Why Are Byju's Directors Running Away?

• <00:51> Why Are Indian IT Companies Not Venturing Into Semiconductors?
• <08:59> Byju's makes another pitch but fleeing directors is not a good sign.
• <12:29> How nano-enterprises, one backbone of the country's economy, grow when they get credit with Sharon Buteau
• <21:20> And the rains are here, some numbers on where exactly we are deficient and what's lost by divisions.

---

TRANSCRIPT

NOTE: This transcript contains only the host's monologue and does not include any interviews or discussions that might be within the podcast. Please refer to the episode audio if you wish to quote the people interviewed. Email [email protected] for any queries.

Good morning, it's Tuesday morning, the 27th of June and I'm Govindraj Ethiraj coming to you from Mumbai, India's financial capital !

Our top reports for the day

-Why Are Indian IT Companies Not Venturing Into Semiconductors?
-Byju's makes another pitch but fleeing directors is not a good sign.
-How nano-enterprises, one backbone of the country's economy, grow when they get credit.
-And the rains are here, some numbers on where exactly we are deficient and what's lost by divisions.

Semiconductor blues - Who should set it up?

The Vedanta Group run by Anil Agarwal calls itself a global natural resources conglomerate operating in India and Africa in industries ranging from oil and gas to a range of metals from zinc and aluminium to iron ore and nickel.

Vedanta and Foxconn signed an MoU in September 2022 with the Gujarat Government to invest Rs 154,000 crore to set up the country's first semiconductor manufacturing facility. It was also touted as independent India's biggest-ever corporate investment so far.

The project seems to be unravelling now. More so since the Government asked the duo to come back with a fresh proposal for a different node of semiconductor. The duo applied for a 28-nanometer fabrication plant while the Government now feels we should focus on 40 nanometers which has more widespread application in devices and the like as opposed to the 28 nanometers which could be used for high-end phones and the like.

The Economic Times is now reporting that Foxconn has begun reaching out to large business houses as it seeks to partner with them to further its semiconductor manufacturing ambitions in the country.

The ET quotes sources saying that there are differences between the two partners and the Government has apparently suggested that Foxconn scout for other partners which it is doing. One concern with the Vedanta Group is its relative financial stability, or more specifically its debt position.

Vedanta's Agarwal in April told media persons that they were comfortable and not once in 25 years had they defaulted. It also repaid around $1 billion of debt at that time and said at the time that its gross debt was $6.8 billion at the end of March 2023, as compared to $9.7 billion in March 2022.

Foxconn is now apparently talking to other business groups.

Be that as it may, I have wondered from the start why other companies or types of companies have not thrown their hat into the semiconductor ring.

The reasons for not getting in are obvious:

Very large capital expenditure, policy and incentive dependent (can go up to 70%)

Risky business inherently because semiconductor capacity is going up elsewhere and being driven by the likes of Intel and TSMC at scales not seen before.

Very high precision manufacturing and thus, prone to technical problems or things going wrong.

There could be other reasons too. But I have wondered why is it that a Vedanta would be the only serious large business house or company to pitch, at least that is openly known.

The obvious reason for this, as has always often been the case, is that new investment areas like this demanding scale execution usually draw the bigger risk takers with the balance sheet confidence to pull it off. The industry itself is not so relevant. As a group like Reliance has demonstrated or for that matter Adani.

But if I were to look west..the companies that are expanding in hardware are traditional chip manufacturing companies like Intel or AMD or Micron and of course TSMC, so it is a core competence issue. Though the chips for Nvidia, AMD and Apple are made by TSMC who by the way is not coming to India from what I can see. Nor is Intel which last week announced a $25 billion chip plant in Israel, a move which has surprised many, including perhaps in Israel itself.

The other companies that are entering the broader hardware space are Facebook, Google and Apple, among others.

So it is no secret that chip-making is something most people are wary of, even if the returns are high and the incentives higher.

Parking that thought for a moment, why would India's software giants like Wipro, TCS, HCL and Infosys not think of chip manufacture? Through partnerships of course, with Foxconn or others who could come to India.

