Facebook's growth slows down

Ahead of its proposed IPO in May/June this year, Facebook has come up with financial results for the Q1 2012. The results are bit disappointing for investors and potential investors who are thinking of a pie in IPO shares. Revenues crossed the magical $1 billion mark in last quarter, a healthy 55% growth Y-o-Y. But when you look at the bottomline, it was a bit concerning. Net profit for the quarter came down by 12% Y-o-Y, primarily driven by the expense factor. Marketing expenses have nearly tripled.

Facebook might be struggling to keep its revenue and user growth and spending a lot in marketing and ads. The company even cited in its recent filing that it may not sustain the growth level in coming months.

Here's the latest filing: http://sec.gov/Archives/edgar/data/1326801/000119312512175673/d287954ds1a.htm

A look at Facebook IPO

And yes, it's finally came! That's the reaction from the world of investors, analysts and others who have interests in Facebook. Facebook has filed for IPO yesterday with expecting to raise $5 billion from the public. However the company remained silent on the number of shares that are floated for IPO. Also, no break-up of users by country is available in the filing.

The numbers seem really promising and as expected. Revenues were $3.7 billion in 2011, an increase of 88% from previous year. Profits stood at $1 billion (~27% profit margin). Number of Facebook users jumped to 845 million at the end of 2011, up by 39% Y-o-Y.

Industry estimates put the valuation to be in the range of $75-100 billion.  Well, these are all on the positive side of Facebook. Let's have a look at some other numbers as well that may be really worth considering for investors and followers of Facebook.

    1. Sales growth has been on decline since 2009 (sales growth in 2009 was 186% over 2008, but it was 88% in 2011 over 2010)
    2. Total expenses have been steadily increasing since 2008 and it was up by 100% Y-o-Y in 2011
    3. Net income was increased by 65% in 2011 and was at $1 billion (don't know whether Mark wanted it as a rounded/exact figure!)
    4. Cash and cash equivalents were at around $4 billion at the end of 2011
    5. Number of monthly users were around 845 million as on Dec 31, 2011, increased by 39% Y-o-Y; the same number witnessed an increase of 69% in 2010; this shows that Facebook is nearing maturity in terms of adding people; this may not be an issue if it considers other unexplored markets like China;
    6. Daily active users were around 483 million in 2011
    7. Advertising is still the major source of income for Facebook with around 85% of its total revenues come from that segment, but note that it was 95% in the previous year
    8. Revenues from the US market has been on decline. Around 56% of its total revenues were from the US in 2011, it was 62% in 2010.
    9. Every Facebook member generates ~ $4.5 in sales for Facebook and adds ~$1.2 in profit to the company
  10. Expected offer price will be in the range of $40-53 per share
  11. Around 12% of its revenues come from Zynga

So, everything seems to have been well for Facebook. But that may not be the case in future. The issues that may affect the company's growth in coming years could be,

                   - data privacy regulations from the government
                   - increase in marketing expenses to sustain the revenues growth
                   - find out a mobile strategy that would help Facebook to explore new markets and people
                   - marketing strategies that help Facebook to retain members base (with innovative products/services)
                   - exploring new markets (e.g China)
                   - explore new avenues for generating revenues than depending only on advertising

Let's wish Facebook all the best with this fund raising in the new year!

Are ecommerce companies in India really sustainable?

We all know that ecommerce in India is growing at a rapid pace (around 40-50% a year) and presently valued at $10 billion. So everything seems to be on a very positive side as far as ecommerce is concerned in India. As a result, hundreds of new players are entering into this market every year. Some estimates claim that there are around more than 3,000 ecommerce companies in India.

So, how these companies manage themselves to differentiate their products and services from competition? There are many things that are common among all the ecommerce companies. viz cash on delivery, free shipping, security, new payment options like cash cards, EMI plans linked with credit cards, etc. But when it comes to differentiating factors there are very few things and that are captured only by very few companies. For example, some companies provide a great user experience and simple buying process. Another differentiating factor could be 'product offerings' i.e offering niche segment of products like kidswear, diamonds and other luxury items, etc.

So what's making these companies to mushroom in number? Well, everybody is competing for a share pie in this one of the fastest growing markets in the world. But all these companies tend to forget one main thing for any business to survival i.e profitability and scaling up (in terms of number of customers and revenues). There are few cases that has made many of these start-ups to revise their strategy. Recently, Taggle.com, an online electronics retailer, has announced to close its business due to increase in losses and the reason is it couldn't survive the intense 'price-war' that's going on among these so-called ecommerce companies.

So now the issue is about 'sustainability' in this space for the Indian ecommerce companies!

One good thing for customers though - great deals at an all time low prices!

Falling Rupee and how it affects you?

Rupee fell for eighth day consecutively on Wednesday to finish at 52.36 against USD. So there's been hype in the market on falling Rupee against USD. We can't blame anybody for this. This is a massive outcome of various things like Eurozone crisis, instability in global equity markets, etc. Investors are looking for safe investment horizons like government bonds that could shield them against any financial vulnerability.

India's central bank, RBI, is closely watching the situation is expected to issue rupee denominated corporate bonds to overseas investors to boost the ailing rupee. Also it plans to buy around Rs. 100 billion worth government bonds to ease the pain on Rupee. The Rupee has lost around 8% against USD since April.

