Case Study Colloquy is a leading global distressed investment management company with expertise in debt strategies. The company was founded in 2000 by a group of Indian investors together since the mid- 1980s with high yield bonds, convertible securities, troubled debt, real estate control investments and listed equities. distressed investment combines the best of both real estate - debt-free cash flow through stock appreciation. The risk here is certainly high, but those who carry their risk have set an huge returns over the history. Colloquy considers that the greatest risk in the world not taking any risk and, therefore, their investment philosophy is to invest in distressed securities. This actually includes the purchase of equity as well as fixed income securities of companies facing bankruptcy or having the opportunity to file with extinction in the near future. In fact, troubled companies do not have the money to service their debts. However, they can offer several important advantages, as the 100-200% benefits are typical, if a company improves its performance and there is a turnaround. Distressed equities can provide estimated returns in multiples, however when a company reset or files a bankruptcy then these become futile. The idea that attracts the company is consistency and specialisation. However, the hard part is doing the right thing i.e., right decisions, because of which Colloquy views its analysts as its primary asset as they take right call at the right time because of their thorough research and extensive experience. It is definitely not the work of those who are weak at heart because of unpredictability that comes with the profession. “Only those who run the risk of getting too far can see how far one can go,” is one of Colloquy’s principles. Great strategy and structural change are something Colloquy looks forward to, while still building investment in distressed firms. Unlike other consolidated and commercial loans, the distressed assets are their niche opportunity. However, in addition to capital, it requires skills and abilities. Pure Disturbed by increasing pollution and falling air quality due to vehicle emissions, two Graduates of Delhi, Mr X and Mr Y started a car company, Pure, which is aimed at providing consumers with lower costs and reducing emissions in July, 2009. The concept is different and soon earned enough money to start operations. The company got its start in the market as there was no competition (some competitors had not yet started making successful cars in this field to date) and it quickly gained a large share of the commercial market due to its low-cost cars, large customer service and emission efficient vehicles The company is slowly expanding and becoming one of the biggest names in low cost, fuel efficient sector. Founded in Delhi, it had over 20 stores selling in 18 cities in India with more than 150 dealers selling its cars in India, Vietnam, Myanmar and Cambodia. It had 5 Production units in India and was planning to open 1 automated production in Myanmar in December, 2018 which would increase its production capacity by 20%. It had 3 regional offices (1 each in Mumbai, Chennai and Kolkata) and 1500 dedicated hard working staff and 2000 employees to take care of its customers. When the company reached mid-2016, its quarterly revenue nearly touched INR 700 crore and profit had crossed INR 70 crore. There was an 18% market share in India, a 13% market share in Myanmar, 15% market share in Cambodia and 11% market share in Vietnam in the low cost, fuel and emission efficient car sector. But then the real problems came up. Other companies have begun to recognize the importance of producing low-cost, fuel-efficient vehicles and began to invest heavily in the sector. Two competitors have come out with models that worked well in just six months. Those models were not as successful as it should have been but nevertheless, greatly reduced Pure’s market share. However, this also served as an eye-opener for Mr. Y who started to emphasise more on investment in the R&D sector to benefit new types and maintain and grow the market share of the company. On the other hand, Mr. X was reluctant to do so as he felt no need by investing in R&D at the time as they had gained sufficient market control. In addition, most of the profits the company had earned were gone in paying to investors. Mr. X believes the company should always keep its investors happy because of which investors were paid annually. Unable to convince Mr. X the importance of investing in R&D and also became outrageous reckless spending, Mr. Y left Pure and started his own car manufacturing company ABC ltd in January 2017. This sudden departure left Pure and its staff frustrated. Mr. Y also lured Pure’s employees to leave it and join his company as he will provide better incentives and facilities than Pure. As a result, about 25% of the staff left Pure and joined Mr.Y company. To keep the remaining employees, Mr. X had to increase their salaries and wages which increased production costs by 5%. In addition, Mr. Y also started producing cars at low cost, fuel and emission efficient sector. The remaining competitors, starting to gain