Sunday, March 1, 2015

Is Debt/Loan/Leverage good for business?

So the other day I was in a debate with 2 of my friends Anish & Baboo with them arguing Loan/Leverage is good, actually better for business and me patiently trying to explain that Debt is something a company should run away from as far as possible.

One of the major arguments they made is Debt is a 'win big if you are right' & 'lose nothing/minimum' if you are wrong, with Anish giving the analogy of many industrialists he knows personally & Baboo relying on the more than 900 Harvard Business Reviews he has read so far.

My argument was & is that the only way a business family can lose everything is if they have debt. A loss making venture seldom leads to ruins if there is no debt involved.

So Baboo wanted me to do a financial comparison for analyzing the Risk/Reward ratio to see what would happen in the scenarios where things go right & things go wrong.

So to do the test we first make some assumptions as following

1. Baboo has 30 lakh cash

2. Baboo has a land parcel of 1cr which he can either sell to raise equity or place as collateral to get a term loan for 5years @ 12.75%. (Though banks generally give loan upto 60% of collateral here I am considering that the bank gives loan upto 70% of the collateral)

3. On selling the land Baboo raises 1 Crore.  Since we don't know the tax implications, we are not considering them, also given the fact the bulk of land transactions in India are not accounted, the tax implications we believe would be minimum so not considering them.

4. The income generated from the venture is just enough to repay the term loan & taxes. The personal expenses of Baboo are taken care of from other sources.

5. In case of venture being unprofitable the loss is to extent of interest being paid to the bank, with no principal repayments.

5. Income Tax is considered at a flat rate of 30%.

So now we do a comparative analysis of various scenarios both with debt and without debt. Basically we will see what happens 'at the end of 5 years - your venture is successful & you are able to repay and close your term loan' & 'at the end of 2 years-the venture is unsuccessful & you are forced to close your unit prematurely.'

3 Scenarios when the venture is successful.

Scenario 1:

Land is given as collateral to bank & Term loan is raised (Debt) - Venture Profitable:

Baboo raises debt of Rs. 70 Lakh, with land as collateral. Add that with the margin money Baboo already has of Rs. 30 Lakh, Baboo has just enough money to start his venture.

Here is the table of total loan repayment, interest paid & Taxes for 5 Years, by the end of which the total Loan is repaid.

So by the end of 5 Years the networth of Baboo would be Rs. 2 Crore. That's 1 Crore of investment in the debt free company & 1 Crore worth of Land.

Please note the Earnings considered are after depreciation in the company's assets & also the networth would be higher or lower depending on the appreciation or depreciation in the value of the land at the end of 5 years.

Scenario 2:

Land is sold to raise equity. Margin Money & Profits are Deposited @ 8% (No Debt) - Venture Profitable:

On selling the land Baboo raises 1 Crore.  Now Baboo has 1.30 Crores (1 Crore from land & 30 lakh Cash). Baboo invests 1 Crore into the business and puts the 30Lakh away in a FD. Also the profits realised from the Business & Interest are ploughed back in to further more FD's. The interest on FD is calculated at 8% before taxes. Below is the tabulated scenario for the 5 Years.

So by the end of 5 Years the networth of Baboo would be Rs. 2.38 Crore. That's 1 Crore of investment in the debt free company & 1.38 Crore of FDs.

Scenario 3:

Land is sold to raise equity. Margin Money & Profits are Invested @ 20% (No Debt) - Venture Profitable:

Scenario 3 is same as Scenario 2 just that the Margin money and profits from the business are ploughed back into business for further expansion. Pls note in the above mentioned venture we believe the return to be in the range of 23.5% - 28% of capital before Interest & Taxes. If Baboo manages to find ways to invest incremental amounts of capital at a marginally lower return rate of 20%, this is how things will pan out.

So by the end of 5 Years the networth of Baboo would be almost Rs. 2.75 Crore. That's 1 Crore of investment in the debt free company added with 1.75 crores of further margin money & profits reinvested @ 20% returns.

