VAKRANGEE Ltd. - Some Estimates & Calculations

In my previous article on VAKRANGEE Ltd., I had mentioned that I am estimating an Average Revenue per Month of about Rs.2,00,000/- from all the Next Gen VAKRANGEE Kendras, after a few months of operations. Some readers have raised questions/doubts about this figure. So let me present some explanations:

1) As per VAKRANGEE's March'18 result, the company generated a little over Rs.1600 crores in Revenues for the quarter from it's Kendra business. Assuming the company having all 45,000 Kendras active throughout that quarter, we can divide Rs.1600 crores by 45,000 to arrive at Average Quarterly Revenue generated by each Kendra, which comes to a figure close to Rs.3.60 lakhs. Dividing this number by 3, we get an Average Monthly Revenue per Kendra to be around Rs.1.20 lakhs. Obviously, not every Kendra will be generating this kind of Revenue. Some of the larger & older ones, could be generating in excess of Rs.2 lakhs or even Rs.3 lakhs per month. Whereas there could be many smaller ones, doing only Banking Correspondent business, generating less than Rs.50,000 per month. Since each Next Gen Kendra will be offering the entire bouquet of services, the Average Revenue per Month could easily cross the Rs.2 lakhs mark after a few months of operations. Obviously, the Average Revenue from an Urban Next Gen Kendra will be higher than that from a Rural one. VAKRANGEE shares nearly 75% of the Commissions/Fees earned from a Kendra with it's respective Franchisee, which is then accounted as a Cost by the company.

2) Consider Amazon booking business: Amazon offers VAKRANGEE a commission of between 2% to 8%, depending on the product category. Let's consider the Average commission to be 4%. Today one can buy almost everything via Amazon, right from a toothbrush upto an LED TV or from shoes to Caps. Many people, even from rural areas, have started buying stuff like Mobile phones, shoes, Laptops, clothes, even stuff like Mixer-Grinders or TVs or Coolers, etc. Online as it offers them a large variety of products to choose from. If each VAKRANGEE Kendra does an Average booking of goods worth just about Rs.50,000 per day on AMAZON, the Kendra generates a Commission of about Rs.2000 per day, translating into about Rs.50,000 per month, considering 25 working days in a month. Many of the Kendras, having larger population density around them, can do much higher amount of AMAZON business. Remember that most of the VAKRANGEE Kendras are located in areas where people do not have a proper Postal address. Hence it is convenient for both, the customer as well as AMAZON, to do business via a VAKRANGEE Kendra.

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3) Courier Booking/Delivery & Reverse Logistics for eCommerce Companies: Many of the VAKRANGEE Kendras, doing AMAZON business, were already handling Parcels. This provided VAKRANGEE the experience & opportunity to offer full fledged Courier Booking/Delivery services for many leading Courier Companies. How this works is: These Courier Companies will handover Parcels/Packages to VAKRANGEE's District Master Franchise, who in turn will be responsible to reach those goods to the respective local Franchises, depending on Pin Codes covered. With more & more people across the country making Online purchases, the demand for efficient Delivery mediums is on the rise. These eCommerce companies also need Reverse Logistics services to handle product-returns. VAKRANGEE intends to offer this service through it's network of Next Gen Kendras. Even if each VAKRANGEE Kendra handles on an average about 50 parcels per day, it can easily translate into Average Revenues of about Rs.25,000 per month from each Kendra. The demand could easily go higher in the coming months/years.

4) ATM Service: Most of the Next Gen VAKRANGEE Kendras are being setup in locations which have a large number of people from lower middle class residing nearby. Most Banks do not prefer to setup their ATMs in such locations. Standalone Bank ATMs have much higher operating costs as they need exclusive outlet with AC, Guard, Lights, Internet Connectivity, and also Cash replenishment tie-up with a service provider. All these things take the Fixed Costs of a Standalone Bank ATM to anywhere in the region of Rs.20,000 to 40,000, depending on the Rural or Urban location. Hence the break-even for Standalone Bank ATMs is around 50 transactions per day. In case of VAKRANGEE's ATM at it's Next Gen Kendras, most of the Operating Costs are saved as it doesn't need Exclusive outlet (for ATM) or a guard or separate AC/Lights. Even Cash replenishment is handled by the Kendra staff. Hence the ATM-specific Fixed Costs are very low and even those are borne by the Franchises. Every transaction at such White Label ATMs earns VAKRANGEE a fee of about Rs.25 or 30. Even if the Average number of ATM transactions per day is just 50 per ATM, it translates into about 1250 transactions in a month with 25 working days. Hence the ATM alone can earn in excess of Rs.30,000 in fees from the various Banks in a month on a conservative estimate.