Wipro and HCL, which used to manufacture computers once upon a time, are still involved in some form of manufacturing, at least Wipro is. TCS is not but it has many sister companies that are in manufacturing, from cars to now batteries.

Infosys is the only company that does not have the hardware background but it surely has the balance sheet strength if it wanted to.

The fear could of course be that if I am a software services company and valued as such then why would I stick my neck into something that could blow up and cause my share price to tank, maybe in the reverse order too?

The fear and apprehension part is understandable. But it is interesting that none of these companies for whom it is a more logical expansion than say a zinc, aluminium and power company, are willing to take a plunge, even if small.

So the larger point is really this. India has a hardware ecosystem. Making chips is a very high-precision task and which is why there are literally a handful of companies doing it and no one else venturing in.

India has taken a call that it is in our strategic interest to manufacture semiconductor chips because, as India Semiconductor Mission advisor and HCL co-founder Ajai Chowdhury told me two weeks ago, "Wars will be fought over semiconductors"

He also strongly believes we should go for the more mature 40-nanometer-size chips.

So, to conclude, quite likely semiconductor manufacturing is a very precarious and tricky business, literally and figuratively but it does merit asking, why is a business or product that is so critical and backed with such massive incentives from the government still is so studiously avoided at this point?

More Malls

Elsewhere, while semiconductors are still to get off the ground, more malls are coming up. The UAE-based Lulu Group has said it is working on various Indian projects and will invest ₹10,000 crore in the country over the next three years.

The conglomerate has invested some ₹20,000 crores in India till now, Lulu Chairman Yusuff Ali MA said on Monday, according to the Mint Newspaper.

Lulu has begun construction on a shopping mall in Ahmedabad, another one is coming up in Chennai and the group is also in the process of setting up a food processing plant in Noida and Telangana.

IT Companies Are Busy

One reason why IT companies are not investing anywhere else (apart from all the logical ones) might be that business is still strong, at least for the big companies, despite the slowdown in the US and Europe and a tighter rest of the year forecasted.

Infosys has bagged a digital transformation deal with Nordic-based Danske Bank valued at $454 million for a period of five years.

Significantly, Infosys will also acquire the lender's IT centre in Bengaluru which employs 1,400 people. This also has strategic significance since usually companies set up their captive centres to manage and control the operations directly and the selling of it or handing over suggests they are revisiting the model. This happened in previous years as well.

Infosys also got a $1.5 billion deal from energy major BP, earlier British Petroleum, for five years, also the largest deal it has won in the last 3 years.

The MoU was signed on May 16, 2023, and involves the modernisation of end-to-end application services to enhance operational efficiencies and business resilience, according to the company.

Last week, TCS said it had received $1.9 billion from UK workplace pension scheme NEST to digitally transform its scheme administration services.

NEST and TCS have worked together for around 12 years.

Why Would Investors Leave A Company?

Byju's has called for a shareholder meeting this Saturday to ostensibly clear all doubts. The call comes on the heels of three directors and the auditor of the company resigning from their positions.

Reports say Byju Raveendran the founder pointed out that his own investments are at stake and insisted the company's valuation was intact at $22 billion. He also apparently acknowledged his past mistakes and assured shareholders that his learnings far outweigh any missteps.

Raveendran apparently highlighted his personal investments in the company, including $400 million in the parent, $250 million for learning company Aakash, and an additional $250 million through pledged secondary shares for the last funding round.

Importantly, he said that the company would close its year before last year's results which is 2021-22 by the end of September 2023 and the 2022-23 results by the end of December. Apparently, the audit for most subsidiaries for 2021-22 had been completed.

This of course is a warning sign in itself that a company is still auditing subsidiary results and trying to, evidently, reconcile them. Even multinationals, Indian or overseas with subsidiaries all over the world don't dare use this excuse. Or at least without inviting considerable shareholder ire. And for a tech company, this is even more surprising.

Which brings me back to the resignations. I really don't track how many startups are imploding and the reasons for them but one thing seems to be in common.

In all cases, the investors are taking control and effecting management change. In this case, surprise, surprise, the investors as represented by their directors seem to be running for the door.

