Monday, June 2, 2008

Red to Black

The inflation (money chasing goods) is rising in India; we reached 8.1 % last week. As per “The Economist” considering the important commodities it should be over 10%. As such in India we use wholesale price index vs. the consumer price index in most of the developed nations. Considering we are picking inflation at wholesale levels, rather than consumer level, the inflation may be more than even 10%, which we all know, in our visits to the market. Even the finance minister last week finally conceded that it is not coming down in a hurry. Another issue is that all this is happening at pretty high interest rates, which are bound to move northwards as the situation persists.

Before moving forward I would recommend people to read about Ron Paul’s theory on Federal Reserve creating inflation in US essentially by increasing money supply:

Now one paragraph from this note from Ron Paul:

“Federal Reserve Chairman Ben Bernanke faces two basic ongoing choices: raise interest rates to prop up the dollar, but risk pushing the economy into a recession; or lower interest rates to stimulate the economy, but risk further declines in the dollar. This unfortunate dilemma is inherent with a fiat currency, however.”

By the way you can enjoy this gag video on Ben Bernanke from students of Columbia Business School's Dean Glenn Hubbard, who was not nominated for the big boss job of the Fed. very well done:

Back to topic, A similar situation lies with the Finance Minister and RBI chairman these days. Now the fuel prices and food grain prices in the world are also on the rise, soon fuel prices will also go in India. Other than international impacts, there are various theories on the same. One being Dollar chasing Rupee for significant time, and rupee getting printed in higher amounts to manage supply. The other being about money supply and money velocity, and I hit a point where my “economics” fuse blows……Just one more thing, we had a great economy growth, GDP going up by close to 9 %, so there is positive news as well.

What’s the point? We saw high inflation periods, from mid 90s to close to late 90s (1998). During these periods, the share markets were not bad, but post this period, we suffered an economic downturn. The early 2000’s saw the share markets operating at low levels, around 4000, which started picking up from year 2003-04, during this time, the interest rates were brought down considerably to increase the money supply. Is this a sign of another slowdown? High inflation, High interest rates, stock markets still staying stable.

Now coming to internet industry in India, where most players are in RED or a faded black. Other than the exception of infoedge(23 crore(06) profit on a topline of 85 crore(06), before IPO), essentially only, none of the players are on a confident wicket. With most players eying an IPO scenario and in case an economic downturn comes, with stock markets coming down, SEBI will never allow the “grey companies”(just in black) to float IPOs. Now some of the players, which have been there for a long time, are feeling the pressure of raising stakes and therefore some of these players are creating somewhat forced black situation, by reducing variable costs. But years and years of financial books of red, especially in a dull economic scenario (IPO scenario is already going dull in India), the SEBI support for an IPO will be little.

With majority of industry players backed by debt investment, and a potential of weak stock markets in offing, the industry players need to think differently. Now all this is not negative talk, as far as I think this is realistic talk. So what’s the point here? Nothing to worry, Internet will grow and most of sites will make money. The catch is the way VCs have to fund the right companies, the debt investments need to move in right companies, and need to sustain them in case stock markets are gullible. One good thing that will happen is that investment will cease for a lot of tom, dick and harry players who have mushroomed all over the place. So its my appeal to debt investors to keep backing the serious internet ventures in India, to make it last the day.

The other thing is planning for serious firms, who are in red or in faded black. It is important to gauge risk and work on some realistic estimates. Trying to overkill at this moment can be disastrous with poor financial books not worthy of IPO, and shaken VC confidence. The companies, in my humble opinion need to create a growing loyal base and get fundamental numbers showing for them, month on month. The fundamental numbers being the key comscore metrics, unique visitors, page views per unique visitors and time spent per unique visitors. These numbers are more important than the revenue black and red numbers. THIS IS WHAT BOTH VC’S AND INTERNET COMPANIES NEED TO BELIEVE!!! The Internet firms need to believe in these fundamental numbers, and VCs and Investors, need to look at firms with these numbers, as serious players and fuel these players only. This is important in the next year or two to come, as internet population reaches the threshold of 70-80 million connections, from whereon it is expected that a lot of businesses would hit a steep upward curve.

I wrote this while watching IPL final, great match, shane warne rules, I hope in the frenzy of match I didn’t make a mess of this entry…