Though the US economy is in a bad condition, factors like Europe's failure to bail-out the countries which are in financial trouble, make the investors' confidence to ruin on Euro. All these factors pushing up the USD value against many currencies (good or bad, it's USD getting the hit!). So one could expect the Rupee to gain in Q1 2012 as the European economy is expected to get some sort of bail-outs from the governments. Once the global confidence among investors roll back, then we could say that Rupee might be back on track against USD (in the range of 45-47).

Decrease in value of the Rupee is good for the people who are working abroad and sends money to their families here. Also, the imports get dearer. There might be increase in price of goods like mobile phones, laptops, TVs, etc in coming months as the import prices would be higher. Energy companies (like oil importers) would also bear the brunt by paying more on importing oil (no surprises if the fuel prices go up!). Exports would be less valuable now and companies that export goods to abroad could expect their top line revenues to come down. Many Indian IT companies that weren't prepared for this free fall of rupee would certainly face the heat in this quarter.

Will Kingfisher Airlines survive?

Everybody is talking about the financial position of Kingfisher Airlines, the second largest carrier in India with a market share of around 20%. Speaking only based on the financial numbers, yes, Kingfisher is in a dire situation. But before arriving at any conclusion, let's review about its recent quarterly results (three months ended Sep 30, 2011).

1. Revenues decreased by 19% Q-o-Q, may be an overall effect in the industry
2. Fuel expenses went up to a new level of 53% of revenues
3. Employee costs also went up by 5% Q-o-Q, constituting around 12% of revenues
4. Both Fuel and Employee expenses accounted for 65% of total revenues in this quarter, should really be a concern for Kingfisher
5. Cash at bank was about $44M at the end of the quarter, around more than 21% of short term loans payable within a year (as of March 31, 2011)
6. Total secured and unsecured loans as of March 31 ~ $1.4 billion
7. Kingfisher announced in its earnings call that it may require only around $100-$150M to meet short term needs (working capital)
8. There are some flip side as well -

- passenger load factor was down to 77%, compared to 82% in the same period last year
- reported a EBITDAR loss of around $25M, since two years
- reported a net loss of around $94M

Interesting to note is that around 75% of revenues were from domestic operations. So, increase in fuel costs in India would obviously have its impact on the margins of Kingfisher. Jet fuel costs are surcharged at a higher rate than many other countries, it's around 50-60%, which made the airliners to shed more money on fuels in India. This was the biggest cause for this financial mess at Kingfisher, followed by the increasing staff costs.

Fuel expenses were 'higher' in the previous quarter (Q1 2012), which Kingfisher was able to overcome due to its increase in revenues in that quarter. There were factors that made Kingfisher hard times this quarter - increasing fuel costs, employee costs and decreasing value of rupee against dollar.

Though the company is making all measures to cut costs like shutting operations in few loss making routes, Kingfisher has no other option.

All the company needs is an infusion of around $100-150M to save its day-to-day operations running. I think it can made it easily by various measures like selling more equities or converting debts to equities to sell stakes to the creditors, etc. Also the talks have already been through with various banks in India.

All the airliners in India are running in losses and this mounting debt may not be a 'significant' problem for Kingfisher and I hope the company would come up from the crisis and this would be a lesson for all the operators in India to tackle their working capital efficiently in order to maintain day-to-day business operations without any financial hitches.

Gold Vs Sensex

This is one of the most sought after season for aggressive short term investors. Investors are trying to buy as much of gold,, which is soaring for the record heights recently to nearly $1100 an ounce.

Investors are now trying to make very short term profits from stock markets and trying to reinvest in high returns commodities such as gold.

Hence today's 500 points up in the Sensex doesn't mean that positive factor is back in the market. Investors who are really interested in long term investments (1-2 years) should enter the market now. But this is not a good time for entering for real aggressive short term investors!

Sensex will stay in the range of 16000-17000 till Q1 2010. Higher volatility may affect the market sentiments in short term (say 3-6 months).

Bharti Airtel - Buy

Bharti Airtel recently announced its Q2 results with good numbers, but not upto the expectation.

Revenues increased by 9% to Rs.98.45 billion Y-o-Y and net profit up by 15% to Rs.23.7 billion Y-o-Y. Net margin was at 24%, relatively higher than a year before.

Here are some positive notes:

1. Customer based increased to more than 110 million as on Sep'09. This is up by 42% from last year same period.
2. Net debt came down to Rs.42 billion, lowest in last five consecutive quarters
3. Return on equity (RoE) is consistently above 30% for the past five quarters (though it was down from 36% in Sep'08)
4. Net debt-to-EBITDA was at 0.26, lowest in last five consecutive quarters. This is due to the decrease in net debt.
5. Interest coverage at 56, highest in last five quarters

Here are some concerns:

1. Average revenue per user (ARPU) came down to Rs.252, from Rs.331 in Sep'08.
2. Market share in mobile services fell to 23.5% from 24.6% a year earlier.
3. Operating expenses increase over last five quarters (though slightly less than previous quarter)
4. Return on capital employed (RoCE) was at 26%, compared to 36% in Sep'08.
5. Capital productivity (annualized revenue/capex) was down at 64% from 73% during last Sep'08.


Share price is at Rs.292, approaching its 52 weeks low, Rs.290. The stock touched Rs.495 (its 52 weeks high) and hence the stock is currently trading at deep discount. Moreover the trading volume is at around 6.5 million.

Considering its positive fundamentals and free-falling stock price, Bharti Airtel is a 'GOOD' pick now. Investors considering long term investments with 1-2 years investment horizon, can make a call now.