The Abuse of the Inland Letter

29 09 2009

The blue inland letter evokes warm feelings.  Those who lived in hostels would know personal letters from family and friends would usually come in those inland letters.

Private. Economical. Large enough to convey the message.

The very same virtues of the Inland Letter seen by middle-class Indian families have been discovered by the corporate India now. What started off last year as a one-off case has become the norm this year. Premium notices from Insurance companies, Dividend information, IPO allotment information, Notices for AGM to shareholders etc which earlier used to come in envelopes are now being sent in Inland Letter cards.

The Blue Inland letter instead of evoking warm feelings, now evoke feelings of disgust, reserved for junk mail.

With companies in cost-cutting mode, every rupee saved helps. Inland letter postage is Rs 2.50 as against Rs 5.00 postage for an envelope. In addition, there are savings on stationery.

The cost of delivering a letter from one-point to another in India is the same, whether it is an Inland letter or an envelope. Government through India Post subsidizes the Inland Letter postage.

When Television competitions were abusing the low cost of post-cards, the postal department came up with a separate category of postcards called competition post-cards, which was priced much higher than the ordinary post card.

As the government subsidizes the postage on the Inland Letter, the government should check this abuse and come up with a separate category of Inland Letter for Business use in a different color.

The Blue Inland Letter should get back to its original use for personal mails only.

– G. Mohan


Share Premium: An Ingenious Political Graft

23 09 2009

One ingenious method for raising money that has come to light in Andhra Pradesh is using share premium account. It is well known that the late CM’s son has business interests in the media sector. The media ventures are already operational and hence visible.  Fewer people are aware of newly floated  cement and steel companies  which are yet to be operational.

The media, steel and cement companies issued shares to the promoters, namely the family, at par. Then the same companies sold at huge premiums often 100-500x times the share value to other investors. On the strength of these investments the media business was valued at Rs 3500 crore in 2008.These investors were large real estate, construction and other AP based firms. These investors perhaps, invested large amounts of money and gave such valuations to shell companies or yet-to-be executed projects with the hope or explicit knowledge that the returns for the investment will come not from the projects per se but through other considerations. The considerations could be anything like concessional land, government contracts, tax concessions etc, which only a person in power can give.

There is nothing intrinsically unethical about issuing shares at a premium. Share valuations have an element of subjectivity. Many angel investors back greenhorn entrepreneurs, based on instinct. It is just incidental that the entrepreneur here had a very powerful father. Now, if the returns do not come through, they will be written off as bad investments in their books. If these investments have been made by public limited companies, as indeed many are, then it is the minority shareholder who loses.

–       G. Mohan

If Jim Collins Were to Analyze the Grounding of Jet Aiways …

10 09 2009

Thousands of passengers were left stranded in airports due to cancellation of 186 Jet airways flights last Tuesday. The flights got cancelled because 360 pilots reported sick

The flash strike by the Jet pilots is just a symptom of the larger problem that Jet Airways is in. It is a manifestation of the sickness that Jet Airways has got into. If I look at Jet through the model propounded by Jim Collins in his latest book How the Mighty Fall, then it is showing many signs of being in an advanced stage of failure.

In this book, the author Jim Collins based on a study of many large companies, proposes that most companies who fail, go through five stages.  Let us look at each of these stages in the case of Jet.

Stage 1:- Hubris Born of Success; – Jet Airways was very successful and became the market-leader in Indian aviation till 2006-07. It redefined customer service and was the toast of the business passengers. It is the sole surviving private airline among the many which were launched in the 1990s. It also made reasonably good profits till 2005-06. In 2005-06, it made a profit of Rs 452 crore on a turnover of Rs 6,088 crore. The success bred arrogance.

Stage 2 – Undisciplined Pursuit of More: – From 2005-06 onwards when the domestic aviation market was growing fast, Jet like other airlines expanded its fleet and network. In the eagerness to grab market share it bought Sahara in 2007.By the admission of Jet Airways CEO Wolfgang Prock Schaeur in Business World, “We have expanded rather fast.”

Stage 3 – Denial of Risk and Peril: – From early 2007 onwards the operating environment of the aviation industry has been very negative. The price of crude started going up and touched its peak of 147 $ in July 2008. The competition in the sector was severe and thanks to the slowing down of the economy, the utilization rates of Jet fell. Jet management behaved as if it was a temporary problem. They launched their international flights. They renamed Sahara as Jet Lite. Yet it continued to make losses quarter-after-quarter.