Which begs the question why?

As a backdrop, Byju and his family own anywhere between 20 and 25% of the company from what I could gather. The precise number is not so important for now. What is important is that funds own close to 65% and various other entities hold another 10%.

Thus the majority is clearly owned by investors and they had three representatives on the board. All of them have now expressly resigned and reaffirmed their status going to reports.

Which brings me to the question. Which investor or investor representative quits and runs? And that too after collectively investing close to $6 billion?

Is it because of the Enforcement Directorate's investigation into Byju's books including raids in the last week of April 2023? The ED was looking specifically at some Rs 9,754 crore sent to various foreign jurisdictions between 2011 and 2023 of some Rs 28,000 crore it received in the same period, it was reported. The money could of course be going out for many, quite valid, reasons but we do not know till the investigation is completed, when it is completed.

So either the directors feel the inquiry itself is sufficient reason for them to get out or they feel there is more than meets the eye which the ED knows and they also know or suspect.

Or it could be an altogether different reason but similar in character. Else they would not get out, however frustrated or unhappy they might be with the people running the company.

Either way, without key directors and an auditor, the company is clearly in no man's land or like a boat afloat with of course close to $6 billion down.

Nano Enterprises on MSME day

After talking about billions of dollars going down the drain, maybe it's time to talk about the relatively unrepresented and hardworking few who can make a few lakhs of rupees go a long way, helping themselves, their families, communities and the country at large.

Better still, if these nano enterprises, defined as small businesses like retail or kirana shops, micro wholesalers and even street vendors with an annual turnover of between Rs 10 lakh and Rs 1 crore, get loans, they are able to grow their businesses. And the more credit they get, the more they are able to grow their businesses, according to a study by Chennai-based IFMR Krea.

These nano-entrepreneurs sit under the larger definition of MSME or micro, small and medium enterprises in India who contribute to roughly 30% of India's GDP growth, according to estimates. Speaking of which, today, the 27th of June is MSME day.

Importantly, the majority of nano entrepreneurs in India are women and between the ages of 20 and 50. They have been mostly educated up to the 12th Standard.

The sample is small but apparently pretty well represented and the authors are confident that the potential for credit-led growth, trickle-down growth and thus economic expansion in this sector is pretty high.

To get a better sense, I spoke to the author of this study, Sharon Buteau, Executive Director at LEAD at IFMR University.

Rain Check

I have seen, over the years, that many people in the stock markets follow monsoons very closely. Part of the reason is the obvious one, there is either a sentiment or material impact of monsoons on the stock markets, in anticipation of a positive or negative impact on the economy.

Part of it, I feel , is because once the data starts coming in, it becomes an interesting statistical exercise in itself. Something that intellectually challenges many.

But of course the impact or significance is real.

So the latest numbers as per Bank of Baroda Research are as follows.

Monsoons have now reached 80% of the country, the Indian Meteorological Department has said and unusually hit both Mumbai and Delhi at the same time, the first time since 1961.

But the delayed monsoon this year has meant that the rainfall distribution has been uneven. As of 25th June, there was large excess to excess to normal in 13 divisions of India and deficient to large deficient in 23 divisions.

The deficient divisions cover Maharashtra, Karnataka, Telangana, AP, Odisha, West Bengal, MP, Chhattisgarh, Bihar, and Jharkhand among others.

Hence 23 of the 36 divisions which is 63% of the met divisions are in deficient and large deficient territory.

This is 61% of the total land mass.

Presently the interiors of the country are in the deficient zone as far as rainfall is concerned and have limited access to irrigation facilities.

Delayed monsoon can affect cropping patterns in the country and the total area under cultivation is lower than that last year by 4.5%, says BOB Research

There are more details available as we go crop wise like rice which requires more water at this stage as well as cotton and oilseeds.

But now that the rains have started, we will of course keep revisiting for status reports and impact.

Meanwhile, prices of tomatoes have crossed Rs 100 per kg, according to various media reports. Too late of course to tell you to do anything but in case you feel it could go higher.

That's it from me for today, have a great day ahead and see you tomorrow.