The ‘Deccan: Chronicle’ of an Empire Past
There was once the Rome Empire. With its Caesars, its Triumphs, its Colosseums. And its excesses. The more things change, the more they remain the same.
In July 2012, the Industrial Finance Corporation of India (IFCI) filed a petition with the Andhra Pradesh High Court for winding up of a mid-sized media company called Deccan Chronicle Holdings Ltd (‘DCHL’), when it failed to redeem Nov-convertible debentures worth Rs. 25 crores. Within a couple of days, Karvy Stock Broking, a depository filed a criminal complaint against the DCHL promoters for pledging the same shares twice with an intent to de-fraud. Today, the once bellwether company trades at a puny Rs 11 a share, down more than 60% for the year. Its market cap is a puny Rs 244 crores, probably less than the carrying value of its owner’s corporate jet.
Newspaper reports, sourced from MCA filings of hypothecation deeds show that the company has borrowed as much as Rs 1494 crores and majority of the promoter’s shares are pledged with the various lenders. The company admits it is facing a liquidity crisis, and its shares are in free fall.
How does a #1 newspaper of a fairly large city go from editing the news to being in the news (for the wrong reason)? How did the Reddys, one of Hyderabad’s most high-profile business families, known for their jets, Bentleys, hand-rolled cigars and political connections, get it so wrong? The answers, not surprisingly, are found in the management decisions over the previous few years.
Here are a few businesses DCHL got into over the last couple of years:
- The Indian Premier League, brainchild of the BCCI and Lalit Modi, is one of India’s most high profile sports events, with 8 city teams fighting a season of T 20 cricket. DCHL picked up the Hyderabad franchise for $ 107 million, an expensive valuation in itself. The IPL bubble peaked when Sahara picked up the Pune franchise for $ 370 million. Things have gone downhill since then, with viewership falling, stands going empty and valuations dropping. The DCHL promoters rightly decided to sell the ‘Deccan Chargers’ franchise, but couldn’t find a buyer at the ‘right price’. Today, they are stuck with a illiquid asset that sucks a lot of cash each year that no one is willing to buy.
- Odyssey- is a chain of bookstores that sells music, movies, stationery, gifts and toys. In May 2010, it had expanded to 56 stores throughout India funded by its cash-rich parent. It also entered the eyewear and writing instruments markets via ‘The Eyewear Store’ and ‘Editions’ stores. By July 2012, the company had shut most of its stores, bringing them down to 6 from a one-time peak of 78!
- Flyington Freighters – DCHL ventured into cargo aviation, placing orders for 12 Airbus A330s with Airbus. Economic headwinds and perhaps, simple business reality sunk in, when the company apparently cancelled its orders in January 2011. Cancelling an aircraft order is very prohibitive, with the customer being required to forfeit its deposit – easily running into a few hundred crores.
- Aviotech – Inspite of its experience with Flyington, DCHL promoters launched Aviotech to ‘to provide seven star luxury experiences at a fraction of the cost of owning or chartering a private jet’. The business was “created with the clear objective of capitalising on vast, untapped niche areas in the rapidly-growing corporate aviation and defence aerospace segments in India. While this business was held outside the DCHL balance sheet, atleast Rs 50 crores out of the Rs 170 crores raised from Future Capital, one of the DCHL lenders, was sunk into Aviotech. Ask Warren Buffett how aviation worked out for him (NetJets, the world’s largest company for fractional jet ownership and leasing, has barely made a decent profit for him)
Diversification, as envisaged by Markowitz, states that investors get a return-risk proportion benefit from diversifying into varied assets. The theory won the Nobel Prize for economics, and is the basis for the portfolio theory as we know it today. The ‘D word’ remains the perfect excuse for CEOs and investors with high-profile egos to build large, sprawling and inefficient empires. Today, the DCHL story reminds the world why each theory must be taken to practice with a pinch of salt.
Why did the DCHL dream of flying high not work out? The answers lie in elementary strategy and simple common sense:
- DCHL was in the business of newspapers. It was never really in the business of retail or aviation or sports. One can’t be a good doctor and a good engineer and a good CA! You can be good only at a few things – and you should focus on being the best in just that. Even a giant like Reliance faltered in its retail strategy, because it had no experience of running a store. Companies, like individuals, must work on their ‘core competence’ and expand accordingly, and avoid jumping from media to unrelated sectors such as aviation;
- Too much of cash can be a bad thing. DCHL’s flagship business was the ‘Deccan Chronicle’ newspaper in Hyderabad. DC is the #1 newspaper in that city, making it a very valuable asset. The best part about owning a #1 newspaper is that as an owner, one gets to pretty much define what advertising rates should be. Even with the advent of other media, newspapers are a very important way for marketers to reach a well-educated audience. Customers are also extremely reluctant to switch out of existing newspapers subscriptions and remain a lifetime source of revenue. The newspaper generated cash by the droves, but was needlessly thrown around by the management;
- The sectors DCHL put money in were laggards. Retail is a highly competitive industry – with low margins, high costs esp. rentals and no real competitive advantage for players. It didn’t help that this was the time that e-commerce boomed in India – and the likes of Flipkart were born – that delivered fantastic service at your doorstep at significantly cheaper prices. Consider a retail consumer vis a vis a newspaper reader. A retail consumer will go to a store that has the lowest cost for apples, but a newspaper reader is very unlikely to change a subscription for his favourite newspaper that he has become so habituated to reading each morning at less than Rs. 5 per day;
- Even the airline business was a difficult one to enter into. In India, with poor airport infrastructure, unusually high taxes on ATF (aviation turbine fuel) and increasing competition, the airline industry is facing huge pressure. Kingfisher is on the verge of bankruptcy, and save a couple of exceptions, most of the airline companies are bleeding. Although DCHL was targeting a top-tier market, the airline business is not the right business to deploy excess cash, much less if you’re a newspaper company;
- Very few companies are blessed with an asset that has an extraordinary return on equity and few competitive pressures. Such an asset is likely to generate lots of free cash flow – a dream for any businessman. A well meaning manager will either find a similarly worthwhile asset to invest into, or return the cash to shareholders. Others with misaligned incentives will seek to build large empires of an unrelated plethora of businesses, hoping to increase the size of their egos and the zeroes on their bonus checks. The IPL and the private jet business are all about larger-than- life personalities and excessive glamour.
In the much-acclaimed movie ‘The Dark Knight Rises’, Selina Kyle whispers in Bruce Wayne’s ear, “There’s a storm coming, Mr. Wayne. You and your friends better batten down the hatches, because when it hits, you’re all gonna wonder how you ever thought you could live so large and leave so little for the rest of us.” If only Venkatrama Reddy had seen Nolan’s masterpiece…..
(Views are personal. Aniket can be reached via email at firstname.lastname@example.org or via twitter at @aniket_nikumb)