Bankerupt (Ravi Subramanian)

by Ravi Subramanian

  Cirisha freaked when he told her about how he had managed to get a bottle of alcohol on a dry day by paying an additional five hundred rupees. ‘How could you even do that? You bribed a shopkeeper for a bottle of alcohol! How can you be so cheap?’ she ridiculed. ‘I can’t believe this.’

  ‘It’s OK. I am happy, he is happy. I got what I wanted, and he got more than what he wanted.’

  ‘Getting what you desire at any cost is all that you crave for, Adi. Right?’ Cirisha was livid. It was not about the five hundred rupees. It was about the fact that Aditya had broken a moral code of conduct that she had expected him to adhere to. He didn’t understand what the fuss was all about. But seeing Cirisha go ballistic, and in the interest of peace, he apologized. The bottle of Chivas was consigned to a shelf in the room, with Aditya promising not to touch it on that trip.

  It was for the first time that day that Cirisha was exposed to Aditya’s tendency to focus on the ends more than the means. Shortcuts didn’t matter to him as long as the objectives were achieved. This worried her. But in the euphoria of the honeymoon, the incident was forgotten. At least temporarily.

  5

  June 2004

  Mumbai

  Aditya and Nalin walked into the coffee shop of the Grand Hyatt. They were late for the meeting with Jigar Shah.

  Hailing from Kolhapur, Jigar Shah had created Step Up Shoes, one of the most successful footwear brands in western India, from scratch. From a modest beginning twenty-six years ago, when he was hardly thirty, Jigar Shah had grown the company to clock a turnover of over four hundred crore rupees.

  Somewhere along the line, handicapped by the lack of big-corporation finesse and hindered by his lack of pan-India selling and distribution skills, Jigar Shah had hired a CEO. A professional who came to him armed with an MBA from a premier business school with a decade’s worth of expertise in managing businesses. Shivinder had been with him for over six years and it was under him that the company had really flourished. Of late, Step Up Shoes had even diversified into other products like belts and handbags. Jigar Shah maintained a small corporate office in Bandra Kurla Complex, while his manufacturing facility was located outside Mumbai on the Goa highway.

  Nalin was distinctly uncomfortable. It was always a red flag when a promoter wanted to exit a business. He had mentioned this to the branch banking head of GB2 who had set up this meeting.

  ‘I am told that he is a very finicky guy.’

  ‘I’ve never met him.’ Aditya said.

  ‘For the first time, we are meeting someone without knowing his complete background.’ They had heard about him. Everyone had. But no one from the investment banking community had ever met Jigar Shah. It was because Jigar Shah was not seen as someone who would ever sell his company. For Jigar Shah, Step Up Shoes was not just another business; it was a means to provide livelihood to the thousand people who worked for him.

  Jigar Shah was in the coffee shop waiting for them. ‘My apologies, Mr Shah. The traffic was horrible today.’

  ‘I can understand, Mr Sud. My office is close by. So it wasn’t a problem for me.’ Jigar Shah turned out to be surprisingly warm and welcoming.

  The pleasantries continued for a few more minutes. Nalin took the lead. ‘Pardon my ignorance, sir, but I am not completely conversant with your business in terms of financials, scale and dynamics.’

  ‘Oh yes. My CEO will take you through the details.’ And he raised his hand, pointing in the direction from which Nalin and Aditya had entered. Both of them turned to see whom Jigar Shah was pointing towards.

  ‘Shivinder?’ Aditya exclaimed. ‘What are you doing here?’ The CEO had just walked into the meeting.

  ‘So you know each other?’ Jigar Shah was confused.

  ‘Of course. We went to the same business school,’ Shivinder Singh quickly responded. ‘Good to see you here, Adi.’ And he walked past Aditya’s extended hand and hugged him. ‘Didn’t know you were with GB2. The last I met with you was when you were a photocopier salesman. Modi Xerox it was. Right?’

  ‘Yes. Years ago.’ Aditya nodded. ‘You joined Step Up Shoes?’

  ‘Shivinder is our CEO. He has been with us for six years. He is like family now,’ Jigar Shah stepped in.

  Nalin, who was just a spectator to this reunion of B-school alumni, was getting impatient. ‘Let’s begin.’