2 Scenarios when the venture is unsuccesful

Scenario 4:

Land is given as collateral to bank & Term loan is raised (Debt) - Venture Unprofitable:

In the unfavorable scenario where the venture turns out to be a breakeven(including depreciation) but loss to the extent of interest to be payed to the bank. We will have the following scenario where at the end of 2 Years networth would be 1.12 Crores. Ofcourse the networth would be higher or lower depending on appreciation / depreciation of the land parcel.

In this case at the end of 2 Years you are either forced to close the business or sell your land & it doesnt take a genius to say that we dont make good decisions when forced.

Scenario 2:

Land is sold to raise equity. Margin Money is Deposited @ 8% (No Debt) - Venture UnProfitable:

In the unfavorable scenario where the venture turns out to be a breakeven(including depreciation) but there is no loss a there is no interest to be payed to the bank. We will have the following scenario where at the end of 2 Years networth would be 1.35 Crores.

Here you are not forced into selling your business, you can keep running it till you find a suitable buyer who is willing to give you the suitable price and offload it then.

Net result/analysis

So when we take debt the land value has to 

1. appreciate by 23% in 2 years to match the returns in scenario 5.
2. appreciate by 38% in 5 years to match the returns in scenario 2.
3. appreciate by 75% in 5 years to match the returns in scenario 3.

Now I let Baboo to take his decision based on this analysis. Ofcourse there are a lot of permutations and combinations possible here in these calculations & there are many considerations in the above calculations which can change the results dramatically. The most primary of them being that things wont be as linear as projected here.

I personally, in the above scenario would not prefer going through the loan/debt route but actually preferring liquidating the land parcel and investing the proceeds into business. I know thats a easier thing to say but harder to do, selling a land has a lot of emotional trauma attached to it, but I would rather not let my rational decisions be controlled by my emotions. Then you would argue what are humans worth without their emotions, so I rest my case saying ' To each his own'.

There are a few conditions where I would consider having debt, here are the following

1. When the rental yield on land is above 6% - 8%. If the land parcel can generate rents in the range of 6% - 8% I would consider debt but provided my business stands on that land. I wouldn't keep a land disconnected with my business by leveraging my business.

2. There are strategic reasons to consider debt. Often government provides many subsidies likes TUFS, CLCS, etc... which can be availed only on having a bank loan. In such a scenario debt is favorable as the cost of debt goes down.

3. Strategic reasons to own the land - Sometimes the business needs the land bank for strategic reasons like further expansions or if the capital expenses on the land in the form of customised buildings/plants is too high that makes renting the land unfeasible for the business.

So debt may be taken for strategic reasons but taking EXPENSIVE debt when you have other assets that can be monetised, in my opinion is plain foolish.

I read somewhere that the Promoter of SUZLON Energy has a business philosphy which reads as, to do a business all you need is 'some soojh-boojh & lots of Loan'. That is where the company name SUZ-LON has been derived from. I don't know if thats true, but looks like the company has been run on that philosphy and its condition now is no news. So my philosphy is 

Tread on the path of debt with extreme caution - its generally the path to ruins.

Thursday, December 18, 2014

Truth - The Elusive Mystery

My Friend: One who wants to know the truth has to be completely deprogrammed . He should not have any belief , religion , nation or race .... From there, with that innocence , like a child , he has to start. -Osho.

Me: Isn't that where we all started from already?

My Friend: We were programmed (conditioned) involuntarily by parents , society teachers etc .Now consciously shed & unlearn your beliefs with full awareness .

Me: It is impossible to stay neutral.... To generally say we all were conditioned us not correct IMO.... Haven't or beliefs changed over the years.... Haven't we questioned the society and our parents at various points of time..... Also truth is nothing but a perception, a point of view..... For different people there will always be different perceptions and different truths.....

