs 41,000 crores of liquidity was freed up. They can now be lent anyone outside the priority sectors.
This money can go for home loans, consumption loans or industry loans where the expectation of recovery is much better.
To understand this tweak, let’s first understand the Small Finance Banks of India.
source: Perplexity AI
AU SFB holds the key to this liquidity being unleashed for the sector. Already sitting at a solid loan book, decent Gross and net NPA numbers (in line with industry), the bank has got a solid push.
RBI is also considering to give Universal Bank licenses to the Small Finance Banks who have shown strong fundamentals.
As per our assessment, AU SFB sits at the very top of the RBI’s Universal Banking license pile.
With that the Bank will be unleashed to sit at the big boy’s table with HDFC Bank, ICICI Bank, Kotak Bank, etc. It will be a huge push of confidence.
With more liquidity comes more options to deploy them.
India is a credit starved economy. Yes, there are a lot of banks out there to service them but the paper work, banking staff that can hardly keep pace with changing regulations and outdated technology keep them from lending to those who really need it and are able to repay it.
AU SFB is a technologically sophisticated to handle such scenarios. Some industry experts even say that this is what HDFC Bank was in the early 2000s.
A breath of fresh air in the banking system.
Well, whether it remains the same or goes downhill like Bandhan Bank will depend on series of decisions that the management takes. We are outsiders need to keep doing our homework and keep a close check on our investments, if any.
Story #2: Abbot India doubles in last 3 years despite skeptics feel that it’s lost it’s competitive advantage
Back when the idea of Abbot India as an investment option hit us, we were tasked to answer a series of questions. Most of which were easy but there was 1 question that was psychologically hard to answer.
Abbot India was trading around 16,000 per share at that time.
So if you are thinking of putting some Rs 1 lakh, then you will get upto 6 or 7 shares, give and take a few thousands.
Now, the question is not whether the Rs 1 lakh will grow or Abbot India will grow.
The question was whether Rs 16,000 could become Rs 32,000?
Since, we have learnt investing from Warren Buffet and Charlie Munger - so for us business performance matters more than what the entire market thinks at that point.
And fundamentals were always strong!
So we invested and didn’t quite give convincing answers to those who were raising the price question to us. All we could tell them was if Rs 16,000 cannot become Rs 30,000 then it will also not become Rs 100 quickly.
A safe bet.
And boy it performed!
Currently, there are too many speculations about the reason why the stock price has gone up so much. Now, let’s leave that for traders. They do a much better job at understanding the finer nuances of the news cycle then we can.
Here’s what happened after we invested.
source: Perplexity AI
Revenue went up slowly, but Profits jumped. This is on the back of a good operating profit margin and net profit margin. In simple words, the company showed high efficiency.
Return on Capital Employed for Abbot India is currently at 46%. (huge!)
When the business become efficient and needs less cash to run the same operations, then that cash can be used for Capex and distributed as dividends to shareholders.
Abbot has done both. It’s a strong display of Corporate Governance.
So if you are like us who don’t understand complex names of medicines but understand the potential of the sector, then sometimes having simple quant systems in place helps you generate investment returns.
The Mindset Shift!
You don’t need to worry about the stock price being Rs 100 or Rs 16,000. All you need to think about the company’s ability to grow and their willingness to communicate this growth with shareholders.
In the nature of accounting, bonus and split - can bring the price of the stock down and increase number of share available to buy or sell. But that is company’s decision and not yours. So leave it to them.
Story #3: Vodafone Idea - wired in troubles, seeks more debt to stay relevant in India’s Telecom Market but should you invest your money in the stock?
Vodafone Idea’s story is a blend of resilience and adversity. Despite being one of the largest telecom operators by subscriber base, it faces existential risks due to its weak financials and intense competition.
The government’s intervention, through debt-to-equity conversion and continued support, makes its future uniquely dependent on both operational turnaround and regulatory goodwill.
Vodafone entered India with a lot of promises and hopes back in 2007.
India was a country which was slowly adopting mobile phones as a medium of communication. Landline was the name of the game back in the day.
So much has changed since then.
But the journey of Vodafone has been extremely tough. Every time, the company was supposed to gain market share, some or the other controversy would hold them back.
This is what happened!
But by 2020, Jio had already entered the picture offering freebies like how different politicians offer just before elections.
Mukesh bhai led Jio made sure that voice calls were completely free and he was ready with 5G while Vodafone was busy fighting India’s tax authorities.
And this meant that the superstar was now an extra on the Telecom’s theatre set.
Suddenly, the rules had changed. There was Covid.
Tax authorities who had been fighting tooth and nail, now found Adjusted Gross Revenue (AGR) as it’s weapon against the company.
So in 2021, India’s tax authorities miraculously find a new leak.
The Supreme Court of India upheld the government’s definition of AGR, which includes all revenues (not just telecom services) for calculating license fees and spectrum charges.
This resulted in massive retrospective dues for telecom companies, with Vodafone Idea being one of the most affected.
Here’s the summary!
Another shocker is the shareholding pattern. Take a look.
Government of India now owns 49% of the company.
So the tax that is still left to be collected, will somehow be collected. Sooner or later.
Achhe din aayenge!
But what about a common shareholder?
Well, it’s a tricky call. Because it’s not everyday that a reputed multi national company gets treated like a third class citizen in India.
That’s why most multi national companies are happy with just selling their products in India rather than manufacture here.
Anyone who thinks that just because the stock price is Rs 7 at the moment and can go up, needs to think this angle through.