Friday, January 27, 2006

Lunch Coupons, Warren Buffett & the Pot of Gold

All of us working in the so called “New Economy Companies” are quite familiar with Lunch Coupons that companies like Sodexho issue. Our employers’ issue these coupons as part of our “CTC” (that interesting invention of HR which makes us believe, erroneously, that we are earning more than what our parents did) and we go home without a second thought about them.

But have we ever wondered how all this works for Sodexho and others of its ilk?

Let’s make the extreme assumption that all the money that we receive in the form of vouchers is spent within 3 days of our receiving it from the employers. One can easily assume that the employers themselves had kept in their custody for three days at the very least. The retailer in turn presents it to Sodexho a day after the receipt for redemption. The money has thus earned zero interest for 1 week.
Typically Sodexho issues coupons against funds received while they pay the retailers only thirty days after receiving the coupons. Effectively Sodexho has paid 0% Interest for one month. And Next Month the cycle starts again!!

Essentially at all times Sodexho has one month’s equivalent of lunch reimbursement on which it pays no interest. Out of an estimated 1 million employees in the IT and ITES space if we assume that 10% are issued coupons worth Rs. 2000 a month then at the very minimum the industry is lending Sodexho Rs. 20 cr. at 0%. Not a bad deal at all. What say?
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And the moment we change our assumption from “immediate use” to an average of “15 days to use” the effective money lent changes to Rs. 30 cr. at 0%.

An elementary knowledge of finance tells us that if one borrows at say 6% and lends at 8% one makes money. If we borrow relatively large amount of money at 6% and lend it at 8% we make large amounts of money.

Simple enough is it not? Banks across the world work on this basic principle.

The flip side is if for some reason we borrow at 6 % and are able to eventually lend only at say 5% we end up losing a lot of money. Financial experts call this the Power of Leverage. Leverage magnifies both profits and losses many times over.

Here we have a Sodexho that “borrows” money from us at 0% and we do not even think of how the process is benefiting them. If I were to ask you guys to lend me money at 0% interest you would think I am completely crazy. Why would any individual in his senses want to park money with me for no returns? But for a Sodexho you are game, aren’t you?

One rule of making pots of money that Financial Experts on channels like CNBC forget to tell us is that one must try to borrow money for as long as possible preferably at 0% interest. And after a few years one is likely to be stinking rich.

Much like a famous gentleman who goes by the sobriquet, “The Oracle of Omaha”.

Warren Buffett at the beginning of his career controlled a company called Blue Chip Stamps that had an estimated 100 million dollars of money on account of vouchers issued. Some of the companies that he acquired in the early years were through these moneys.

While it is always difficult to estimate, surely a lot of the spectacular returns that he made were because of the zero cost funds he had at his disposal.

Most of us know that he is considered to be amongst the greatest investors around. No one would argue that he was not.

However very few would know that he was also amongst the best in identifying and using low cost capital, a point that is equally important but is seldom discussed with the seriousness that it deserves.

Maybe this is so because if aam junta like us sees that all that he achieved was possible only because he was shrewd enough to see and acquire a cheap source of funds he will look less like an Oracle that he is proclaimed to be. Probably this is why “Magicians never tell”.

A glance at the operations of the Oracle and Sodexho shows remarkable similarities and is obviously the road to riches. Now if only I could get onto this gravy train.
Authored by Sameer Nair

3 comments:

AJITH said...

Thats correct... But lunch coupons, in principle, are meant to save taxes.. 12*2000 = Rs.24,000/- on which you get a tax benefit upto 8,000/- and simultaneously you consume the principle amount. Where as, the so called tax savers like Life Insurance policies etc gives you no returns other than what you pay over years... Though none of these give you any financial benefits, the "Tax Saver" tag that they hold make them the first step for salaried class of "New Economic Companies" (precisely from IT and ITES space), from whom you cannot expect 100% financial education. Companies like Sodexho, Tickect Restaurant do get their bounty on this, but the simple solution of giving tax exemption on the equalant amount directly, will question the very existence of such multination giants.

Ajith

Rajesh Kothari said...

You have missed one point here. Sodexho has one more revenue stream that of lost / torn / mis-placed and expired coupons.

What happens to this money? I believe RBI guideline of Sep 2009 says 'money should be kept in escrow account'.

But what's mechanism to repay/refund money locked up in lost / torn / mis-placed / expired coupons?

One of my friend just found Sodexho PASS Gift Vouchers worth more than Rs.2,500/- with valid up to date 31-12-2006!!! Do you think -he will get the refund?

If it was a currency or Demand Draft or Traveller's cheque - he could have got the money. But what about Gift Vouchers?

Does any one know about this?

Kate said...

What happens to this money? I believe RBI guideline of Sep 2009 says 'money should be kept in escrow account'.

But what's mechanism to repay/refund money locked up in lost / torn / mis-placed / expired coupons like joann fabrics coupons ?

One of my friend just found Sodexho PASS Gift Vouchers worth more than Rs.2,500/- with valid up to date 31-12-2006!!! Do you think -he will get the refund?