My Friend:  it might be possible for you. But for many they are not able to come out of the conditioning. The message is for them. To start from scratch , to enable wisdom to dawn and to come out of all cultism or organized religion or theism etc.

Now this discussion on Facebook is what has prompted this Blog. I initially wanted to reply with a comment in that discussion but knowing its futile and look childish to the other person and with a insurmountable urge to get my words out, put it out here in the blog.

The Truth, The Elusive Truth. This is one journey, one voyage which doesn't seem to end for the human race. Generation after Generation this is one search which never ends and almost everybody keeps pursuing it. So lets start with the most basic question. 

What is Truth?

Let's say a Mr. A kills other Mr. B. That is a fact & we are most likely to term Mr. A as murderer and feel sorry for Mr.B, but what in this case Mr. B  died here in self-defense & he was the one who was actually trying to kill Mr. A. Do the tables turn now? So what is Truth? Just the knowledge of the final incident or the knowledge of the complete chain of events? Even when we have the knowledge of complete chain of events, all we have are just facts, Truth is the ability to assimilate that knowledge and make sense of it.

As osho says, to know the truth, one needs to be completely deprogrammed and not have any beliefs. In a age when there was no communication, there was no religion, no beliefs, no ration, no race, no nothing. Human just considered himself just a kind of Animal in many. It was completely ok (and I guess even necessary in some parts of the world) to kill another animal for food, for its skin or for any use he deemed fit.

Today we have organisations & nations which ban killing of certain species because they are on the verge of extinction. Hindu Religion considers cows sacred and ban killing of it. Jain Religion considers even a accidental killing of even an Ant a sin. It is believed Mr. Einstein said that if Earth becomes devoid of Bees, humans wont live for more than 4 Years. Now for a person with no beliefs, Religion, nation, it is perfectly ok to keep on killing all those animals he is not to. But is it really so? Is it the truth that it is ok to kill endangered species? Is it ok to kill all the bees on this planet? I am not even divulging into religion(somehow talking about religion has become a taboo in the modern society). You may call all that killing to be truth but that certainly ain't wisdom.

As I explained before, Truth is not just some particular isolated incident but a knowledge of a complete chain of events and the ability to assimilate it all and be able to make a sense out of it. In my little time on this earth what I have learnt is every facet is multi-dimensional & it is just not possible for anybody to see a event in all its possible dimensions. 

As in the above example of Mr. A & Mr. B as the new fact added our perception/view regarding the event changed, so as we keep getting new information about the history related to the incident our perceptions can keep changing and we might reach to a point where we start doubting the information or our ability to process all the intrinsic connections and our possibility to weigh everything correctly. Just to turn the tables I will just add one more information to the story, what if Mr. B was attacking Mr. A because Mr. A was a terrorist?

Certainly there would have been some enlightened souls who walked on this ground and some may be here still, who have the knowledge of everything and the sight to see things in all their dimensions.
For us all, all the lesser mortals I would borrow a phrase from Shiva Trilogy of Mr. Amish Tripathi

" There is my truth & there is your truth, as for the universal truth, it does not exist."

Saturday, February 22, 2014

Bikes - Roads - Love!

People ask me & they will ask you, why do want to go biking? Why cant you just take your car. What is this madness?

I ask, How do you experience a new place without experiencing its scent? How do you know the people when you see them through a glass? How do you feel the chill run through your spine with the heater on? 

How do you feel alive without air hitting your face?

This MADNESS is because bikes are limitless.  Car-ing protects from the world, Biking opens it. The Bike is not a shelter, its a friend. Always with me, sharing everything. Life is not fair, you got to see it all, feel it all, go through all & endure it.

It is tough to put all this in words, but

Ever experienced freedom? Well, Get out of the BOX!

Four wheels move the body. Two wheels move the soul.

Sunday, January 16, 2011

time travel part 2..... THE FUTURE, is it written????

Hello folks,

So did you happen to read my previous post???? Below is the link, please read it if you haven't...