5) Banking Correspondent Point: This is still the primary business for VAKRANGEE Kendras and is also responsible for propelling huge growth in the number of VAKRANGEE Kendras across the country. Many of the Kendras still continue to operate only as BC Points. These BC Points are mainly located in areas where there are good number of migrant labourers. These labourers transfer cash to their family member's bank account at their native place, after every few days. Most Bank branches take little interest in serving such customers and push them towards a Banking Correspondent. The BC takes care of such transactions and charges a small fee of about 1% of the amount. VAKRANGEE is probably the largest Banking Correspondent license holder in the country. VAKRANGEE's Banking Correspondent in my town, started as a single-person, single-laptop, operation a few years ago. But today has 5 people working there and 3 laptops. Most of the times all the people there are completely busy. Even on a conservative estimate, if each Banking Correspondent/Kendra handles just about 50 transactions in a day with an average ticket size of Rs.5,000/-, the total amount transacted comes to Rs.1,50,000/-, translating into a fee of Rs.1,500/- per day per Kendra. Hence this business alone could take the Monthly Revenue to something like Rs.40,000/- per Kendra.

The Four services that I have discussed above, together have the potential to generate Monthly Revenues of Rs.1.50 lakhs or more per Next Gen Kendra. Apart from these services, there are other services like Rail/Bus ticket bookings, Life Insurance & General Insurance sales, including Motor Insurance, Mutual Fund Investments, Bill Payments & Recharges, etc. All these services together can easily take the Average Revenue per Next Gen VAKRANGEE Kendra per month to over Rs.2 lakhs, after the initial few months of operations.

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Some thoughts on VAKRANGEE Ltd.'s Potential

After an amazing run throughout 2017 & hitting a peak of over Rs.500 in January'18, VAKRANGEE Ltd.'s share price has experienced extremely stormy weather since then. Over the last 6 to 7 months, the company has been accused of several things, including misuse of funds to purchase large number of shares of PC Jeweler Ltd.; overstating or misguiding investors about the number of it's active franchises; resignation of auditor at an awkward time creating doubts about the authenticity of it's numbers; withdrawal of it's announcement of large Dividend/Buyback further creating doubts about availability of funds with the company; etc. All these developments, aided with lots of rumour-mongering, somehow makes one feel that the share price fall from a peak of over Rs.500 to a low of just over Rs.30 is an orchestrated fall.

I looked at VAKRANGEE Ltd's share price for the first time when it fell from Rs.500 to about 220 levels. After a quick check of the company's Quarterly Results & it's business model, I made my initial investment in VAKRANGEE Ltd around the Rs.200 to 225 zone. My initial views were: VAKRANGEE Ltd. offers several necessary services through it's over 40,000 Kendras to Semi-urban and Rural Citizens, mainly for people at the bottom of the pyramid. My Logic was simple that there is immense scope for growth of this kind of business as India has a huge population which can benefit from these kind of services. Unfortunately, my Views were mainly built on the Next Gen VAKRANGEE Kendra format, which the company had released only in February'2018 or so, a little before I had my first look at the company.

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It was only a little later that I realised that over 95% of VAKRANGEE Kendras are still from either of the Phase-1, 2 or 3 formats. While trying to better understand VAKRANGEE Kendra's business evolution, I now know that a substantial portion of the 45,000 Franchises that the company boasts of, are operating as just Banking Correspondent Points or BC Points (Phase-1 format). I am assuming the number to be a third of the total number, i.e. about 15,000 could be just BC Points. BC Points primarily offer a customer the facility for Cash Deposit or Withdrawal upto a certain limit like Rs.5,000 or so.

Another 15,000 centers could be of the Phase-2 format, where they are offering few additional services like Prepaid Recharges for Mobile & DTH connections or Electricity Bill Payments, etc. in addition to Banking Correspondent services. Most of these Phase-1 & 2 centers are of the non-exclusive type, i.e. they are only a part of some other business setup like a kirana store or some other consumer-facing business.

The Phase-3 format, which was probably introduced only about 15 to 18 months ago, is more of the exclusive store type. In addition to BC services & Recharge/Bill Payment services, these centers offered e-Governance services as well as e-Commerce services. Tie-up with Amazon is one of the biggest positives for centers as a person living in relatively remote areas can approach a nearest VAKRANGEE Kendra to book a product on Amazon and get it delivered at the Kendra itself for easy collection. This is positive for Amazon as well as VAKRANGEE as well as the Consumer from remote areas. Many of the Phase-3 format centers also offered ATM service.

