For private equity firms trying to make a quick buck from their investments in stock broking firms, the horror show seems endless. The first of a three-part series
On Wednesday, Geojit BNP Paribas Financial Services reported an 8% decline in revenue and 65% crash in net profit, for the quarter ended March 2011, over the corresponding previous quarter. Other broking companies haven't reported results so far, but nobody is expecting them to do wonders. What does this mean for a set of private equity firms, which lemming-like, had been clamouring for a piece of the business of stock broking firm in 2007? Very simply, the horror show continues.
Look at the stock performance of these companies from their lifetime highs of 2008. Emkay Global Financial has crashed by 84%, Edelweiss Capital has collapsed by 78%, India Infoline has fallen by 80%, Indiabulls Securities is down by 87%, JM Financial by 84%, Motilal Oswal Securities by 70% and Networth Stock Broking has slumped by 77%. Over this period, the Sensex is down by only about 5%.
This is not what the smart private equity investors who had jumped into the broking companies were hoping for. It was the pre-crisis period of 2007-08, when PE firms were investing in well-established broking companies which were on the path of huge expansion. The idea of course was to offload them within a couple of years to an eager public. What could be easier? After all, they have played the game many times before. Citigroup Venture Capital bought an 85% stake in Sharekhan, India Capital Growth Fund and Caledonia Investments took a stake in Rajkot-based Marwadi Shares, Barings bought a 45% stake in JRG Securities, Gaja Capital a stake in Bonanza and IFC Washington a stake in Angel, among others.
But their timing couldn't have been worse. Within a few months of their investment, financial turmoil rocked the world, deep crises hitting Western economies particularly hard. Brokerage income collapsed. And even though the overall market revived and real businesses are doing well, private equity firms find that they are still badly stuck with their investments in Indian broking firms. So, what went wrong?
In 2007, when the private equity players rushed into unlisted broking companies, they expected a continuation of the long bull market that started in 2003. This would mean robust market volumes and increasing brokerage income. It turned out to be quite different. When the Sensex was at 20,000, in December 2007, there was some optimism among a section of retail investors. Mutual funds were drawing net positive inflows from individual investors.
The mood this time is one of caution, with individual investors busy reducing their stock portfolios and redeeming their fund investments. There are specific reasons why broking income has collapsed now, some of which would have been clear even in 2007, but nobody wanted to see. And so, in 2007, at the height of the euphoria, the assumptions used to project income and profits were deeply flawed.
In the situation they find themselves in, how would private equity players recover their investment or even make an exit from their investments? The investment attractiveness of stockbroking firms has turned out to be a trap. The PE firms have no easy exits. Public issues of broking firms are unthinkable and there are no buyers of their stakes. Scope for 'consolidation' is low for fundamental reasons.
The point is, is this likely to change? When will things change for broking firms and how? Can things really improve for the big brokers, who have expanded with PE money, and are saddled with an inherently-flawed business model? That is what we will highlight in the second part of this series when we discuss the model of broking firms.
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Mangalore-based Vishal Rao creates ‘RuinedMyTrip’, which appears in the top search results for ‘MakeMyTrip’ on Google, to avenge cheating by the travel portal
Feeling cheated by a company, either because of unfair treatment or poor services, many of us would usually end up staying silent. Yes, in the head of the moment, we'd get angry and some of us may even vent the anger on the company's staff. Still fewer would choose to take legal recourse through the consumer court, where the battle could be long. But here's an example of a person who chose to use his skills with the Internet to fight against injustice.
Mangalore-based Vishal Rao was cheated by the online travel agency MakeMyTrip. He had decided to spend Christmas 2010 along with his family in Mysore. So he made the bookings through the online agency well in advance. Imagine his surprise when he was denied accommodation at any hotel in the tourist city.
MakeMyTrip had accepted the necessary payments and even sent him an e-mail confirming the booking, but he found that the agency had not made the hotel reservation. "In fact, in the confirmation voucher which was sent through e-mail, apart from the check-in date and time, it was also stated that 'your booking is confirmed and you are not required to contact the hotel or MakeMyTrip to reconfirm the same'," Mr Rao says.
Aggrieved by this treatment, Mr Rao created a blog, 'Ruined My Trip', to make people aware about his experience and the unfair business practice by the company.
There are hundreds of such blogs highlighting consumer complaints on the Net and most of them are hardly noticed, barely receiving a comment or two. Unfortunately for MakeMyTrip, the blog 'Ruined My Trip' turned out to be different.