  All of them settled into their respective chairs around the coffee table and Shivinder began. ‘You must have read the profiling document that I had sent out.’ Aditya and Nalin nodded. ‘The company was started by Jigar Shahji over twenty-five years ago. A first-generation entrepreneur, he built this company to its current level. Last year we clocked a turnover of roughly four hundred crore rupees, out of which we made a profit of around eight crore rupees. Our growth trajectory has been fairly impressive.’

  Nalin was listening intently. He held back his questions.

  ‘Over 40 per cent of our turnover comes from the overseas market. We are suppliers to Puma and even Nike. We adhere to the latest CPSIA and ISO norms.’ Nalin raised his eyebrows.

  ‘CPSIA—Consumer Product Safety Improvement Act. It was implemented by the US government particularly with respect to children’s products.’ Nalin simply nodded. He had no clue what Shivinder was referring to.

  ‘The remaining 60 per cent comes from the local market. Our margins here are quite reasonable. Better than exports. A shoe which costs only a hundred and twenty-five rupees to produce, retails for around six hundred rupees. We make roughly two hundred and fifty rupees a pair.’

  ‘Interesting,’ Aditya butted in.

  ‘Yes, it’s a good business to be in. I have built every bit of it with my own hands,’ Jigar Shah finally spoke.

  ‘Then why are you selling it?’ It defied logic that a promoter would want to exit such a lucrative business. Nalin had obviously not been briefed about what prompted Jigar Shah’s decision.

  ‘I am physically not in a state to run it, Mr Sud. It has not been an easy decision. This business is my life. Last month, I had an open-heart surgery. I don’t have any children who would take care of this business. Or, most importantly, the people who work with me. I want to make sure that after me, there is someone to take care of them.’

  ‘OK. Fair enough.’ There was no sign of emotion from Nalin. Aditya looked at him. ‘Never mix business and emotions. Else you will be in trouble,’ Nalin had told him once.

  For the next thirty minutes, Shivinder spoke uninterruptedly about the business, the challenges, their customers and their business model.

  ‘What’s the expectation?’ Nalin asked Jigar Shah when Shivinder was finally done.

  ‘Price?’ Jigar Shah confirmed the question. Nalin nodded.

  ‘Not sure. But I am not stuck up on the price. I only want to secure the future of my employees and their families. The buyer will have to be someone who commits to take care of these employees.’

  ‘Emotional fool,’ Nalin thought to himself. ‘I presume you would value the company at roughly fifteen to twenty times its projected future earnings. Right?’ Shivinder butted in, ‘That’s what we would expect.’

  Nalin didn’t respond.

  The discussion ended in the next fifteen minutes. As they were walking towards the exit, Shivinder caught up with Aditya. Nalin and Jigar Shah were walking ahead. Nalin glanced back and, seeing Shivinder quite a distance away, whispered to Jigar Shah, ‘Mr Shah, have you considered allowing Mr Shivinder Singh to take over the company? Obviously with funding from friendly private equity players. He has been around for some time and knows everything inside out.’

  ‘I wouldn’t want that to happen.’ The response surprised Nalin. ‘Shivinder is a fantastic salesman, but he is emotionally very cold with my employees. That’s the reason why I have had to stay involved despite his presence. After me, if he is the only person running the company, I fear that the employees will have a tough time. I definitely don’t want that to happen. If contractually he is bound to keep these emp
loyees intact, then I will be fine. Please do …’ He stopped abruptly when he saw that Shivinder and Aditya had almost caught up with them.

  ‘Understood,’ Nalin acknowledged as he walked to the exit.

  Aditya saw Nalin off at the porch and turned towards Shivinder. ‘Where do you stay, dude?’ Over six feet tall, he wore his slightly excess weight around the midriff well. Very articulate and clear in his thoughts, he sounded like a true-blue CEO.

  ‘Santa Cruz. And you?’

  ‘Bandra. Pali Hill. Are you heading home now?’

  ‘Yes. Unless you’re telling me there is some other plan.’ Aditya smiled. Shivinder had always been a smart-ass. Never one to give direct answers.

  ‘We can grab a drink if you are up to it.’

  Shivinder looked at his watch, thought for a second and said, ‘OK. Let’s go.’