Stage 4 – Grasping for Salvation: – Using the Collins model we can say with reasonable degree of confidence that Jet is currently in Stage 4. This is a fairly advanced stage after which redemption is rather difficult.

A look at the ‘Markers for Stage 4″ for Jet is in order here.

  • A Series of Silver Bullets: – Jet tried a number of dramatic, big moves like launch of the international service. Even though it was a full-service carrier, it tried to position Jetlite as a low-cost carrier . It also launched Jet Konnect as a new service, which was neither full-serive nor a low-cost carrier. Now, the silver bullet is a 600 Mn $ cost reduction programme.
  • Panic and Haste: – Collins says that instead of being calm, deliberate and disciplined, people exhibit hasty, reactive behaviour bordering on panic. in 2008, when Jet fired 1.900 staffers at one go and then with government pressure Naresh Goyal, Chairman, Jet  made a spectacle of himself when he took the back. Clear demonstration of haste and panic. BusinessWorld reports that based on some insights, Jet Konnect was conceived in a four-hour brainstorming session. It may well be a record time for launch of any new brand, says BW.
  • Confusion and Cynicism: – The flash strike by the pilots stems out of the cynicism and absence of trust in the management. They want to form a pilots union to negotiate their case, which the management is responding by sacking the pilots leading the union. Passengers are totally confused whether Jet is a full-service carrier, low-cost carrier or something in-between. Their drop in service standards has led many long-standing Jet Privilege (JP) customers to shift allegiance to other airlines.
  • Chronic Restructuring and Erosion of Financial Strength ;- Jet has been making losses since the last eight quarters. It has a huge debt burden of 3 Billion $. It has not been able to raise any equity since its IPO in 2005.

Stage 5 – Capitulation to Irrelevance or Death; – This is the last stage of failure. There have been very few instances in business history where companies have recovered and renewed themselves after reaching Stage 4. Xerox is one such case. 

Will Jet Airways be able to pull itself out of the mess? Will Jet xerox Xerox ? 

The odds are clearly stacked against Jet.  

PS: Readers are advised to redeem their JP Miles at the earliest. They may be worthless before you know. 

–       G. Mohan

The Education Sector: Private Enterprises in Profitable Niches

6 09 2009

 Last week, I attended the e-India 2009 conference at Hyderabad. As a part of the event, there was an exhibition. One quick round of the exhibition and one cannot but see the large number of companies and start-ups in the digital learning space. Most of these companies are focused in providing computer and internet aided learning support to secondary school and coaching for IIT and other entrances. HCL Digischool, NIIT eGuru, topchalks, Learningmate, Edurite are some of the names I can recall seeing there.

It seems the success of Educomp whose share prices rule over Rs 4000, has triggered many start-ups in this space. The poor man’s Educomp, Everonn Systems, also had a big stall in the exhibition. The rush to enter this space is not unlike the boom computer education, seen in the ’90s, after the success of NIIT.

BusinessWorld reports that the private equity investors are also very keen to fund education ventures.

“From a sleepy segment, which was the bastion of bureaucrats and an obstinate government unwilling to loosen its grip, education seems to be transforming into a hot sector, luring entrepreneurs on the one hand and private equity (PE) funds on the other. In the past few months, at least four education companies have received equity funding from PE players adding up to about Rs 300 crore.

The biggest investment came from Matrix Partners India, which pumped in Rs 100 crore for a 16 per cent stake in Delhi-based FIITJEE, which prepares students for IIT entrance examinations. Franklin Templeton, another PE player, invested Rs 50 crore in Kota-based Career Point. Delhi-based Career Launcher received Rs 50 crore from Intel Capital. Helix Investments acquired a 30 per cent stake in Mumbai-based Mahesh Tutorials for Rs 60 crore. Helix put in another Rs 50 crore in Mumbai-based e-learning solutions provider LearningMate Solutions. A key reason why PE funds have invested in the coaching segment is that coaching institutes remain outside the purview of the regulatory framework because they do not provide degrees or certificates.”

The entrepreneurs and investors are finding niches in the education sector which is outside of the regulatory framework, where for-profit enterprises could be setup. Education is big business in India, but the government does not want to admit it. It is time the Minister of HRD, opens up education to private sector for for-profit enterprises. This will remove the hypocrisy surrounding the education business and allow good promoters to enter education without using questionable structures like not-for-profit trusts or societies to setup schools and colleges. So investment will come into the area  which needs huge investments rather than just the profitable niches.

– G. Mohan

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