The Curse of The Khiladi.

     Fiscal year 2019 wasn’t a great time to be in the midcap space, to say the very least. Valuations suffered a reality check and several cases of corporate fraud emerged, even as the Indian growth story came to a screeching halt. Outliers, however, always save the day. Even in these turbulent times, there are some stocks out there that are consistent performers, outpacing the market in any era. Bollywood, in that regard, isn’t too different. While the recent past has seen several films led by the biggest names crash and burn, the industry does have its crop of bankable stars. And over the years, one man has stood tall above the rest.

     Rajiv Hari Om Bhatia. The man who holds a Canadian passport and masquerades behind the screen name Akshay Kumar just so happens to be one of the most versatile actors out there, one who has undoubtedly reached the dizziest heights of stardom. Starting out as an action hero in the industry, Akshay Kumar has proven over two and a half decades that he can easily handle any role and genre, be it romance, action, comedy, thrillers or socially sensitive films. Bollywood is abound with high budget films that crash landed at the box office, despite having the biggest stars, the most popular soundtracks and extravagant marketing campaigns but not too many of Akshay Kumar’s movies feature in that list. He is arguably the most bankable star in Bollywood today, with nearly every film breaking even for the producers and most going on to be smash hits at the box office. While an on-screen presence has been his main driver, Akshay Kumar stays in the limelight off screen as well, be it having a chinwag with Prime Minister Modi on national television right in the middle of election season or promoting socially sensitive topics such as menstrual hygiene, Swachh Bharat and road safety. He has made his presence felt on the small screen by hosting numerous television shows and signing a starring role in ‘The End’, an upcoming series on Amazon Prime. Thus far, he’s managed to steer clear of any major controversies and to his credit, in order to keep both his fan following and producers craving for more, he appears in at least 2 movies each year and doesn’t subscribe to the trend of making just an annual appearance on India’s silver screens (Mr. Khan, we’re looking at you).

     One could argue that he’s got the perfect formula in place. Choosing to co-produce nearly every one of his own movies via his production houses Hari Om Entertainment, Grazing Goat and Cape of Good Hope Films, the Khiladi’s films are usually made under a tight production budget of under Rs. 30cr. Most films are shot and wrapped up in under 3 months, allowing him to juggle multiple shoot schedules each year. Selling the music and television rights recoups a significant part of the budget even before the film hits the screens. Then again, the hype behind an Akshay Kumar release rakes in well over that amount in the first two days of the movie’s release and over the first weekend, ensuring that the film at least breaks even. Needless to say, almost every film generates a healthy surplus over its first week of theatrical run and most breach the Rs. 100cr mark. The co-production formula has worked for several of Akshay Kumar’s movies and most leading production houses are known to often take a lower revenue share to partner with the actor. Couple that with low-budget, mass appeal and socially relevant films and the outcome is a sure-fire smash hit at the box office that keeps the cash registers ringing. And therein lies the beauty of contiguity, a formula which has produced a series of critically acclaimed and financially successful films at the box office.

     The star’s production houses usually partner with leading names such as T-Series, Nadiadwala Grandson, UTV and Fox, which have massive distribution and marketing reaches, ensuring an opening of at least 2,500 screens globally, which almost assures that the film’s costs are recouped even before the profits come streaming in. Fox Star recently signed a three film deal with Akshay Kumar to co-produce his movies, the first of which was Mission Mangal, which sailed over the Rs. 200cr hurdle at the box office. It’s almost certain that the Khiladi will go on to close the year with another housefull at the box office, speaking both literally and figuratively.

     It isn’t without good reason then that the fourth spot on the Forbes World’s Highest Paid Actors 2019 list belonged to Akshay Kumar. A big contributor to all that moolah was Akshay Kumar’s advertisement earnings, from a portfolio of over 20 brands. And while nearly everyone who rode the Akshay Kumar wave may be laughing all the way to the bank, there are a clutch of brands that the Khiladi endorses that didn’t share the same sentiment in the recent past. For every Thums Up, Sparx and Honda, there are those endorsed brands that witnessed their growth and market standing positions go horribly wrong. While Akshay Kumar and his films have had an almost endless run of success at the box office, a bevy of star-crossed brands backed by the star power of the Khiladi suffered a veritable fall from grace.