market share in this line, which was low but important and started to question the Pure’s capture over market. Even worse problem was yet to come. On November 15, 2018, the Police Department of Petroleum and Natural Gas (MoPNG) announced a 2-year development in the introduction of BS-VI procedures. The procedures now would work from April 1, 2019, instead of April 1, 2020. This has caused a huge surge of activity in the automobile sector as companies resorted to massive discounts and increased R&D expenditure to make their cars comply with the BS-VI norms. Pure took up as much space as it had to sell cars that were of older generation with heavier discounts compared to the recently introduced cars manufactured and sold by other companies. In addition, it should have generated more R&D cost for maintaining the fleet in line with BS-VI standards as it has not invested in the industry. Overall, Pure posted an average loss of INR 25 crores per quarter on their quarterly average page March 31, 2019, due to depreciation, amortization and heavy discounts. These high losses forced the company to cut its workers' salaries and wages by 10%. This resulted in lowered credibility of the company's employees and began to hold on to it regular protest against this wage cutdown. One estimates that the product has been affected by 8-12% as a result of this strike and lickdowns. Beginning in mid-2016, Red Dragon, China turned its head toward these South and East Asian countries capture in these developing economies and capture their markets. The Chinese used special Economic Corridors and the amended ASEAN-China Free Trade Agreement (ACFTA)to enter in these markets. Thus, Chinese firms have been able to enter the ASEAN automotive market and consolidate their own position by providing better and more marketable products at a lower rate to consumers. Due to increased costs and a reduction in profits and revenue, Pure was not able to provide after- sales services and follow-ups on its cars and it had to cut down on general expenditure as well. It used to provide extraordinary in the past that have been one of the many things that have made it so different from its competitors. The hurdle to the company, which many believe is the last nail in the coffin came during a sustained decline in emerging-market currencies, investors started to cash out and there were few major Indian investors and promoters who withdrew their large sums of money as it was often feared that the company might collapse at any time. In addition, the company has been paying no dividends for the last two years too which contributed to investors' decision to withdraw more money. One estimates that 35% of the company's investment was released and the company had serious cash flow problems. After this crisis, Mr. X saw the need for R&D and the development of new vehicles which can provide a solution to rising petrol prices and also reduce the negative impact that car emissions have on the society. So, he came up with a completely new line of models, which was cheap, a type of electric cars that had the most power to expand and hold the market. One estimates that this will be able to increase the market share of Pure by 10% in domestic market and 5% for each foreign market. But to open it was expensive and they didn’t have enough funds and the name of company was tarnished in the market at that time. However, if it gets the money, it will be able to do other projects, and gain confidence in customers and investors and may reverse their current circumstances. If it does, this is for sure that it will be marked as one of the biggest turnarounds in the history of the automotive industry. Market Share of Pure in different countries 18 16 14 12 10 8 6 4 2 0 Cambodi Cambodi Cambodi Myanma Myanma Myanma Indi Indi Indi Vietna Vietna Vietna a a a m m m a a a r r r 201 201 201 7 8 9 Quarterly Profits (in crores) 100 80 60 40 Profits (in 20 crores) 0 -20 -40 -60 -80 Quaters Quarterly revenue (in crores) 700 600 500 400 300 200 100 0 Gear Up One man practicing sportsmanship is far better than a hundred teaching it. Although our own game manager, Mr. Dev, who could not enter the field, kept the heart for it alive. Being a fan of Mohun Bagan, he had a deep desire to watch India play in the FIFA World Cup. When Dev was 4 years old, he got to know that India could not play the 1950 World Cup due to unavailability of shoes. India was denied entry to the stadiums as one could not play without shoes. Dev began to see well and wanted to start a company doing sports equipments and providing the same cross country. His dreams came true when, in 2010, he launched Gear Up - an online retail platform for sports equipments for various products all over the world. The company started to succeed as India was not keeping up with the e-commerce situation at the time. The company was a game-changer in the field of sports as it was sequenced by all age groups and included most of the games played India. In addition, delivery through retail stores and online platforms provided by Gear Up most market share. Gear Up’s forte has been the emphasis given to R&D as the company has a separate team working on that, taking