Jacob Kurian On NSR Strategy, Rajat Gupta Issue

Jacob Kurian has always had a formidable reputation as a marketing whiz. During his tenure at the Tata Group, he had helped Tanishq emerge as one of the most powerful consumer brands in the country. Kurian, who is known as the turnaround man of Tanishq, brought a dramatic change in the company’s fortunes. He engineered a multi-dimensional restructuring, repositioning Tanishq as a retail business and growing revenues at over 40 per cent CAGR over the next three years, with steadily increasing profits and cash flows. And how Tanishq became one of the leading specialty retail brands under his leadership is now part of the company’s history. Today, as one of the partners at private equity firm New Silk Route (NSR), Kurian is endeavouring to carry out similar operational engineering. In the wake of an overheated market where valuations are skyrocketing, especially in the private markets, NSR will look at creating its own companies and building platform play. In an exclusive video interview, Kurian talks about creating platform play, discusses expansion plans for portfolio companies and also throws light on reputational issues emerging around Rajat Gupta, former McKinsey & Co managing partner who co-founded the $1.4 billion private equity firm. Excerpts:

It is generally a very difficult deal-making environment with overheated valuations. How are you coping with them?

Deal-making has become a challenge for well-publicised, highly marketed deals as there is more capital chasing good companies. So, when you find good companies which meet all the investment criteria and they come to the market, there is a flood of interest. As a result, valuations get ratcheted up.

What we have chosen to do in such a scenario is to be really disciplined because ultimately, the math on private equity investing is the difference at what you enter at and what you exit at. So, at NSR, we are dealing with such overheated scenarios by going out and building our own deals. We try to build our own companies, create our own platform play and thereby, try to acquire or invest in businesses at reasonable valuations with plausible exit scenarios.

What do you mean to do with a platform style of investing?

A platform play is an attempt in a very fragmented, sub-scale sector to find a way to create scale and size, and bring in those elements which are typically missing – elements without which these companies will remain very small. For example, it may be an ability to build a good marketing engine or expand some common services.

Where we have found that valuations are very high and difficult to justify, we have gone out and created our own entities. For instance, the one we did early on was in the financial services space, which was an area of focus, and found a company at a reasonable valuation. So, we bought a defunct company that had all the licences, found a management team who wanted to come in and we put in the capital. We put the three together and today, Destimoney is about to look for another round of funding and there is a great deal of interest from investors. Having done it in one or two cases and establishing that we can do it, we are now keen to it across two or three more sectors.

NSR’s investment in Café Coffee Day has been a very hot deal. And on top of it, VG Siddhartha has a reputation of being a very difficult negotiator. Isn’t it overvalued and how is the investment coming along?

I think the reason why Siddhartha has been able to command the valuations is that he is one of the few guys who have demonstrated that he has understood what it takes to scale a business.

If you look at the restaurant business, it is a very challenging consumer service-cum-retail kind of play. There are real estate issues, people issue, supply chain issue. He is one of the few guys who have shown that they understand what it takes to build more than 1, 2, 3 or better say, 20, 30, 40 such stores. Yes, the valuations in Siddhartha’s companies are always challenging. We have done something innovative about the valuation issues but unfortunately, I can’t share that.

But, he is four times the size of his nearest competitor, twice the size of the entire coffee sector and is continuing to add 150-200 doors a year. So, we think, in that context the valuation is not aggressive and we remain very optimistic that it is going to turn out to be a very good investment.

You have had a stint with the media as well. You invested in INX Media, which did not quite turn out the way you imagined. What exactly went wrong? What are you doing to resurrect the company?

Yes, it can’t be denied that INX Media started with a lot of hope. It was started with a very marquee set of investors and backed a team which had enjoyed a huge deal of success in their previous company.

We have learnt a lot from that experience. At the end of the day, even when you put all the blocks in the place, success is not guaranteed. And I don’t want to discuss what we learnt out of that.

