This post is a fantastic analysis of why airlines isn’t usually a good business: http://investorsanthology.blogspot.in/2011/12/fundamentals-of-value-creation-part-ii.html?m=1

I have been trying to understand the plan of digitization of land records and its positive effect on property transactions and mortgage loans. It looks like many states have digitized major part of the land ownership records and people can take a printout of the ownership records from the state government websites, although the printouts do not have legal validity yet. The plan is to bring the digitization to a level where the printouts can work as a legal proof of ownership. This would bring down the inconvenience and cost of property transactions and should lead to better business for mortgage lenders like Can Fin and others.

My knowledge of the status of land ownership digitization programme and its possible impact on mortgage loans is rudimentary? Please share if you can add something to it.

A few months back I had written a note on Vakrangee highlighting the red flags. The note was based on the reported financials and some management claims regarding biz economics which were too good to be true. (some of the data may be a few months old)

1. No Free Cash Flow – While the Company has demonstrated strong earnings growth, the Company has not generated any free cash flow. High earnings growth with continuously -ve FCF is a red flag suggesting that earnings may not be real. Debt reduction that has happened over the last 1 year was also through equity issuance and not internal cash flows.

2. Increasing Working Capital requirements – Over the last 5 years, Vakrangee’s net current assets have increased from 55 crs to 750 crs (13.5x increase) while sales have gone up from 295 cr to 1950 cr (6.5x increase). WC requirements increasing substantially faster than Sales is a red flag suggesting Sales may not be real.

3. High capex on government business
   -Vakrangee incurred 228 crs in capex in FY14 (of which 197 crs is for Computers & Printers) towards the e-governance business. Vakrangee continuing to incur high capex for the government business does not make business sense considering the poor economics of the segment and low growth expected by the management.
   -197 crs in capex for computers and printers suggests the purchase of over 20,000 computers in a 1 year period. This number would significantly exceed the company’s employee count (permanent and contracted – Vakrangee incurred 31 crs in employee costs in FY14 and as per the opex breakup does not have significant sub-contracting expenses). The high capex does not match with the current scale of the company’s operations and this is probably opex classified as capex to boost earnings.

4. Vakrangee Kendra (VK) economics – too good to be true
   -As per management, a typical VK requires very little upfront investment by the company with franchise bearing most of the capex and working capital costs. And a typical VK generates 10 lakhs in annual revenues with the franchise getting 70% share leading to 3 lakhs revenues per VK for Vakrangee. These numbers seem too high and are inconsistent with the realized economics of other companies such as FINO and ALW which have struggled in the BC business.
   -In March 2014, Vakrangee had 3,853 VKs which generated approx. 900 crs in Revenue in the full year. This implies Revenue/VK of 23 lakhs which is substantially higher than the management estimate of 10 lakhs per VK. If we consider that the VK rollout would have happened over the year, the average revenue/VK number would be even higher. These numbers are staggeringly high and hence in all likelihood fictitious.

5. Exaggerated claims on White Label ATM (WLA) business –
   -Vakrangee has the license to install and operate 15,000 WLAs over a 3-year period (starting January 2014). Management claims the WLA ATM business will be extremely profitable. However, Vakrangee having installed less than a 100 ATMs over the last 14 months is contrary to management claims (http://www.npci.org.in/nfsatm.aspx). Management claims that they were trying to get RBI permission for new biometric ATM technology and hence the delay. This is difficult to believe considering all the other players (Tata, Prizm, BIT) have already started installing ATMs and now Vakrangee would have to make do with sub-par locations for their ATMs (location is the key driver of ATM transaction volumes). Vakrangee’s lack of progress on WLA ATM deployment is consistent with the market view that the WLA ATM business is economically unviable for most players (http://www.livemint.com/Industry/3YLmH9ZyWTIxjIchh8ed1K/White-Label-ATMs-struggle-to-stay-afloat.html)
   -Management has guided at installation of 5,000 ATMs over the next 3 months and another 5,000 over the next 9 months. Even the largest ATM players have been unable to achieve such a pace of ATM rollout. This number seems fairly exaggerated. Should be verified 3 months down the line if the company is anywhere close to even achieving its rollout target. (The company had made this claim 3 months back – they haven’t installed even 50 ATMs since then)

6. Employee count inconsistent with claimed size of operations
   -As per management, Vakrangee currently has 1064 employees (150-200 at the corporate-level, 800-900 at block level for managing 12,000 VKs and identification and deployment of new VKs). The employee count is inconsistent with their current pace of VK rollout (37 per day) and planned ATM rollout (50 per day) over and above their government business. This suggests that the overall scale of operations is much smaller than what the management claims.

The biggest red flag for me at that time was the company’s capex on computers and printers of approx 20 lakhs per employee !!!! A clear sign of opex being shown as capex.

Thanks Gautham, I agree with your thesis.

@NikhilJain, just take my views for what it is worth. We cannot take someone’s exit multiple as base and arrive at PE. Market will not oblige us in both upside and downside. There is a HIGH price to pay for predictability and sustainability. If page can grow at 35% fo the past 6 years when the economy is not very good it can very well grow at at least 25% when economy leaps. So EPS after 10 years would be 1840. Coming to PE, I would say it will sustain 50 PE if the business maintains its current high ROCE, ROE, Dividend payout, Cash flow. Capex also would have been reduced by then. In which case the price would be 92000 plus dividends each year. I myself do not like to predict 10 years ahead. I would only go 3 years from now and I believe Page could be a doubler from here in 3 years and I’m happy with it.

Generally, companies like Page will be valued at “X times Sales”. I would say page can command 7 times revenue. Currently it is at 10 times sales. So reverse engineering from my above paragraph, would Page attain a sales of 13000 crore in 10 years? Let’s see. I think Page can command 25% market share. Market size for men, women, kids, swim wear in aggregate can be 75000 crore.

Very forward looking statements, so please feel free to sideline me.

@Donald and other admins, I think the last few opinions on page could be moved to Page thread.

Disclosure: I hold page in my concentrated portfolio and I’m not good at predicting stock prices, just that you wrote next 10 years from your view, I wanted to pitch in with my view. Of course, if the current business case changes I would exit.

about page, i agree its not a buy at this level. for some one who has been holding from a lower levels, i dont see any reason to switch. some points. i will keep it simple since most of us know page very well.
1. no meaningful competition.
2. some of the other names like bluedart,Gillette, jubilant foodwork etc trading at 100 plus pe. this is despite repeated under performance in several quarters. HUL with flat growth is trading at 50 pe. what it implies is that one can get out with minimal damage even in the event of bad result. ( page had its first bad (relatively ) quarter in q1 and the price didn’t fall much.
3. in this overvalued market (even after this correction), where are other compelling buys in the high quality space? ( business with predictable earnings, scalability etc)
4. pays 40% of net profit (consistently) dividend. usually high growers dont give that kind of dividend.
5. i have seen tons of companies/instances where reported eps growth is a lot higher than sales growth. you can call it operating leverage, margin expansion or whatever. but this cant go on. in case of page, the profit growth rate has always been equal (more or less) to sales growth. this is one thing i like about page.