SKS Micro Finance – Spat continues

The SKS MicroFinance spat involving the founder-promoter Vikram Akula and the board on one side and the erstwhile CEO Mr Suresh Gurumani continues. In the past two weeks while none of the sides have openly traded allegations, media reports indicate that the spat is still very much alive.

Analysts across the board have agreed that such a sudden change in management is not good for the company and its perception with investors.  Mr NR Narayan Murthy’s (of Infosys fame) PE fund Catamaran has a stake in SKS Micro had reportedly advised the company to make a statement clarifying the details of sacking Mr Suresh Gurumani. The news article also states that a draft statement, circulated amongst board members, mentions investors requesting Mr Vikram Akula to return to a full time operational management position. This is purportedly the reason for the sacking of Mr Suresh Gurumani. However we do not believe this is the full story as in such as case Mr Suresh Gurumani would have been given another profile within the company or given adequate time to decide and move on. A sudden departure is always seen with suspicion.

SEBI, the regulator, has also asked the company to explain the reasons for sacking the CEO. SKS Micro has apparently responded to the query.

It has since transpired that Mr Suresh Gurumani, though sacked as the CEO, continues to be a director on the board of SKS Micro on the back of a Andhra Pradesh High Court Order. The order requires the company to continue Mr Suresh Gurumani as a director of the company. A bigger boost for Mr Suresh Gurumani is that same order also prohibits the new management and / or the CEO from taking any major policy decisions.

We believe that this is in essence bad corporate governance. We expect companies to be more transparent in their major policies, including those related to human resources. The top management drives policies which in turn is likely to drive growth. Any sudden changes therein unsettles investors and undermines the seriousness of founders to professionalize the management. Today’s board and management should remember that investors are well aware of inter-personal friction amongst management, and an open address of the issue is more appreciated.

The board of SKS Micro is slated to meet again on 22 October 2010, and Mr Vikram Akula and Mr Suresh Gurumani are both expected to be present. For investors, we can hope that the board first debates and approves the second quarter (Sept-2010 end) results and then debates the on-going issues within the management.

SKS Micro Finance – First Results post-Listing

Since this was the first result declared after the company’s IPO during July-August 2010, I think it was nice of the management to present financial results for the previous year comparable quarter (June 2009) and preceding quarter (March 2010) as well. The management also mentioned that the business is cyclical with larger business being derived in the 2nd half (Oct to Mar). It is interesting to note that while the management has indeed provided quarterly disbursements for the past three years, none of the other data, including the Income Statement (Profit & Loss Account) have not been provided for the other quarters (i.e. not provided for quarters ending Sep-09 and Dec-09). In light of the management’s own admission that their business is cyclical and the fact that these were the first results declared after the listing the financial details for the intervening quarters would have helped analysts better.

It should be remembered that beginning October 1st we have entered the earnings season for the second quarter results, i.e. for the quarter ending September 2010; while SKSMicro has declared these results for the first quarter, i.e. quarter ending June 2010. Hence, I believe that these results for the first quarter, i.e. June 2010 could have been announced earlier.

One surprise, and investors do not like surprises – especially without explanations – was the firing of the CEO. Though the whole new management team was announced, the reasons for firing the erstwhile CEO was only hinted at during the conference call as performance related. Having ensured a spectacular listing, investors were left guessing the nature of performance issues within the management. This, in short, isn’t being investor friendly or transparent within a few months of listing. A recent example is that of Mark Hurd, the ex CEO of HP. While he was fired, the Board of HP in clear words spelt out the reasons for the same. Whether investors agree with it or not; or view it as too harsh is a separate matter – the fact is that HP clearly laid out to the investors the reasons for firing its CEO. That is indeed being transparent.

The result presentation is available here.

Pipavav Shipyard IPO Analysis – Avoid

The Pipavav Shipyard, jointly promoted by SKIL and Punj Lloyd, has set-up an integrated shipbuilding and fabrication facility. Once the fabrication facility is completely operational, Pipavav Shipyard would be the largest shipbuilding site in India capable of manufacturing ships up to 400,000 DWT (dead tonne weight) and fabricate and construct offshore supply vessels (OSVs). Pipavav Shipyard comprises two sites. The SEZ unit is located on ~95 hectares of land and an EOU located on ~103.92 hectares of land (benefits of which are available till FY12). The construction of the shipyard (excluding the offshore yard) is expected to be completed in Oct-09.

Key Data

Opening Date
16 Sept 2009
Closing Date
18 Sept 2009
Price Band
No of Shares on Offer (mn)
Total Post-Issue O/s Shares (mn)
Market Capitalisation (Rs Bn)

Project Costs (Rs Mn)

Total Cost
Invested (till 15 July 2009)
Investment from IPO Proceeds
Construction of Shipbuilding & Ship Repair facilities & Offshore Business
Working Capital Margin
Total Project Cost

Order Book

  • Pipavav Shipyard has a current order book of Rs44,596 mn (USD931.63 mn). This order book requires the company to deliver a total of 34 vessels, including 12 OSV’s for ONGC.
  • Of the below detailed order book only Rs23,234 mn are firm orders. These firm orders are for 10 panamax size vessles and 12 OSVs. Of the balance Rs21,362 mn, orders for 8 panamax vessels worth Rs14,469 mn are under re-negotiation and an order worth Rs6,893 mn (4 panamax size vessels) is under arbitration.
Order Value
No of Vessels
Vessel Type
Rs Mn
Golden Ocean
Panamax Firm Order Agreement
Panamax Firm Order Agreement
Golden Ocean
Panamax Firm Order Agreement Under renegotiation to grant option to delivery of vessel, option exercisable until 31-Dec-10
Panamax Firm Order Agreement Under renegotiation to grant unilateral right to customer to terminate the contract if it is unable to arrange funding
Panamax Firm Order Agreement Under arbitration

