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Uber Is Taking Investors For a Ride. And So Are Its Bankers!

Nov 18, 2016

In this issue:
» Executive compensation at debt heavy firms
» As we predicted, banks start slashing deposit rates
» Update on markets
» ...and more!
00:00
Bhavita Nagrani, Research analyst

Startups...

Two groups are typically most interested in these companies. The first is the private funds. They look to invest in a well-known startup and then offload their stakes later at higher valuations. The second group is the investment banks. They're more keen to take on a management role during the initial public offer. The prospect of high fees and a reputation boost from working with startup poster boys keeps the banking community coming back to this space.

Ride-hailing company Uber has never had much trouble finding funds. This is despite the company's refusal to disclose its financials. Uber's progress, big ideas, and near monopoly fascinate investors. Not the financials...or whether the company is earning a profit.

And some of the world's leading bankers have been selling Uber shares to their clients. The selling activity did start to wane for a bit (again, because Uber does not disclose its financials). However, that has not waned interest there is another group of banks who are happy to take their place.

We would never do this at Equitymaster.

A great service or a popular brand does not always translate into a great investment for shareholders. Knowledge of financials and fundamentals is a must for us to consider a company. And if we don't like the financials and fundaments, we don't recommend the company.

Managements we meet, are often keen to know, whether the company's stock could be recommended. But we maintain our distance in these relationships. And if we give a negative view, well, that's usually that time we'll ever hear from that company. But this has always been our policy - to give an independent view in the best interests of our subscribers.

We have a process. A process that ensures no biases or other interests are at play and that our subscribers' money is not exposed to undue risks.

Deep knowledge of the financials and management of a business are at the core of our recommendations. We are willing to travel far and wide to meet managements and visit plants. But we will reject any company that lacks sufficient information or is simply beyond our circle of competence, irrespective of how popular its growth stories are with the market.

This is certainly true for the The India Letter. Rather than buying into the rosy pictures managements and the press paint, the team looks to capitalise on Megatrends. With its boots on the ground approach, the research team makes sure that there is more to the company than just an interesting narrative.

02:45 Chart of the Day

It will be wrong to assume that the problem of huge NPAs in Indian banks is primarily due to the large borrowers. The smaller companies in India, put together, have had a big role in exacerbating India's excessive debt problem. In fact as per an analysis by Mint, out of the 305 small non-financial companies in BSE 500, most have high amount of debt relative to their market capitalization.

It is therefore not surprising that these firms have trying to cut costs to meet their debt obligations. And as a result of this their executive compensation as a percentage of sales have remained stagnant. In fact the gap in the executive compensation between debt heavy companies and those with lean balance sheet has widened over the years. With interest coverage ratio in most debt heavy firms near ten year lows, it is unlikely that the executive compensation of indebted firms will improve anytime soon. Which means many of them could be at the risk of losing their key personnel.

Widening Gap in Executive Compensation of Debt heavy and Lean Companies


03:20

Like we wrote a couple of days back, demonetization could end up being a demon for savers. Particularly for a large section of the population that saves money in bank fixed deposits. We had predicted that bank deposit rates could go to decade lows in the days to come. Some of the largest banks in the country, like SBI and ICICI Bank, are receiving more deposits in a single day than they typically receive in an entire month. So with their deposit books swelling, banks have now begun cutting the interest rates on fixed deposits. The demand for credit also remains muted. For the banks, the temporary rise in treasury income will compensate for the pressure on lending margins. But for depositors looking for higher real interest rates, the rate cuts are a big dampener.

04:00

Just like Equitymaster strives to recommend stocks that meet our stringent quality standards, our associate company, HelpYourNGO works to make donating to NGOs more transparent. All the NGOs recommended by them meet the highest standards of financial reporting, management quality and a proven track record of helping the most needy.

This month they recommended Cuddles Foundation, which provides nutrition support to children affected by cancer. More than 20,000 cancer-affected children and their families are thankful to Cuddles Foundation for their efforts. Thousands of Indian children lose their battle against cancer because they lack the funds to access the kind of nutrition we take for granted. In fact, more than 40% more children can survive childhood cancer if they only had access to better food.

Cuddles Foundation reaches out to these families and provides them with nutrition support, counselling and food rations so that their children do not succumb to the disease. Their results are outstanding - only 3% of patients surveyed dropped out of the treatment as opposed to 21% before Cuddles intervened. The smiles on the children's faces, the relief for the parents, many of whom are daily wage labourers, tells its own story. Even the Government recognises Cuddles Foundation's achievements - President Pranab Mukherjee awarded them with the National Award for Child Welfare on 14th November! Support Cuddles Foundation in reaching out to underserved families in government hospitals across India.

04:45

After rising sharply in the early session, the benchmark indices have shed most of the gains in the post noon session. At the time of writing, BSE Sensex was trading lower by 75 points and NSE-Nifty was trading lower by 10 points. But the mid cap and small cap indices are trading higher by 0.6% and 0.3%, respectively. Stocks from auto, power and pharma sectors are the biggest gainers.

04:55 Today's Investing Mantra

"It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you'll do things differently." - Warren Buffett

This edition of The 5 Minute WrapUp is authored by Bhavita Nagrani (Research Analyst) and Tanushree Banerjee (Research Analyst).

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Equitymaster requests your view! Post a comment on "Uber Is Taking Investors For a Ride. And So Are Its Bankers!". Click here!

1 Responses to "Uber Is Taking Investors For a Ride. And So Are Its Bankers!"

sanjay limaye

Nov 18, 2016

Your bulletins, news letter and reco intimations are very good.

It is for the first time I read about HelpYourNGO related info on Cuddles Foundation. While it is expected that every reader will always go through the entire write up, it may be worth while to spell out about this HelpYourNGO related information right at the beginning of every letter coming from Equitymaster. This in itself a service to humanity as knowing real good NGOs is as importnat as the place to invest. I ma sure most readers will not object to this change as Giving should come before Taking.
regards,
Sanjay

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Equitymaster requests your view! Post a comment on "Uber Is Taking Investors For a Ride. And So Are Its Bankers!". Click here!
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