Noon in Delhi. In a room at a five-star hotel, Mr Khattar, the promoter of Jug Jug Jiyo Tutorials (JJJT), is talking to NAPL (Not Another Prop Loss) Capital’s investment bankers who claim they can take his company public.
Khattar: We south Delhi-types don’t need money. I have enough to pay for my lifestyle. My children are doing well in California. Why should I take JJJT public?
NAPL banker: But, sir, think about what you could do if you had another $100 million of capital. You can take your company national. You could go head-to-head with Rearson in the KMAT training market. For a man with your contacts in the political system, the possibilities are endless if you have extra capital.
Khattar: Lekin… what valuation will I get? Rearson got 30x when he floated in 2007. My company has grown faster, has trained more kids, has better profitability…
NAPL banker: Sir, you have my guarantee that we will get you 40x. Nobody has ever floated an education company at 40x.
An hour later in the car park of the same five-star hotel.
NAPL associate: Sir, how will we deliver 40x earnings to Khattar? His earnings have grown at 30% CAGR over the past two years and JJJT does not generate any cash.
NAPL banker: The problem with you over-educated types is that you have no imagination. The IPO will happen at least a year hence. In that time JJJT’s earnings growth can accelerate to 50%.
NAPL associate: How will this miracle happen, sir?
NAPL banker: Here is the business card of my CA, Dalal & Dhokha. Call and tell him that we need JJJT’s earnings growth to be 50% in the next set of audited accounts.
About a year later, in the morning meeting in NAPL’s dealing room.
NAPL education analyst: We are today beginning pre-marketing for the IPO of JJJT, a market leader in the IIT-JEE tutorials market with an expanding portfolio of offerings. JJJT has consistently grown earnings at 50% whilst maintaining operating margins at 20%. Khattar, the promoter of the said company, was formerly the head of the NCAEAT.
NAPL salesman: Isn’t he the guy who was sacked for inserting lewd cartoons in textbooks?
NAPL education analyst: Can we please focus on one thing at a time? JJJT has shown that by choosing the brightest brains in India and then training them rigorously, it is possible to combine rapid growth with the highest standards of educational training.
NAPL banks analyst: My nephew studies at the Powai branch of JJJT. He failed his class 10 exams. So…
NAPL education analyst: As part of its CSR effort, JJJT has a programme aimed at helping mentally challenged children from the stockbroking community.
NAPL head of sales: So when can we take this wonderful company to meet investors?
A week later, as part of his pre-IPO roadshow, Khattar is meeting fund managers at KamaalKa Asset Management.
Fund manager: Khattar, why has your company not generated any cash in the last five years?
Khattar: If I am to build a nation-wide chain of top notch tutorial schools, I need to invest in real estate, I need to hire the best teachers, buy computer equipment. You tell me, sir, how can I invest in growth and at the same time generate free cashflow?
Fund manager: So true. How do you plan to make a mark in the KMAT space? After all, US tutorial companies have a competitive advantage in that space.
Khattar: “Where there is a will, there is a way.” That has been the motto of the Khattar family for generations. The fact is my son, Lovelinder, based in California, prepares the KMAT material and sends it to me.
Fund manager: You mean he sends you the books, the interactive presentations, the apps for test prep… All of that.
Khattar: Err… All of these are available somewhere or the other in the US.
Fund manager: OK. But do you pay royalties to the third parties from whom you get the KMAT material?
Khattar: Err… I will check with my son in California and get back to you.
Fund manager: OK. Let’s move on to the real estate. You have bought 10 acres in suburban Mumbai for a new training centre. Who did you buy the land from?
Khattar: Let me see my notes. Ah, yes. The land was purchased from Khattar Kitab Khana (KKK).
Fund manager: Who is the promoter of KKK?
Khattar: Err… well, that would be my wife… But rest assured, this is an arm’s-length transaction signed off by the reputed auditors, Dalal & Dhokha.
Fund manager: Of course, Dalal & Dhokha, are experts. Why is your income tax rate so low? You are paying less than 20% tax in most years and now it is 12%.
Khattar: Thankfully, the law of the land gives tax breaks to educational institutions.
Fund manager: But the last I heard, private tutorial colleges are not deemed by the Income Tax Department to be educational institutions. Your tax status should be no different to that of a travel agent or a stockbroker.
Khattar: Err… Let me check with Dalal & Dhokha.
A month later, we are in the last day of the JJJT IPO. The books will close in a few hours.
NAPL associate: Sir, this won’t even get close to being fully subscribed. The issue will devolve to the underwriter, i.e., us. What should we do, sir? How can you look so relaxed at this time of crisis?
NAPL banker: The question is, “What should you do?” I resigned from NAPL yesterday.
NAPL associate: How can you do that? Do you not have an obligation to Khattar to take him public? You were the man who promised him 40x earnings.
NAPL banker: I wouldn’t worry about Khattar if I were you. He was last seen boarding a flight to Dubai with the Enforcement Department hot in pursuit.
NAPL associate: What for?
NAPL banker: Well, my source says Khattar was selling second-hand Tokya phones with preloaded porn in tier 2 and tier 3 cities. So all that revenue growth in the year before the IPO, came from… from… health education software.
NAPL associate: But why were his cashflows so poor if his growth was coming from selling phones with porn?
NAPL banker: This is the problem with you over-educated types. If I am selling porn, would I put the cash back in the company’s coffers or would I pump the cash out of the company?
NAPL associate: You mean, Khattar was selling the phones, booking the revenues in JJJT and then lending the money to…
NAPL banker: …his son, Lovelinder’s company.
NAPL associate: But I thought his son was in California? Surely, Indians can’t lend money to foreigners. We don’t have capital account convertibility.
NAPL banker: Clearly, you have been spending too much time in the office. California is the new happening night club in south Delhi.
NAPL associate: Oh, well… there goes my bonus for the year. How about you? What will you do now?
NAPL banker: I am becoming the CFO at “Jhansi Ki Rani”, a developer of adult fantasy games for Android smartphones. The US PE firm TheWNE (The World is Not Enough) Capital owns 30% of this company and we will be taking the company public in two years.
NAPL associate: And what will happen to me?
NAPL banker: You could try to take us public and then post-IPO join us as the Investor Relations guy.
The views expressed here are personal