by RV Raman
‘You’ve said that before, Papa. Right now, our interests are aligned.’
‘What about outsiders? Competition? Do they know about Project Iskan? You’re in discussions with three acquisition targets.’
‘All my discussions with Ivory, Ebony and Mahogany took place in Singapore or Hong Kong. Discussions in India have been carried out only through intermediaries.’
‘And your finance person? Sundar?’
‘He too thinks it is a fund infusion of about $250 million by Kantoff. He hasn’t been involved in the acquisition discussions.’
‘Good. Sundar is a loyal fellow – not too ambitious – and will do as he’s told. He will be an asset when the time comes. His last report seemed to suggest that you were short of cash. Are you?’
‘Yes, but don’t worry. The Kantoff cash will come in time.’
Chapter 8
Arnav Mazumdar turned out to be the antithesis of Vikram – a soft-spoken man of medium height in his early thirties, wearing round rimless glasses. Clad in a pale grey T-shirt and blue jeans, he was waiting for Dhruvi when she entered the Cafe Coffee Day outlet. He smiled pleasantly and shook her hand as she thanked him for meeting her.
‘No, no,’ he said. ‘It is I who must thank you for taking on this case.’ The worry lines on his face deepened as he continued, ‘Any news of Puneet? It’s been 36 hours now.’
‘Unfortunately not, Mr Mazumdar –’
‘Call me Arnav, please. No need for formality.’
‘If you don’t mind, Mr Mazumdar…it’s not a formality. It’s the way we are required to interact with people, a norm. It’s to show that we respect the citizens we serve. So please allow me –’
‘Sure, Inspector. If you insist.’ Arnav smiled genially. ‘I didn’t mean to…you know.’ He shrugged.
‘Thank you. I believe you are here with family?’
‘Uh-huh. My wife is expecting and is here with her mother.’
‘So you are not a part of the MyMagicHat due-diligence team, I gather?’
‘That’s right.’
‘How well do you know Puneet?’
‘Oh! Very well. We are good friends.’
‘He’s younger than you, isn’t he?’
‘Only by a couple of years. But our tastes match and he comes home often. My mom is very fond of him too.’
‘Have you told her about Puneet’s disappearance?’
‘My mom? Of course not. Why trouble her unnecessarily? Puneet will turn up soon.’
‘Will he turn up soon, Mr Mazumdar?’
‘Why not?’ Arnav’s face clouded over again. ‘Won’t he, Inspector? He has to. Where could he have gone? He’s a very sensible guy, not the kind who takes needless risks.’
‘Any idea what could have happened to him?’
Failing to articulate a cogent answer, Arnav threw up his hands and shook his head.
‘I hope he hasn’t had an accident,’ he said eventually. ‘Have you checked with the hospitals?’
‘The missing persons’ department is doing that, but there is no news yet.’
‘Oh… I hope he’s okay.’
‘What kind of a person is he?’
‘He’s a great guy. A really good human being. Doesn’t speak ill of anyone, keeps his cool in the face of adversity, has excellent judgement and unquestionable integrity. He is a soft-spoken guy too. I’ve never heard him raise his voice. He also doesn’t waste his money. Still preserves his middle-class values despite earning an income that already exceeds his father’s.’
‘Looks like you know him well.’
‘Oh, very well. I know his parents too. His mother must be worried sick. She dotes on him.’
‘I wanted to speak to you because you know him well, Mr Mazumdar. I need to know if he had any personal problems. I will keep it confidential.’
‘Certainly, if that can help in finding him.’ He lapsed into thought for a moment, then shook his head. ‘No personal problems that I’m aware of. He does confide in me, sometimes, but he never mentioned problems.’
‘Drugs, alcohol?’
‘No drugs – you can absolutely rule that out. Alcohol…well, he does drink and enjoys his drink too. We get together some weekends and go to a bar. But he can hold his drink. No addiction, if that’s what you mean.’