Finally in January or February this year, VAKRANGEE introduced the Next Gen Kendra format, which is aimed at offering a modern and standardized look & feel of exclusive VAKRANGEE Kendras, offering the entire bouquet of services, including an ATM at every Next Gen Kendra. Since April'2018, VAKRANGEE has taken up the task of upgrading all it's existing Franchises to this Next Gen Format over the next 12 to 18 months. This is a mammoth transition for the company and actually deserves appreciation, but unfortunately the company's share price has been surrounded by so much negativity that all these developments have been ignored.

Out of the existing 45,000 franchises of VAKRANGEE, I am expecting only about 20,000 to 25,000 of them to readily Invest for Upgradation to the Next Gen Format. These will include all the Phase-3 franchises and some of the Phase-2 ones as well. The rest of them might prefer to continue operating with limited number of services. When the time comes, VAKRANGEE might decide to look for New Franchises in all such locations where the existing ones are Not willing to Upgrade to the Next Gen Format. VAKRANGEE continues to aim at having 75,000 Next Gen Kendras by the end of year 2020. This is a very Big aim and it will be a Big positive surprise if the company manages to achieve this figure even by the end of 2021.

Coming to some Financial numbers, VAKRANGEE reported a little over Rs.1600 crores in Revenues from it's Kendras business for the January to March'18 Quarter. The company books all the Commission earned for the various services offered through it's Kendras as it's Revenues and then shares between 60 to 75% of it with the Franchises, depending on the type of service & existing format. The Next Gen Upgradation work was yet to start during that Quarter. Assuming that the company had all 45,000 franchises active during that quarter (in Phase-1 or 2 or 3 formats), the Average Revenue earned comes to about Rs.1,20,000 per Kendra per month.

Normal Logic says that the Phase-3 Kendras will be earning much more than the Phase-1 or 2 Kendras, and those in Urban areas to be earning more than those in Rural areas. Let's assume that Phase-3 Kendras to be generating an Average Revenue of over Rs.1,50,000 per month. The Next Gen Kendras can certainly exceed this figure with better marketing support from the company as well as increased number of services with good commission structure, like Life Insurance, Health Insurance, Car & Bike Insurance, Mutual Funds, Rail ticket & Bus ticket bookings, Amazon & other e-Commerce booking, Courier/Parcel booking, etc. The ATM alone could generate over Rs.25,000 in Revenues per Kendra per month. I am expecting the Average Revenue per Next Gen Kendra to be crossing Rs.2,00,000 per month mark, after a few months of operations.

{Remember that VAKRANGEE will be using it's substantial Cash Balance for primarily 2 things: Capital Investment for purchase of thousands of ATMs (about Rs.2.5 lakhs for each machine x 20,000 = Rs.500 crores over the next 12 months alone); Large-scale Advertising/Marketing support across the country to let the public know of VAKRANGEE Kendra near them. Once the operations at the initial batch of about 5,000 Next Gen Kendras stabilise and they start generating decent Revenues, VAKRANGEE is expected to distribute a portion of it's Cash Balance with the shareholders in the form of a Dividend or a Buyback.}

Assuming that by June'19 VAKRANGEE manages to upgrade about 20,000 Kendras to the Next Gen Format, Revenues from these Next Gen Kendras alone could be in the vicinity of Rs.1200 crores per Quarter.Even if the old format Kendras, active then, contribute just about Rs.300 to 400 crores, the total Quarterly Revenues could be in the vicinity of Rs.1500 crores. By December'2020, even if the company manages to have about 40,000 to 45,000 Next Gen Kendras active, instead of the targeted 75,000 Kendras, still VAKRANGEE's Quarterly Revenues could be in the vicinity of Rs.3000 crores or higher. I think these are fairly conservative assumptions & estimates and VAKRANGEE can certainly achieve them, if not exceed them.

At the current price of about Rs.42 per share, VAKRANGEE is valued at just about Rs.4,500 crores. This is peanuts if we consider the company's past Operational & Financial track record and the Future potential. An Investor capable of ignoring all the Negative Air & Rumour mongering surrounding this company's stock, can consider this as an Opportunity to Invest for the Lifetime. In a year or two from now, the Dividends alone could offer good returns on the current price. One just needs to hold patience to ride through the current stormy weather & this period of transition, in order to see positive developments start reflecting in the company's Financial Performance from the next year onwards.