Daybreak - Why creditors are losing faith in Byju’s

Episode Date: December 16, 2022

India's most valuable startup breached the loan terms, including a September deadline for filing its results for FY 2022.Byju's filings for the previous financial year, too, were delayed by one and a half years. And their last audit report does not paint a pretty picture of the company's financials for FY 2021.Tune in to find out what is causing this lack of confidence amongst the creditors of the edtech giantWith inputs from Gaurav Tyagi

Hi, this is Rohan Dharma Kumar. If you've heard any of the Ken's podcasts, you've probably heard me. My interruptions, my analogies and my contrarian takes on most topics. And you might rightly be wondering why am I interrupting this episode too. It's for a special announcement. For the last few months, I and Sita Ramon Ganesh, my colleague and the Ken's deputy editor, have been working on an ambitious new podcast. It's called Intermission.

We want to tell the secret sauce stories of India's greatest companies. Stories of how they were born, how they fought to survive, how they build their organizations and culture, how they manage to innovate and thrive over decades, and most importantly, how they're poised today. To do that, Sita and I have been reading books, poring over reports, going through financial statements, digging up archives, and talking to dozens of people. And if that wasn't enough, we also decided to throw in video into the mix. Yes, you heard that right. Intermission has also had to find its footing in the world of multi-camera shoots in professional studios, laborious editing, and extensive post-production. Sita and I are still reeling from the intensity of our first studio recording.

Intermission launches on March 23rd. To get alert, as soon as we release our first video. episode, please follow intermission on Spotify and Apple Podcast or subscribe to the Ken's YouTube channel. You can find all of the links at the ken.com slash I am. With that, back to your episode. This week, the EdTech giant by Jus was asked by a group of creditors who had given it a $1.2 billion loan to immediately repay a part of the loan. According to a report by Bloomberg, a clutch of lenders who now control the loan have lawyered up. They are now pushing Bayju's to liquidate its assets in the US

or pay up from its cash reserves. Now, we are talking about India's most valuable startup that is worth $22 billion. And you probably already know this because you have seen the name Bayju's everywhere, from the FIFA World Cup to the Indian cricket team's jerseys. According to regulatory filings, the company spent more than $2,500 crore rupees on advertising and marketing in the financial year 2021. That is a lot of money.

So you would imagine that byju's must be doing really well, right? What then could have triggered this lack of confidence amongst the creditors of the air tech giant? Turns out, Bayju's was supposed to file its financial results. for the financial year 2022 by September this year. This was a condition that was set when it took the $1.2 billion loan. Bayju's did not make the filings. Still, for a company of the size with the kind of growth that it's seen since the pandemic, creditors could have cut it some slack, right?

Now, the thing is, this was not the first time that Bayju's had done this. The EdTech giant delayed filing its financials for the financial year 2021 as well. It filed it only in September this year after a one and a half year long delay. And the Ken was the first to break the story. To make matters worse, the filings do not paint a pretty picture of the company's financials. Welcome to Daybreak, a brand new podcast from the Ken. I'm your host, Nick Das Sharma, and in each episode, I will tell your business story that is current, significant and most importantly interesting.

Today is Friday the 16th of December. 2021 should have ideally been a great year for Bayju's. It was the year when the pandemic had brought about a newfound appreciation for online learning. Bayju's raised $2.5 billion since the beginning of the pandemic. Its valuation rose from $8 billion to $2,2,2,000. $2 billion. In the short period between 2020 and 2021, Bayju's users almost doubled from 64 million to 110 million. 2021 was a year when Bayju's made a dizzy number of acquisitions and garnered mind-boggling valuations. So when its auditor, Deloitte, took months to give Bayju's an approval for its financial year

2021 filings, many thought it could be because of a lack of audit bandwidth. After all, the company had seen a five-time scale in size. And that is exactly what a company spokesperson also told the ken when in June we asked them about the delay in the filing. Unfortunately for Bayju's, that five-time scale in size also indicated the size of its losses. It was 15 times. Turns out, the Deloitte auditors were not satisfied with what Bayju's was presenting to them as a fair picture of their accounts. The auditors gave in a diverse opinion on Bayju's financial statements for the financial year 2021.