  The two of them headed back into the hotel, to the bar, reminiscing about the old days and updating each other on what their batchmates were up to. They had a lot to catch up on. In any case, Cirisha was in Boston that day. Aditya didn’t have much to do back home.

  6

  November 2004

  Mumbai

  Aditya was in his car, waiting for Shivinder in the porch of a suburban hotel, when his phone rang. Not wanting to pick it up, he let it ring for some time. He was in a foul mood. They had met a number of prospective buyers for Step Up Shoes and nothing had worked out. He had just got out of the seventh presentation and that too had not gone well. Four of the seven prospects found Step Up Shoes to be too small for them to evince any interest and three had found it to be too big. However, there was one thing in common: everyone had said that the profitability did not stack up to the valuations that GB2 was pitching it at.

  The left-side door opened and Shivinder got in. ‘Come, let’s go somewhere and get a drink. I’m really pissed off. If this guy felt that we are demanding too steep a price, why did he even agree to meet us?’

  ‘Shivinder.’ Aditya cut him short. ‘There is a problem. I am advising you not as your investment banker, but as a friend.’

  ‘What’s the problem? Don’t we have a balanced and sustainable business model?’

  ‘Yes, your model is fine. But your growth has been too slow for anyone’s comfort. The valuation of two hundred and fifty crore rupees that we have demanded is not cheap by any yardstick. Our valuations are based on forecasted profitability of twenty crores, a profitability number that you expect to reach three years from now.’

  ‘Yes. I am aware. We are asking for a valuation of Step Up Shoes at a multiple of twelve times the projected earnings. Which isn’t excessive. I was initially hoping to get up to fifteen times the projected profitability, but we have climbed down from that stance. Don’t people even go up to a valuation of twenty times the projected earnings?’

  ‘Yes, they do. However, that’s not the problem. The disconnect is not in the profit multiple that you are demanding, it’s in your business plan. Your numbers have been projected to grow at 30 per cent for each of the next three years. However, you can’t ignore the fact that your growth has been in single digits—nowhere close to what we are projecting. Our projections are sounding very fanciful.’

  ‘So what are you saying?’

  ‘Nothing. Come, let’s talk over a drink.’ And he turned into Turner Road en route to his house in Pali Hill.

  Once they had reached home and after he had poured his first peg of Laphroaig, Aditya started off. ‘Look, Shivinder, as the CEO, you own 3 per cent in this company.’ Shivinder nodded.

  ‘Your profit last year was roughly eight crores. How the hell will you get to twenty crores in three years? In 2007?’

  ‘We have a business plan, a well-articulated strategy. If we execute it properly, we will get there.’

  ‘Cut the crap, Shivinder. For meeting your planned numbers three years from now, you need to get to an annual turnover of over six hundred crores. You seem to be woefully short. Worse, in the first six months of this year, you have shown a de-growth.’

  ‘OK. So?’ There was a tinge of disappointment in Shivinder’s voice. He didn’t like Aditya showing him the mirror.

  ‘If I take a multiple of fifteen times the earnings, instead of the twelve that we have demanded, the company, based on this year’s financials, is worth a bit over a hundred and twenty-five crores. Nothing more. And for the valuation to get to two hundred and fifty crores—the price we are asking for—we need to do something dramatic. Business as usual won’t get you there.’

  ‘So conjure up something dramatic. Who is stopping you?’

  Aditya thought for a minute. ‘I have a plan. It’s not too difficult, if we figure out how to execute it.’

  ‘What plan?’

  ‘Look, there are two ways in which companies can build valuations. One, top-line growth, or, simply put, sales growth. Companies with higher sales figures are valued higher than companies with not-so-high sales. Two, profitability growth. In a country like India, most investors fall for top-line growth. The assumption is that if we grow the top line, the bottom line will automatically grow. If not now, then definitely at a later date. If not today, it will happen tomorrow.’

  Shivinder had been in the trade long enough to know this. ‘The challenge is, how to grow either of these.’

  ‘It’s possible.’

  Shivinder looked at Aditya, surprised. ‘Look, Aditya. Growing the bottom line is difficult. Growing the top line is a lot easier if we are willing to compromise on our margins.’ And after a pause, he added, ‘And compromising margins is something we have never done as a business strategy. Step Up Shoes has never been in the discounting game.’