     Kwality Dairy. The now bankrupt dairy major was once a darling of the bourses and widely touted to be the next big thing in the consumer sector. A company that once started out as a B2B player, Kwality made its foray into the B2C space by launching its own brands and trying to straddle the entire dairy space. It also rode the euphoria wave that lifted all dairy stocks, when Lactalis acquired Tirumala, Heritage bought Reliance’s dairy arm and Lotte acquired Havmor, deals that were all closed at premium valuations. IPOs and several private equity investments in the dairy space also buoyed market sentiments. While its B2C business grew at a much faster pace and nudged the company’s margins higher, the company also took on a lot of debt to fund its capital expenditure outgo of setting up two new milk plants. While its B2B segment provided a continuous stream of cash flows, albeit at a low margin, its growing focus on its B2C segment lifted margins but choked cash flows, with heavy investments channelled into marketing, brand building and distribution. The company raised debt by pledging its shares and the fact that its disclosures weren’t adequate certainly didn’t help its cause. With its quarterly numbers showing little growth and nothing but higher debt, the company’s scrip, which had jumped from single digits to levels of over Rs. 150, slowly began sliding. On a bright and sunny morning, the company announced that a broker who held some pledged shares had dumped them in the open market and was absconding. While Tinseltown and Scooby Doo may have taught us that the butler always did it, on Dalal Street, more often than not, the broker’s usually to blame. Obviously, all hell broke loose. The stock began hitting lower circuits and on expected lines, margin calls struck the company. Kwality soon began defaulting on its debt repayments and its shares crashed to near zero levels. With its creditors (including a certain KKR) lining up to scavenge the remains of the carcass, the company has received low bids from several food majors for its assets. While Kwality’s advertisements showed an exuberant Akshay Kumar jumping over vehicles and encouraging a wholesome lifestyle fuelled by the goodness of the brand, as far as the company’s shareholders and creditors go, it’s no use crying over spilt milk.

     PC Jeweller. When it came to star power, PC had managed a coup of sorts by roping in both the Khiladi and his better half, Mrs. Funnybones herself as its brand ambassadors. The company subsequently turned out to be the perfect example of the manner in which the typical Indian promoter treats and runs his company – akin to a personal fiefdom. When news emerged of several related party transactions with Vakrangee, a scam-hit and tainted entity, the stock cracked by over 60% in the span of a few days. Vakrangee had apparently bought a stake in the company from the promoters and the promoters had also chosen to gift some shares to their relatives via off-market transactions – sans any disclosures to the markets. Today, the company’s stock price is around 90+% down from its peak levels, a perfect example of how the markets can shun a company that decided to blacken its shine and glitter with the sludge of trying to hoodwink its shareholders and the unforgiving markets. Another such instance may indeed go a long way in ensuring that the jeweller for generations, as the company brands itself, may not be around to see the next one.

     Eveready. The cat with 9 lives may have had its last one snuffed out. While the brand may be the market leader with a strong nationwide presence, benefitting from the stardom of both Akshay Kumar and Amitabh Bachchan, its precarious position is a result of robbing Peter to pay Paul, a common occurrence in the Indian conglomerate saddled with the remains of unwise promoter diversifications gone sour. The trouble at Eveready began several years ago when the company decided to enter the LED space, which was a bet on the government’s push towards energy efficient lighting. This, however, saddled the company with excess debt and soon enough, the spectre of funds moving between group companies disguised as loans began to appear. The Williamson Magor Group’s tea business was struggling, caught in an unfavourable spell of low prices. McNally Bharat, the engineering arm, had little going in its favour in terms of growth and new contracts and yet, the group continued to fund it and throw good money after bad. The companies soon went in for a round of debt restructuring, with defaults becoming a regular feature. There were talks of the group being in discussions to sell its core battery business, which was showing stagnant growth, in the wake of the flood of cheaper imports from China. Rumours of land parcel asset sales too did the rounds of the markets and the group exited the packet tea business and sold some of its plantations. The straw that broke the camel’s back was the resignation of PwC as the auditor, citing a lack of information and disclosures (or to be precise, having another default blowing up in its face while serving as auditor). Auditor resignations spook the market and Eveready’s case was no different. Share prices at all group companies were pummelled, while the group continued to insist that business prospects were sound and disclosures were top notch. Eveready is said to be in talks with Duracell to sell its battery and flashlight arm for Rs. 1,600cr but that move would only partially solve the group’s crisis and for now, the company’s famous ‘Give Me Red’ tagline seems to have come back to haunt it, with its financials cloaked in nothing but red ink.