We continue to believe that media is an interesting space. So, when INX (kind of) folded, we were the only investors who still believed that media had an opportunity. So we picked one channel that we felt was differentiated enough. We picked 9XM, bought the stakes of other investors and we are now running that company. We now own that company and we have brought experienced media professional Pradeep Guha. He has also put in some of his own money into that transaction. We are extremely encouraged by what 9XM is currently doing. It is already going neck-and-neck with MTV and, in fact, it’s ahead on several consumer segments. It is perhaps the only TV channel which is profitable both at the PAT and the EBITDA level. So, it’s a niche, a small business that is growing very nicely.

You also have an investment in Aster Infrastructure which is now called Ascend Telecom. What are your expansion plans? 

Ascend is the only tower company which is profitable both at the PAT and EBITDA level. It is small company with best in class tenancy which is one of the metrics for revenues. We don’t build any tower on speculated basis and we are in the process of actually acquiring India Telecom Infra Ltd  ( an IL&FS and TVS Capital backed company) into ours which we will then operate  and manage  and run. They will become co-investors but we will take over the operations & management.

Can we say that NSR is transitioning from a very minority growth equity approach to an operating hand on PE firm? Is it the sign of the franchise evolving, in keeping with the PE scene in the country?

I don’t think that we are prepared to say that we have given up all minority growth capital investing. We continue to look at transactions which are more opportunistic.

But yes, we are beginning to believe that given a five-year window that a PE has typically, you literally need to treble the company’s growth for PE to make that kind of returns.

There are clear differences that happen to the company when it goes from zero to Rs 10 crore, Rs 10 to Rs 100 crore, Rs 100 to Rs 1000 crore, and these are almost like different lifetimes. So, even the companies who grow find it hard to change their operating styles when they are transitioning. There are a few who are reluctant to make such changes.

Therefore, as I said originally, in overheated sectors or attractive sectors that lack scale, it is probably better for us to go and build our own companies. We can then set the standards, governance, people, payroll and all such essential factors.  Having done it successfully in one company (Destimoney) and repeating it in 9XM, we are a lot more confident now and think that perhaps it is a better route. However, we have done minority investments, even this year, and will continue to do that.

What is happening with Reliance Infratel, considering there are so many issues at Reliance Communications?

Reliance is a company in which we have a very small stake. It’s a point something stake. The company has very good assets and very good operating matrix. But it has issues at corporate level and in terms of funding. The debt overhang is not on Reliance Infratel; it is on the telco. As far as our investing company Reliance Infratel is concerned, it has hard assets on the ground, tenants and optical fibres and is an asset-backed business, as opposed to other elements of the telecom business. We are hopeful that we will get a good exit from this business and there is nothing that tells us otherwise.

When NSR came, it was really seen as a firm with a backing of blue chip fund managers. How are your LPs reacting to the issues surrounding Rajat Gupta and is that translating into any problem for NSR?

Our LPs are very clear that Rajat was the chairman of the fund. As far as day-to-day analyses of the companies and working with them are concerned, the people who sit on the boards of the companies are the people from the Indian advisory firm. Rajat, for instance, doesn’t sit on the board of any of our companies; he never had. So, I think, they have recognised that as far as the working part of NSR is concerned, life goes on.

There is no difference as we continue to look at transactions and invest in companies. We are hopeful that Rajat will clear himself, not just because of NSR but because he is a wonderful guy. He is a very successful Indian and he is a role model for many.

Has it affected our LPs? No.  Has it affected us in terms of our portfolio companies? No. Has it affected us in terms of our perspective companies? There was a recent article which speculated that we were not selected for a particular transaction in which we were involved because of Rajat Gupta & reputational issues. I just want to use this platform to really make it clear that it is absolutely untrue.

The company had a certain ‘Ask’ in terms of valuation which the NSR investment committee did not agree with. We think it’s a great company but not anywhere close to the valuation it is expecting. It is about 1/100th the size of L&T and it is still asking for the same valuation as L&T. There are other funds who feel that it merits such valuations and have gone ahead with the transaction. Unfortunately, the media reported that NSR was thrown out for reputational reasons. We are disappointed that the promoters, who were ascribed as sources, did not come out and clarify that fact. But that is the fact and I want to go on record and say that.

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