  ‘If your projections for the next three years are based on revenue growth, sales have to happen. Top-line growth has to come.’ And then he walked closer to Shivinder, put an arm around his shoulder and spoke softly. ‘By hook or by crook.’

  ‘I have no idea what you are referring to.’

  ‘Chill. There is a way out. But for that we need some help.’

  ‘Like what?’

  ‘Wait.’ Aditya picked up the phone and dialled a number. ‘Hi! Aditya here.’ He walked into the next room, gesturing to Shivinder to get himself a refill. In a few minutes, he was back. ‘OK. Deal done.’ Seeing Shivinder’s raised eyebrows, he explained, ‘Look, your turnover needs to go from four hundred crores to six hundred crores in three years. This year, if you grow by seventy crores, it should be fine. You figure out a way to increase your turnover by fifty crores, I will get you another twenty crores.’

  ‘When will you bankers stop talking in Greek and Latin?’ Shivinder rolled his eyes and went back to his drink.

  ‘See, dude. It’s not as complicated as you make it out to be,’ said Aditya and proceeded to outline the entire plan. By the time he was done, Shivinder’s eyes were wide open. The effect of four Laphroaigs disappeared in a jiffy. He could never have thought of this plan. ‘Is it safe to do this?’

  ‘Shivinder, every company that we have dealt with does things to beef up valuations. What I am proposing is nothing compared to what others do.’

  Shivinder walked up to the bar, pulled out a vintage 21-year-old Glenlivet bottle and smiled at Aditya. ‘We must open a bottle for this momentous occasion.’ And he poured out two large pegs.

  It took them three months to put the plan into motion.

  ‘The CFO is on our side now.’ It was early February, and Shivinder and Aditya were having a mid-afternoon snack in the former’s office. ‘The billing and invoicing clerk is in place and so is the logistics manager. They are all guys who have worked with me for over a decade. I can trust them.’ After digging into the samosa, Shivinder asked Aditya, ‘Would you want to meet the CFO? Just to make sure that he is a guy we can back.’

  Aditya thought for a moment. ‘OK. Call him in.’ After a pause, he added, ‘One day you are going to get me into trouble.’

  Within the next few minutes, a middle-aged man of medium build, about
five foot seven, walked into the room. Most of the hair on his head had disappeared and his round Gandhian spectacles gave him a very down-to-earth, sober look. ‘Meet Deven Khatri. Our new CFO,’ announced Shivinder. ‘He joined us two weeks ago.’

  ‘Hello Deven. Good to see you.’ Aditya welcomed him into the room. ‘Shivinder has some really nice things to say about you.’ The handshake was warm and firm. He took an instantaneous liking to the guy.

  ‘Deven has been briefed, Aditya.’

  Aditya looked at Deven. The latter didn’t look too comfortable. The shifting of weight from one leg to the other was an indication. Was it a good idea to go ahead with their plan with a shaky and uncertain CFO?

  7

  February 2005

  MIT, Boston

  A spine-chilling cold had gripped the East Coast. There was a blanket of snow on the MIT campus. Everything looked and felt gloomy.

  Cirisha was too busy to be bothered; she was in the final phase of her research project. Set in Vuyyuru, a small town thirty miles from the eastern coast of Andhra Pradesh, it was aimed at measuring the impact of the availability of credit on the choice of crops grown by farmers. She had spent months working with farmers in a belt that grew rice. A shift to sugarcane cultivation would mean more returns. However, it required more seed investment, a reason that prompted most of them to continue with rice cultivation. As part of the research, Cirisha had tied up with sugar manufacturers to offer financial assistance to farmers with a back-to-back captive arrangement for sugarcane purchase. The idea was to see whether farmers would shift to sugarcane if monies were easily available in their ecosystem.

  She glanced out of her window. The sun was about to set. A few students were walking past the Academic Block towards the car park on their way to the dorm. To get there, one had to cross the car park and walk for half a mile. Straining her neck, she looked up. It was beginning to get dark. More snow had been forecast for later that night. She had better get going, else she would not be able to reach the parking lot without getting soaked. From the stiffened posture of people scurrying on the path below, she could make out that it was beginning to get really chilly.