Alright, so before I talk about the energy equation, I will talk about going into the future & before that there is one more thing which makes me believe that traveling to past is not possible, it is actually just a extension of my 1st point, but will help you understand better that why would traveling into past must not be possible.

It is said that Cockroaches came to India from America in a ship, that came to India from America. Well i wouldn't dwell into validity of that, but what I wish to point is that, if traveling into past becomes possible and the time traveler carries some deadly disease to the past for which the past might not have a cure, it could lead to extinction of mankind way back in past, which would mean that there wouldn't be any future where a time machine would be built, which wouldn't result in anyone coming back to plant that disease, so that makes a impossible equation. I hope I got my point across.

OK. Now lets think about travelling into the future. Now lets ponder over the thought that would future travel be possible, or could future travel result in some catastrophe like traveling into past, that we just discussed.

When we are discussing below, please keep in mind that even if travel to future was possible, it would mean if a person went into future, he would be stuck there. Why? because traveling back to the past would not be possible because of the reasons explained above. What needs to be understood is that, Past, Present & Future are just relative trames, relative to the time now. For example 2011 was future for us when we were in 2010. It is now our present and next year it would be our past. So once a traveler goes to future, it then becomes his present & he cant go back to the past(relative to time he would then be in).

1. Would traveling into future be possible???

- I don't really see any benefits & possibilities of doing it, but then im no big visionary after all. So I would like you people to explore the possibilities if we are able to go to our future. But understand, its a one-way trip, you cant come back!!!! If you go into future you stay there and you cant come back. Well now when I was typing it, I just came with a brilliant use of it..... I could just send some people to future(you know the people I dont like).... Legally speaking I wouldn't be killing them.... Muhaha :)

a. So could traveling into future, result in a catastrophe???? I don't really think so. Every second, actually every nano-second, we are all going into the future, that's how the world works!!! It is just that a time-traveller might go into the future faster than the rest of us. Even if he carries a disease or anything into the future, the future must have already seen it and would have a remedy for it. Even if the future doesn't have a remedy for it, it wont be able to spread its ill-effects into present(past relative to the then future)... Traveling into future can lead to catastrophic effects, but that would not be breaking the laws of nature. Well the kind of weapons the human-kind possess now, it can lead to a catastrophe now. I believe, right this second, if all nuclear weapons possessed by all the nations in this world are deployed it can burn out every living thing on the land. So if there is catastrophe it would be because of the actions of us, the humans, but not because the fabric of space and time would be jumbled up.

So as per the above, travelling into future might be possible. I just came up with a use of future travel. It is widely said according to mayan calendar that 25-dec-2012 is the doom day for this earth & as per Hindu mythology books, the dooms day is after about 65000 years from now. Based on these studies and assumptions we can send various time travelers to travel through time and keep traveling into the future till they go past dooms day. So that would stop the human race and lots of other animals that we choose to take on travel with us to stop from extinction. Ya I see a possible use now, but this might also not hold good. Why? read on...

b. So what about the theory of conservation of energy???? How would the theory of conservation of energy hold good????

- Before you go any further, if you believe that travelling into future was possible, then what you are emphasizing is that future is already written by god/nature. Now we humans before taking a decision do a lot of thinking, in other ways do a lot of permutations & combinations to decide what we would do, and it just not our thinking/decisions that effect us but each and every living being's(not just humans) thinking which in some way, small or big effects our life. So by believing that traveling into future would be possible what you are believing that god/nature has done such a huge calculation(let me tell you that never & i mean never ever would mankind be able to build such a super computer to do such a calculation) and is actually controlling not only our actions but even our thoughts & feelings. Not the actions, thoughts & feelings of just you & me but of all the living beings on this earth. Actually if you believe that traveling into future would be possible, you are believing that god/nature is not controlling us but has actually made a parallel world already, where our next action is stored as a snap-shot and just as the time axis moves forward we go to the next snap-shot/image. Which means we are just a 3D, actually 4D movie for god. Now is that what you think???