     Revital. The OTC brand, inherited along with Ranbaxy, from the stables of Sun Pharma is a leading brand in its segment. Revital may have been hauled up in the recent past for misleading advertisement campaigns but its parent company has had bigger demons to exorcise. Post the troubled acquisition of Ranbaxy (click here), Sun Pharma has been encountering one obstacle after another. Its Halol plant was hit by several USFDA observations on a range of issues even as ridiculous as a leaking roof and the National Pricing Policy capped essential drug prices, putting pressure on the company’s margins. The consolidation of pharma retailers in the USA further hit the pharma industry’s pricing power and the USFDA accused Sun Pharma of price collusion in the US markets. Downward pricing pressure in the generics space and delays in drug launches have impacted margins and Sun Pharma’s stock price has crashed to less than half the level it was at, prior to the Ranbaxy deal. Revital may be preaching a ‘jiyo, jee bhar ke’ lifestyle via the Khiladi but its parent company, Sun Pharma has been doing anything but that in recent years.

     Tata Motors. Now, to be fair, Tata Motors’ tough days didn’t start post signing Akshay Kumar as the brand ambassador for its commercial vehicles. Tata Motors last saw a good year back in 2011-12 when Jaguar Land Rover took it to new heights before all 3 engines of the company (JLR, the passenger car division and the commercial vehicles division) began sputtering. Tata’s passenger vehicles business has been a perennial basket case with the lack of a strong brand perception, market share and above all, a fundamentally good vehicle in its portfolio, while the commercial vehicles arm continues to lead the market in India. JLR was blindsided by the impact of the Brexit, the fall in demand from China and the global move towards electric vehicles. Over the past 5 years or so, the CV business did lose market share, impacted by roadblocks such as the mining ban, GST, demonetization, axle loading norms, transition to new emission norms and the uncertainty over the proposed truck scrapping policy. India’s CV cycle never really took off as a result and now, just when the government tried to jump start the economy with a corporate tax cut, the automobile industry is mired in a slowdown. And with the German auto industry (having the most important ancillary and OEM makers), which is seen as a barometer for the global auto industry’s fortunes, seeming all set to nosedive and drag the global auto industry down with it, a recovery for Tata’s CV arm seems to be a long and bumpy road ahead.

     Micromax. Once the poster boy of Indian manufacturing companies that could compete on the global stage, Micromax rapidly expanded to enter virtually every segment of the electronics market. However, its core mobile phones segment saw an all-out price war from the likes of Xiaomi and BBK Electronics (Oppo, Vivo, OnePlus and Realme) from China and with an inferior product design, Micromax could barely keep up. It tried to play in the sub – Rs. 10,000 space while the real action and money were in the Rs. 8,000-20,000 price slabs, which the Chinese players had gained control of. Micromax’s 4G phones were slow to hit the market, which drained its market share. Micromax was once the second largest player in the space (behind Samsung) and even had the audacity to take potshots at Apple’s iPhone, while managing a marketing coup of sorts by signing both Hugh Jackman and Akshay Kumar as its brand ambassadors. It had begun exporting to other markets and an IPO was on the cards. How times have changed. The company recently offered an exit to its PE investors with a 90% haircut in its valuation.

     It may just be a matter of time before haircuts become the order of the day on the bourses with valuations being as high as they are. The corporate tax cut may have created some short term euphoria but with the world sinking deeper into a crisis and Trump risking an impeachment, a full blown crash might soon result. A lot more companies may suffer the same fate as the six that Akshay Kumar endorses and if a financial apocalypse does indeed materialize, Micromax’s famous tagline may best describe the carnage that would unfold. Nothing like anything.