Being, an expert in the web business, Mr Rao used his skills in the search engine optimization (SEO) area to push his blog into the top ten Google search results for 'Make My Trip'!
"I could (have) filed a case in court against MakeMyTrip.com and this could have taken years, or write a review on the net. I checked mouthshut.com and was surprised to see that there were hundreds of others with similar experiences. But this made no difference to them (the company), simply because the reviews were not showing up in the results when searching directly for 'Make My Trip' or 'MakeMyTrip.com'," he says.
"I decided to create a dedicated web site documenting my experience and allowing others to share theirs too. I used my SEO experience to make this website (to) show up in the top ten Google results when people searched for 'Make My Trip' or 'MakeMyTrip.com'. So nobody will have to go through the horrifying ordeal I have gone through. This was far more satisfying for me than filing a court case against them."
Mr Rao warns the offending companies: "Don't take your customers for a ride. You never know when one of them will turn out to be smarter than you."
Talking about his Mysore experience, Mr Rao said that when he inquired why no hotel room was booked for him, he found out that MakeMyTrip staff called the manager of the hotel only at noon on the day he was to check in. "I (had) booked the rooms on 15th December and they called the hotel on the day I was to check in, to confirm the booking."
Mr Rao managed to get rooms at another hotel and enjoyed the holiday with his family. A few days later, the company wrote saying, "We are really sorry and you'll get a refund within seven days".
"They (MakeMyTrip.com) have a full-time SEO team to make sure that none of the negative reviews crop up in the top ten results. As you can see, almost all the sites in the top ten results are their own sites, which easily distract people," Mr Rao explained. MakeMyTrip even offered him a gift voucher of Rs10,000, which Mr Rao refused.
Blaming system error for non-booking at the hotel in time for Mr Rao, MakeMyTrip, in an email said,"The customer in question had booked a hotel on our portal. However, the online booking could not get confirmed due to a system error. As a process of reconfirmation, we contacted the hotel on the day of check-in, but the hotel was sold out. Our team tried to reach out to the customer but unfortunately could not connect with him. We did connect with the customer later on and offered a full refund on the booking; we deeply regret the inconvenience caused. Upon checking the customer's blog, we reconnected with him and relooked at all details on our end. The case was further analyzed by higher authorities and as a gesture we offered the customer a MakeMyTrip voucher."
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Bangalore-based ZipDial receives Series A investment of over $800,000 from both Indian and US angel investors, led by Mumbai Angels, an angel investing group
ZipDial receives Series A investment of over $800,000 from both Indian and US angel investors, led by Mumbai Angels, an angel investing group.
ZipDial Mobile Solutions Pvt Ltd is a Bangalore-based company founded by Valerie Rozycki (CEO) and Amiya Pathak (COO), technology entrepreneurs with degrees from top global universities and graduate schools such as IIT-Kanpur, IIM-Calcutta and Stanford University as well as extensive professional leadership experience in both India and the US, including companies like mChek, Zapak.com, eBay, and Ketera.
Anil Joshi, head Mumbai Angels, who lead the deal, said that Mumbai Angels decision to invest in ZipDial was simple. "We believe that ZipDial with their patent-pending technology and strong team would leverage mobile platform to deliver host of services to customers across industry." He informed that Sunil K Goyal, founding partner, YourNest Angel Fund and Shravan Shroff, Founder, Fame India Ltd have joined Business Review and Investment Committee (BRIC) of ZipDial to represent the investors from Mumbai Angels Group.
Sunil K Goyal explained that the Mumbai Angels Group is extremely impressed with ZipDial offering of a mass market tool for market research, and customer feedback. A brand or a customer service organisation can get real time response and analysis from their customer, with them using free service of ZipDial. ZipDial's patent-pending missed call concept offers varied services like polling, generating sales lead, and so on. According to him such an approach is unique and would certainly bring customers closure to their brands using high penetration of telecom services.
Mr Shroff explained that investors from the Mumbai Angels Group viewed ZipDial as a high quality early stage company with potential for sustainable scalability and profitable growth. He added that group was delighted by the business progress achieved till date.
"We are delighted to have Mumbai Angels as an integral part of ZipDial now," said Ms Rozycki. "We plan to make ZipDial yet another success story from their portfolio, helping to inspire even more entrepreneurship and innovation in the Indian market."