‘Did you know that he was working all the four evenings he was here? I’m told his colleagues went out to visit the pubs, but he didn’t.’
‘Yeah, I know.’ Arnav grinned. ‘He felt that the time allotted for the due diligence was not enough. The only way he could do a proper job, he said, was by working longer hours. Besides, as our retail industry specialist, he needs to sign off on the DD. So he just rolled up his sleeves and got down to it.’
‘Mr Deswani tells me that the DD was a mere formality.’
‘That’s Puneet for you. In his view, a DD is never a formality. And I agree with that. If he’s being paid to do a proper job, he will do a proper job. Even if his boss is not very particular. That’s how he’s wired.’
‘Okay. You said that he has no personal problems. Any issues at work?’
Arnav shifted in his chair and fidgeted with his coffee mug.
‘Well…he and Vikram don’t see eye to eye sometimes. Puneet can dig in his heels, you know, and Vikram doesn’t like that. Some partners like to have things their way.’
‘Was there a problem between Puneet and Vikram?’
‘I wouldn’t call it a problem, but yes, there were some disagreements.’
‘Relating to MyMagicHat?’
Arnav nodded. Dhruvi waited for him to elaborate, but when he showed no sign of doing so, she prodded him.
‘What was the nature of the disagreement?’
‘An internal Kantoff matter, Inspector. Is it important? I don’t think it has anything to do with Puneet’s disappearance.’
‘With due respect, Mr Mazumdar, can I be the judge of that? I have no axe to grind in this matter and will be objective. I won’t talk about something if it’s not relevant to the investigation.’
‘Okay, but please keep this to yourself. It was at an internal meeting a month back…a video conference with our Singapore and Hong Kong offices. We were considering if we wanted to invest in MyMagicHat. Nigel Tammer, our senior partner from Singapore, and Jason Letang, a vice president from Hong Kong, were on video. Vikram and I were in our office in Mumbai.
‘You must understand the background to the video conference. We were – and still are – under pressure from other partners and some investors to take some exposure to Indian e-tailing. Several other PE firms have already done so and Vikram had been suggesting for over a year that we do so as well. Earlier, he had told one of the Purarias that we would be interested in participating in the next round of funding. They had called back and said that they were now seeking funding.
‘A few weeks before that, Nigel had asked Puneet – as our retail industry specialist – to analyze the Indian e-tailing industry and prepare a presentation on it. With that background in mind, let me tell you about the meeting.’
Arnav shifted in his chair and began narrating his story.
■
‘Before we bring Puneet in,’ Vikram had begun, when the video conference had got under way, ‘I want us to understand that the Purarias will not wait for long. I believe they have already spoken to at least two other PE firms. My sense is that this is a big deal – they’re planning something major.’
‘Fair enough,’ Nigel said. ‘But we’ll have to assess the opportunity just as we assess any other. I am not sure we want to be hurried into a decision.’
‘We must make our assessment quickly, Nigel. Our preliminary evaluation has already taken longer than it should have.’
‘You mean Puneet’s report?’ Jason asked.
‘Yes. We should have had this discussion ten days back –’
‘Perhaps,’ Nigel interjected. ‘We must also give our people the time they need to make a proper assessment. From w
hat I hear, Puneet has been working late into the night on this matter.’
‘We are where we are, Nigel. Let’s not lose any more time. Shall we call Puneet in?’
‘Please.’
Vikram nodded to Arnav, who fetched Puneet.
‘We have seen the presentation you mailed us,’ Nigel said, as Puneet took his seat. ‘You speak of positives as well as negatives of the investment we are considering, but I saw no clear recommendation. Can you summarize your views?’
‘Sure, Nigel. I didn’t make a recommendation, as that would depend on the valuation. I am not aware of the share price the target is asking for. But let me summarize my views. I will first speak of the Indian e-tailers in general, and then about the target company.
‘I’ve taken a five-year perspective, as the commitment period of our fund ends in 2021. If we invest now, we will have to exit before 2021 and return the money to our investors.’