Above is the answer for the law of conservation of energy. That is, when the world/universe was created, it wasn't just one world or universe, but a set of parallel universes were created till inifinity. A snapshot of universe for every second. Which would just mean that we are just a 4D movie. So now the theory of conversation of energy holds good. cos, all the energy was created back then.

By believing above, it would emphasise that all actions of every living being would be meaning less, because it was already decided by the nature/god that it was to happen so. It would be meaningless to give credit to Einstein for his discoveries because it was not his brain but the choice of nature. It would be meaningless to praise the heros in our lives, cos they didn't do anything on their own will, they were chosen by nature. It would be meaningless to punish someone for their crime, cos the person did not do it because he wanted, but he did because he did not have a choice, it was the nature which did it all. All actions, especially of mankind would become meaningless!!! It would all be god's will.

So in case if man-kind ever makes a machine to go into future, it would not be him, but the nature. There is one scenario in which traveling into future would be possible, without the above mentioned snap-shot thing, will discuss it in the next post....

Till then happy timing!!!


Thursday, January 13, 2011

time travel.... Travelling to past is it possble???

Alright..... I have been fascinated by this idea of time travel thanks to many movies like "Back to the future - triology", krish, etc.......

On our trip recently, me and my cousins were discussing this mysterious and magical topic..... somehow science is exciting. Since then my grey cells have been continously working thinking in every possible way about this fourth dimension of world called time.... so I started with the most primitive of questions......

1. Is it possible to travel back in time to the past???

- Think about the opportunities we would have if we could do this. We could travel back in time and correct things that we want to. Just like in the movie Action Replayy!!!

Alright, for the people who haven't seen the movie Action Replayy, the plot of the movie in brief is.... A boy gets in to the time machine made by his girl-friend's grandpa to go back in the past and smoothen the relationship of his father and mother that once went sour even before they were married. The boy succeeds in it & as a result his parents marry 5 years earlier to when they were actually supposed to.

a. So in the above case you see, the boy changes his past & as a result his parents marry 5 years earlier. If anything like that happens this couldn't have resulted in the birth of the boy itself, which could further not result in him coming back from future, which further could not let the relationship of his mother and father become sweet, which could further not result in them marrying 5 years earlier.
But now the present truth would be, they marry 5 years earlier. Which is not possible. So if travel back in past would be possible, it would only result in catastrophe, which should be against natures will and the basic nature or element of fiber on which this universe is built.

b. There is one more reason why i believe travelling back in time would not be possible. The law or reason for my belief is one of the theories of our beloved, world famous scientist Mr. Albert Einstein. He made a very simple theory that Energy can neither be created nor be destroyed.
If we were to believe that travelling back in past would be possible it would mean, world creating a snap shot of itself every nano-second, i.e a parrallel universe is created every nano-second, i.e every momentum/movement is carried-forward in the future and the past holds a snap shot of the entire world, just like a photograph.
So practically what is being emphasised is that every nano-second energy is being created. An equal amount of energy, equal to what is present now. This breaks the basic theory on which a lot of our units function now.
So this theory becomes quite un-believable.

So I deduce that travelling BACK in time is not possible. But if you have some other theory or thoughts... Im open for a debate....


P.S: I just found an answer to the energy equation.... its not very convincing though... will discuss it in the next post.... till then happy timing!!!!

Monday, October 18, 2010

Adndro-Humanoid Robot..... A reality or illusion????


I happened to watch a movie "Enthiran - The Robot" by the superstar god Rajnikanth.... Alright the concept of AI(Artifical Intillegence) and its possible shortcomings have been beautifully depicted in the movie.... but it made a few grey cells in my head to work.....

Human Brain and its thought process is really complex... it takes atleast 18yrs alright.... atleast 14yrs to mature.... and still it cant understand everything going around... actually it can understand only a v.little of the things going around..... understanding emotions and taking the correct decisions is a completely different story.....
In such complexity how is it possible to define everything stepwise in a Algorithm???? Or to fix a if-then clause to determine action of the robot??????