Offshore Supply Vessel (OSV)
Fixed price contract

Subsidy on Shipbuilding
The Government of India had instituted a shipbuilding subsidy scheme wherein shipbuilders could avail a 30% subsidy on the cost of the ship being built from the government. The caveat is that the shipbuilding order should have been placed before 14-Aug-07. Based on this criteria, all of the present order book of Pipavav Shipyard qualifies for this subsidy. This subsidy is available only on vessels ordered through the ICB (International Competitive Bidding) route, and hence the government has assurance of the subsidy demanded being within reasonable parameters. Further, the benefits are capped at 30% of the order value, thus benefits accruing on account of the SEZ / EOU status would decrease the actual cash subsidy that the company is eligible to receive.

The cost advantage that India offered, along with the subsidy provided by the Government (up to August 2007) helped improve the order inflow in the past 2-3 years. In addition, the Indian shipbuilding industry benefitted from orders being passed on from the traditional shipbuilding countries – Korea, Japan and China – as these were fully booked. In the near future, the capacities at these shipyards is likely to be freed up, resulting in increased competition. But most importantly the 30% subsidy incentive will not be available, and hence force the Indian shipyards to compete on a purely cost advantage basis, if any.

Comparative Valuations

Pipavav Shipyard
ABG Shipyard
Bharati Shipyard
Lower End
Upper End
Order Backlog Rs Mn
EV / Order Book (FY11) x
P / E (FY11) x

On a comparative basis, though Pipavav Shipyard’s superior dockyard, product facilities as well as business potential from Punj Lloyd – a co-promoter – do deserve some premium to the peer-set, we believe that the inherent nature of the business continues to be cyclical, and the lack of proven execution (vessel delivery) track record correspondingly requires a discount to the same peer-set. We thus, believe that the premium demanded is unjustified, and the stock would be available at more reasonable valuations in due course.

GMR Infrastructure Analyst Meet Update

GMR Infrastructure Analyst Meet Update

We attended GMR Infra’s Analyst Meet yesterday. Mr GM Rao address the analysts’ after a gap of about three years, i.e. the first time after the IPO. The key takeaways from the analyst meet are:

  • Mr GM Rao gave the gathering a detailed view of the group from the beginning to date, and his idea of building a strong and long-lasting institution which could continually grow.
  • He also mentioned that the group has an internal benchmark hurdle rate of at least 16% IRR for all their projects.
  • The presentation mainly concentrated on a brief about the various operational and the under-development projects.
  1. Airports – Delhi, Hyderabad and Turkey
  2. Power – 823MW of operational power projects, 5,610MW of under development thermal power projects, and 1,190MW of under development hydro power projects. These include two hydro power projects (550MW) in Nepal. In addition, GMR Infra has acquired a 800MW under development gas-based power plant in Singapore.
  3. GMR Infra’s parent company has acquired a 50% stake in InterGen which operates 8,086MW of power plants in various locations across the globe (UK, Netherlands, Mexico, Philippines and Australia).
  4. Roads/Highways – six operational highway projects (three annuity-based and three toll-based), and two recently awarded under development projects.
  5. Urban Infrastructure – this vertical mainly centres around developing SEZ’s. The group is developing a SEZ at the Delhi International Airport, two at the property around the Hyderabad Airport, and one near Chennai.
  • The last few slides on the presentation detailed the present debt-equity position of the group. The presentation states that the present Networth is Rs84.25 bn, while its debt stands at Rs123.38 bn, indicating a debt-equity ratio of 1.5. It was further highlighted that on a standalone basis GMR Infra has a net cash position of Rs3.23 bn. The debt on the books of the various project SPV’s is Rs126.61 bn.
  • To underscore the debt position, the management then highlighted the debt in each of the various project SPV’s and mentioned that the debt is largely on a non-recourse basis to GMR Infra, with the door-to-door tenor varying from 10 years to 17 years.
  • Lastly, and in our view most importantly, the management indicated that they would be required to raise equity of Rs60.0 bn in the current fiscal, and another Rs15.0 bn within the next two years. This equity is planned to be raised as under:
Funding Raising Details
Company / Entity Raising Equity Rs Bn
GMR Infrastructure 25
GMR Energy 15
GMR Roads Holding Company 5
GMR Airports Holding Company 15
Total Equity Issuance Planned in FY10 60
GMR Infrastructure International (by FY12) 15
Total Equity To Be Raised 75

It may be recalled that during the FY10Q1 results conference call the management has stated that they would not be raising any equity in the current fiscal and the funding requirement was not immediate (with the exception of small equity infusion required in the recently awarded road / highway projects). We, however, have estimated that the group would need to raise Rs45 bn in equity and another Rs182 bn as debt over the next three years.

Our estimate for the equity requirement is lower as it is based only on the existing projects at hand. We believe that the incremental equity issuance would partly take care of the funding requirements stemming for newer projects.

At current valuations, we do not believe the market factors in the risk associated with multiple projects, and execution issues therefrom. We find it difficult to justify the growth premium accorded by the market to the stock.

P.S.: The shareholder’s have approved a stock split from a face value of Rs2 per share to Rs1 per share. The record date for the stock split is 3rd Oct-09