‘Got it. Go on.’
‘The first thing to note is that estimates of industry size and growth rate vary widely. Depending on which forecast you choose to believe, the industry size can be anywhere between $48 billion and $200 billion in 2020. That’s a very wide range.
‘After studying multiple forecasts, including the one commissioned by MyMagicHat, my team and I have three main observations: first, the future market share of online retailers is overestimated, particularly, the share of the top five; second, the reports do not take into account several risks; and finally, the profitability forecasts for online retailers in 2020 are too optimistic. I will take each of these, one by one.
‘The market share forecasts assume that online retail will quickly grab a huge chunk from physical retailers. And they are contingent upon a number of factors such as 4G penetration coming together. The forecasters openly acknowledge that the current growth is high for two reasons: e-tailing is in a nascent stage and they are offering deep discounts. This growth in market share is likely to slow drastically once they begin reducing discounts.
‘With everyone getting into e-tailing – banks, payment gateways, retailers, wholesalers, you name it – the market will fragment further. This fragmentation will be hastened as every business opens up an electronic presence on the Internet, an e-shopfront, as it were. This will cause the market share of e-tailers to plateau off sooner than the reports suggest and at a lower level than anticipated.
‘Essentially, e-tailers are information technology-enabled businesses. Technology, as we have seen repeatedly, quickly becomes a commodity, except at the high end. The technology that e-tailers use is not leading-edge or high-end and is, therefore, easily duplicated. Their advantage is not likely to last very long. Nor will the uniqueness of their proposition.’
‘Unless they develop another proposition, I suppose?’ Nigel cut in.
‘Exactly!’ Puneet confirmed. ‘And that brings me to my second point. Established retail chains around the world have developed sustainable advantages, such as better sourcing and a deeper understanding of customer preferences. Some have taken to backward integration too and have house brands accounting for a significant share of their sales. Now, they are not going to sit by and watch idly as e-tailers eat into their business. They are hitting back and this is a major risk that the forecasters have not adequately factored in.
‘Put yourself in the shoes of a physical retail chain. When you see your market share eroding, you will go online too. All you have to do, as Mr Puraria likes to say, is to add an e-commerce layer to your existing operations. He may be oversimplifying it, but his point is valid.
‘With technology becoming a commodity, the cost of an e-layer will continue to fall. Already, there are service providers who offer an e-shopfront “on the tap”. For all we know, Google may announce a free platform. An established retailer then only needs to “plug and play”. The larger ones may decide to build their own e-layer, as MyMagicHat has done. One way or the other, physical retailers will become omni-channel sellers.
‘We already have the Tatas doing that with CLiQ. Once this becomes more widespread, those who are mere aggregators or marketplaces could see their market share stagnate and, eventually, decline. If Google enters the business, their death will be quicker.’
‘What stops e-tailers from adopting omni-channel strategies too?’ Jason asked.
‘Nothing at all. But once they do that, they will become the same as physical retailers. They will have to spend on real estate and physical shops too. Their cost advantage vanishes.’
‘What about customer loyalty?’ Nigel asked. ‘E-tailers claim that loyalty plays a big role.’
‘That remains to be seen, Nigel. We conducted a small informal poll last week. It is, by no means, scientific or representative, but it does give us a sense of customer loyalty.
‘Of the 303 people surveyed, 287 are frequent online buyers. That is, they have bought something online at least thrice in the past six months. Of these 287, 71 per cent have bought from at least three e-tailers, say, Flipkart, Amazon and Snapdeal. And a whopping 97 per cent have bought from at least two e-tailers. Only 3 per cent of the frequent buyers have stuck to one e-tailer! That says something about their loyalty, doesn’t it?’
‘I’m not sure we can go by an informal study,’ Jason snapped. ‘As you yourself admit, it’s not the most scientific survey. But let’s leave that aside for the moment and come to the crux of the issue – profitability.’
