Mistake 1 - Deccan Chronicles

This investment was my first mistake investing in the public markets in India. I am certain that there will be many more mistakes in the future.

For those not familiar with this company, Deccan Chronicle is an Indian English language daily newspaper. The company started its operations in the state of Andhra Pradesh as a partnership concern in 1938. In 2004, the company went public.

I first bought the shares of Deccan Chronicle in 2011. The investment idea came to me looking at Berkshire’s successful investment into the Washington Post. My investment thesis included the following:

a)  The newspaper was amongst the 3rd highest circulation and readership (Million+) in India. They had a stronghold in South India, especially Andhra Pradesh, Tamil Nadu and Karnataka

b)  Strong financials:

• Revenue of INR 1000 Cr.; growth 10% YoY
• Earnings of INR 160 Cr.; previous 5 years of +ve EPS (there was some short term fearof rising print raw material charges which was reducing the EPS)
• Dividend declared for the previous 5 years except in 2010-2011 (between 2-3% yield)
• Debt – INR 300 Cr.
• Current assets/current liabilities – 2.5x; net current assets per share of INR 21
• Attractive valuation – I bought the first few shares at ~INR 45 and subsequently more at ~INR 30 in early 2012
• Cash – INR 700 Cr.

However, in 2013 it was reported that financials had been misrepresented and the company suddenly disclosed a debt of INR 5000 Crores. The entire episode was murky saga, and even renowned investors like Future Capital and Karvy stock broking had fallen victim to a fraud. The CBI went on to file criminal charges for forgery, fraud and conspiracy against the promoters.

There were several signs of the downfall which I had missed out on prior to my investment and while I was holding the shares:

a)  The promoter CEO (T Venkattram Reddy) of the company loved to flaunt his wealth. His car collection consisted of several Rolls Royces, Ferraris and the likes. He also was avid horse racing enthusiast. All of this was well publicised in the news.

b)  Purchase of IPL cricket team, Deccan Chargers, for glamour and ego. Huge franchise fees that made no economic sense were paid. Further, the CEO’s daughter was made a director in the sporting franchise

c)  His family had a close affiliation to politics and his brother-in-law was a member of parliament from the Congress party

d)  Resignation of Managing director and a debt default in the months prior to the surfacing of the scam

The stock is now down to about INR 2 and this has been a major loss in my portfolio.

Learnings:

a) I have come to realize the vital importance of a sound and honest management who aim to accrue value to shareholders rather than amass wealth and glamour for themselves. The ethos of management is far more important in India as compared to other developed nations since the prevalence and ease of fraudulent practises are higher. Hence, it is important to study management incentives very carefully, and other affiliations.