It took man centuries and milleniums to discover the inherent capabilities of nature..... and still it cant all be said to be true, they are all assumptions... for example "Gravity".... Just think over how many centuries did it take man to discover gravity in the right sense.... So if computers get AI will they make all the discoveries which man has still not been able to understand????

And if computers/robots are able to make all the discoveries and also able to act on them..... wont they be able to make a new earth/universe/galaxy............ wont then robots be god!!!!!!!!!!

well alright... you may just considering that as my mind throwing up..... so i dont think robots and AI even as a far away possibility...........

but then there is one human nature that surpasses all the doubts and logic......

Its always Human who has made every impossible..... Possible!!!!!!!!!!!

Signing off for now....

Tuesday, October 5, 2010

A continuous change towards better understanding - The Stock Market


Im trying to write my learning from the stock market....

My dad is completely against the idea of stock market, his ideology is when you are selling or buying shares no actual product or service or right is bought or sold, so practically the stock market contributes nothing to the country's economy and eventually it will contribute nothing to you. One more idea was if you are making a profit now, either somebody else is booking loss now or will book loss on a later date. Well...... I always thought that to be right, and still believe in some of it, and thats a different debate all together....

Then in colleges my friends started investing in stock market, either with no margins or little margins but mainly losses. Then my brothers started investing in stock markets, ending up in losing all the money given to them for that. One of my friends went to an extent where he is still facing a debt of about 2lacs after about 7yrs from booking that loss, he is repaying it slowly.

All the above made me stay away from the market, I never ventured into the details. But then one of my friend started working in Karvy stock broking and he started telling me that people who go for short-term or intra-day or buy-calls on the T.V. are the ones who are regularly facing losses. On my chat with my friends and brothers and asking them of their trends while investing in the market, I got to know all of them faced losses coz they followed these three ways of investing.

I had also heard about Warren-buffet and there were a few success stories I heard, that made me curious about this hype called share-market. There were a few shares my father had from the Harshad Mehta period, I decided to sell them coz they werent performing too good in term of returns so I got them dematerialized and then started my journey towards investing in stock.....

I made a general assumption that all shares will move in the shape of a sine curve(i.e regular ups & downs),so buying a share while its at its all time lowest must do. But that theory didnt work. I also got charmed by the blitz of the market and burned my fingers a little in intraday calls by EXPERTS.

Then I started understanding the shares I had invested in a little, I got to know about P/BV, EPS & P/E. I started investing in shares with lower P/BV and that didnt work. Then I started investing in shares with a good P/E, lower P/BV, shares which are lower in the curve and with low P/C. this model was a little fruitful, but i wasnt going for the right kind of shares, and now i follow the below procedure when investing in shares(thanks to stock-shastra) and this has now started to show good results and I believe there is still lot of scope of improvement for me and I will keep learning and improving.....

1. Stock should be trading @ a v.low P/E compared to the Industry P/E. (No need to ignore companies that are not earning presently.)

2. There should be continual improvement in the sales of the company.

3. P/BV should be inline with the industry. The lower the better.

4. Debt Ratio and the company should be cash rich.(Even buffet suggests on investing in companies that are cash rich.)

5. Market Cap of the company. (The higher the better. Companies with lower market cap dont grow that fast.)

6. Branding of the products that companies manufacture. ( I personally feel in future the biggest assets of the companies would be their intellectual properties.)

7. Management of the company.

8. Patents / Trade Secrets, Toll, Monopoly, Switching cots for consumer, Cost of the product manufactured.

I intend to include the following in my future investment decisions:

9. Cyclicality factor of the Industry.(Actually I had this in my mind, as I was avoiding software company & cement company stocks for this reason)

Pssst.... I believe the cement industry is going through the worse phase of the cycle and textile industry in the best phase.

10. Future growth opportunities for the company and industry.

Thats for now..... :)