‘Okay. The current practice of selling below total cost is inherently unprofitable,’ Puneet continued. ‘I don’t think any of us disputes that. While convenience and choice do play a role, the main proposition today is price.
‘Once e-tailers stop selling below cost, we don’t know how many customers will continue buying from them. Sales will fall, but fixed cost will remain where it is. The forecasts we have seen don’t seem to adequately take this transition into account.’
‘Hang on, Puneet,’ Jason interrupted again. ‘Before you trash all the work forecasters have done, what is your basis for saying this? The GMV has been steadily increasing.’
‘GMV is fiction, Jason, a notional number. It is the summation of the MRP – Maximum Retail Price – of all goods sold, irrespective of discounts and cashback.
‘For instance, it doesn’t reflect the 50 per cent discount this tie was sold at…’ He held up his tie, ‘… or the ₹200 cashback I got on this pen. If they increase the discount to 95 per cent, the GMV will climb faster. The actual sales are only a fraction of the GMV.’
‘Come on –’
‘Let me give you a real example. My mother recently bought a saree at a discount of 80 per cent. The MRP was ₹2999, and she bought it online at ₹599. She was delighted…till she found a very similar saree in a physical shop for ₹600 – the real MRP was ₹600!’
‘A similar saree,’ Jason interjected. ‘Not the same one.’
‘Still, that does tell us something. Except in the case of reputable branded goods with published price lists, who is to say what the real MRP is? Take Casio watches, for example. You will be hard pressed to get 5 per cent discount on popular models. Now that is a real MRP!
‘Any retailer – electronic or physical – can boost his GMV by selling little-known brands at an inflated MRP and offering a high discount. Not only does a huge discount give buyers an illusion of a good deal, but it also inflates the GMV. I suggest we disregard GMV.’
‘Fine. What is your basis for trashing their profitability estimates?’
‘A new equilibrium between physical and electronic retailing will eventually be reached. At that point, manufacturers will show no preference and will supply goods to e-tailers and physical retailers at the same price. Then an e-tailer’s margins will be higher than a physical retailer’s only to the extent his fixed costs are lower. But he will have to bear shipping costs. A physical retailer has real estate costs, whereas an e-tailer has IT and shipping costs. By that time, physical retailers would have established their e-commerce layers. They would be s
traddling both physical and electronic channels. A pure e-tailer would have lost much of his advantage.
‘Also, look at it from the point of view of common sense, Jason. At some point, e-tailers will have to raise prices to begin making a profit. When they increase the price, won’t volumes fall? They must! It’s simple economic theory. While the forecasters have liberally factored in price increases, they haven’t factored in a commensurate drop in sales.
‘Are you suggesting that online retailers won’t be profitable?’
‘Not all of them. Some – most likely, the top few – could be profitable in due course. But they won’t be as profitable as the forecasts suggest.’
‘All right, Puneet,’ Vikram cut in, displeased at how the discussion was going. From his manner, it seemed that he had been holding back all this while. ‘You’ve made your point about the e-tailing industry. Tell us about MyMagicHat itself. Or are you suggesting that they are a bubble too?’
‘The Purarias are one of the very few who have an integrated retail business – from distribution and dealerships to logistics to physical retail to e-tailing. MyMagicHat is the e-layer of an established retail business that has been in operation for years.
‘It is an open secret that some of MyMagicHat’s top sellers source primarily from Puraria companies that share a common sourcing base and logistics network with the group’s physical retail chain. To that extent, MyMagicHat is an extension of the group’s existing retail business. That makes them different from most of the top e-tailers.’
‘Well, then,’ Jason said. ‘Do you support the investment?’
‘If we want to make an investment in the Indian e-tailing sector,’ Puneet replied, choosing his words carefully, ‘it is a potential candidate. However, it is too early to tell whether profits will accrue at MyMagicHat or elsewhere in the retail chain.’
Vikram, whose gaze on Puneet had turned to a glower following Jason’s question, brightened visibly.
‘What about their business plan?’ Jason asked. ‘Do you buy it?’