care of all the needs of the consumer. The company also experienced significant employee benefits during its early years leading to a satisfied employee base. In addition, the growing popularity of yoga and body rule in India gave Gear Up more opportunities to grow. Gear Up’s products were completely authentic and genuine, directly obtained from the products. It offered you a hassle-free shopping experience, assistance on the phone, free expert advice and articles and news on Sports which attracts young minds. So, Gear Up has managed to create a niche in the actual market because of its unique way of selling. It has a very diverse portfolio in between with sporting conditions that prepared and adapted to the subdivided structure of look for an effective management system. However, things have started to get worse since 2014. Gear Up started getting heavy competition from various other e-commerce websites that are growing lately, leading to a decline in the customer base. The company could not keep up with the interface which cannot provide as much detail as other e-commerce websites. This limited Gear Up to attract the attention of customers. The employees started thinking soon about an inconsistent work schedule where Vikram gets everyone working overtime to come up with less expensive solutions to upgrade to an online portal. Gear Up’s biggest hit came when in September 2017, when two new online platforms selling sports equipment were launched. Their communication was excellent and interface was easy to use while they could provide sports equipment with heavy discounts due to the huge funding they have made. This has resulted in a decline in Gear Up's market share and Vikram was unable to find a way out. At times like these one should think calmly and so did Dev, he came up with another idea as well and was adamant that it would change the face of his company in the international market. He planned to introduce his line of sports equipment and retail partnerships with other brands. He arranged that his line of equipments would be able to give him an edge on the market. After a year of thinking, researching and earning money, Gear Up launched its campaign production operations in October 2018. Four production units are established in Uttarakhand, Punjab, Chhattisgarh and West Bengal. Things were improving slightly when sales began to show improvement levels. Destiny, however, had other plans for Gear Up. In the last four warehouses, the one in Chhattisgarh was engulfed in flames due to a short circuit in March 2019. This in itself was not enough when the West Bengal floods hit May 2019 and Dev’s second wave on the edge of Kolkata was devastated, which posed a major problem for the company's commercial management and caused great loss. A loss of 60% was reported in the Chhattisgarh manufacturing division while a 45% loss of goods is reported for one West Bengal, owing to bulk of the wood and the machinery destroyed. People who had previously ordered the ordering equipment faced delays in delivery, which also damages the customer base. The trade unions have also started harassing the company because of lack of factory safety standards. One of the biggest obstacles to introducing its line of equipments is that Gear Up wants to expand its activities in the foreign sector also. But the fire has resulted in a loss and a reduction in infrastructure so much that the production level was severely damaged. In addition, the production line of Gear Up already was working margins due to well- established competition. During this time of grief, Gear Up once again ignored standards the levels of segmentation in demand for various types of equipments for different sports and could not keep up with the pace of demand growth for some categories while oversupplied in others. Now, the only hope for Gear Up is the fruitfulness of Dev's strategy which is to start a new delivery system that allows the user to get items delivered within 36 hours of placement of order. The company will be able to change its operations and emerge as the king of the industry so far if able to execute the program. However, it has no resources to restart producing in the remaining 2 warehouses and expand the product to lay the foundations for this delivery system. Finding the best opportunities for Gear Up requires money and failure otherwise, it may lead to bankruptcy because there is no unforeseen cash flow for Gear Up at this point in time. Demand of equipments for a particular sport cricket football badminton tennis volleyball others Revenue in crores 7 6 5 4 3 2 1 0 1. Quarterly profits in 5 crores 1 0. 5 0 - 0.5 -1 PROBLEM STATEMENT: 1. As the Chief Investment Analyst at Colloquy, you are required to identify the distressed firm in which Colloquy should invest, with a hope to turnaround its operations and generate high returns. Justify your reasons for investing in the selected firm and evaluate the ways in which the funds will be used to revive the chosen distressed firm. 2. Propose a customer engagement strategy to the selected firm to regain its lost brand image and also identify the target market (geographic as well as demographic analysis) for the selected firm.