This basically meant that Deloitte had sufficient evidence to conclude that Bayju's financial statements contained material mistake. and did not represent its financial position fairly. The same month in June, the Ken was the first to report that Deloitte had held off from approving Bayju's financial statements over its revenue recognition practices. Now, one of the most notable changes in Bayju's financials for the year that ended in March 2021 is to do with how it books its revenue. Edutek products, mainly tablets and memory cards, accounted for more than 80% of Bayju's revenue in this period. And as in the previous year, it recorded the entire sale value of these products when the customer bought them. But it took a different approach for the revenue that it got from the streaming of educational content. Whatever a learner was charged for the content, it would now be booked through the period that they availed of it.

For example, if the learner paid, say, $10,000 for Baiju's content over two years, it would be divided equally between the two years instead of being captured entirely in the first year's financials. Apart from that, in its report, Deloitte also pointed out problems related to determination of financial guarantees given on behalf of customers. Also, it noted improper estimation of sales returns and expected credit loss, and also the absence of an accounting manual. Plus, there was White Hat Jr., the 4-year-old coding for kids' startup that Bayju's had acquired in 2020 for $300 million. The acquisition is gradually turning out to be quite a burden for Bayju's. From the time it was acquired, White Hat Jr. pulled in 327 crore rupees in revenue.

But its losses were five times that amount. It contributed to around one third of Bijou's consolidated losses in the year that ended in March 2021. One likely reason is its high customer acquisition costs. The Ken had earlier reported that White Hat Jr. was spending as much as two $2,000 to acquire a customer in the US, which is Baiju's second largest market. The auditors also highlighted that the company had a lack of personnel with adequate experience and required competence in financial reporting and internal control. So no thanks to these auditing changes, the $22 billion ed tech company saw its revenue grow

only by 4%. Apart from the standard audit fee, Bayju's also had to pay 3.5 crore rupees to Deloitte. This was an account of the additional effort incurred in the audit, consequent to material weaknesses observed in internal controls. So, now you're getting a sense of why Bayju's lenders saw their confidence in the company dropped to a new low. Clearly, they were not happy with Bayju's audit report. The report showed them how Bayju's overestimated its revenue,

how the company had weak internal financial control, and how they had not hired the right people to handle their accounts. While the exact details are not disclosed to the public, it was reported that the company failed to file its annual statements for the financial year 2022 and couldn't get credit ratings for the $1.2 billion loan within the, duration of nine months. It all started in November 2021 when the company was looking to raise $500 million via an institutional term loan. But it ended up raising $1.2 billion, which was touted as one of the largest unrated term loans by a startup ever. Now, one detail that we need to understand

about such loans is that they can be traded, which means lending. can actually be securitized. The lender can turn the loan that it's given into an asset for itself. For example, if you lend me 100 rupees, I am an asset worth 100 rupees to you. You can trade this loan with someone. You can go to someone and say, give me 80 rupees now, and you can take back 100 rupees from Snigda. And this is exactly what Bayju's original lenders did. They passed on the loan to a third part of.

Now, this third party is the one who is negotiating the terms of the loan with Bayju's and is holding Bayju's accountable for breaching the terms of the loan. Bayju's in turn is asking for renegotiating the terms of the loan because interest rates have gone up significantly. But lenders are pointing towards Bayju's failure to keep up with the original terms of the loan in the first place. Now, the new lenders want Bayju's to pay a pay a pay. part of the loan in order for them to renegotiate the terms to suit Bayju's.

To sum it all up, Bayju's has made multiple stakeholders very unhappy, from its customers and auditors to its lenders. No matter how successful a business becomes, it does need to be mindful of the value that it is creating for all its stakeholders. Daybreak is produced from the newsroom of the Ken, India's first subscriber-focused. news platform. What you're listening to is just a small sample of our subscriber-only offerings. A full subscription unlocks daily long-form feature stories, newsletters, subscriber-only apps and podcast extras. Head to the ken.com and click on the red subscribe button on the top of the website.

It is t-he-he-k-en.com. I am Sniqa Sharma, your host, and today's episode was edited by my colleague Rajiv Sien.