The Gray Hair Speaketh

Why I cannot comprehend some types of valuations?

If you are thinking that this must be about some astronomical valuations that unicorns are getting, well, this piece is NOT about those valuations.

(I cannot fathom many of those valuations also, but that is a subject for another post, someday!)

As I have been reading about the hot new topic of NFTs (“non-fungible tokens), while I appreciate the tech behind it, and the concept of NFTs per se, one of the consequential story around suddenly finding a lot of value in say, a sports card, or some other random memorabilia, got me thinking about a peeve that I have had, around some kinds of investment areas.

Say, gold, for example.

Gold or sports cards or a T-shirt autographed by someone, while of some value to you for sentimental reasons, can continue to command a rise in valuation, only provided the demand for these, continues to be higher than it’s supply.

Let me elaborate the idea.

Yes, almost everything is valued fundamentally, on a demand vs supply scale. If there were ample diamond stones available and being sold to you by street vendors, they would have cost a few cents and not the thousands of dollars of price that these command. Everything else about the product remaining the same.

It is only the limited supply and a larger demand, that continues to give the diamonds a higher price.

And then came factory manufactured diamonds, with qualities that were so close to the mined stones, that it made it hard to decipher the difference between the two. Factory manufactured diamonds, not being constrained for volume productions, suddenly skews the demand-supply gap, potentially leading to a drop in prices. While this phenomenon is a work-in-progress, the idea just explains how something valued only on basis of a demand-supply gap, can have challenges.

Let’s consider gold.

At a fundamental level, it’s a shiny yellow metal, with certain qualities, and used for jewellery making, and maybe some small industrial uses also. But often held in. raw form, as blocks of the metal, in vaults (folks who would have seen the popular series, Money Heist, might remember the vivid details!). So, just sitting idle in that vault, doing nothing “productive”, how does the value just appreciate? Since that has been the basis of gold being viewed as a part of your asset mix, in your investment portfolio?

Think about sports cards or some limited edition Barbie dolls or Marvel comics, etc., and other such “assets”! They are not even a shiny metal that can convert into a necklace. The value of these is only and only based on the assumption that there will be a continuing demand for these, from people, and being limited edition, therefore, the price will keep going up.

Is there a risk that the appetite for some sports cards or an old Barbie doll goes down? Or that people are not that fascinated by gold anymore? Since, as a hedge to currency risks (for which also gold is used), there are now other options like Bitcoins, say?

Considering the fact that these items are almost worthless, except for the inherent demand to hold them, anything that goes out of favour, stands a big risk of a sudden devaluation!

So, the question can then be that, this aspect of demand-supply drives valuation of everything, and not just the kind of examples that I listed above. You may say that an equity share is also valued thus, because of the limited number in the market, or that silver and copper or foodgrains or a piece of real estate, etc. are also valued on the same basis of demand-supply gaps.

Right, that is a fact. However, as long as these items have a functional role to play, besides the demand-supply gap, that potentially drives their value, then there remains a difference in the way you perceive them.

Say, when you invest in equity. While the price may have been dictated by the demand for the stock, once you invest, your money is part of that pool, which is being used by the company to create value, and which translated to an appreciation of the value of the stock.

The value of silver or copper is also connected to their respective utilisation in industry. And if the prospects of the produce of those industries are good, the demand for the products, and hence the supply chain in terms of silver or copper, go up. Leading to the value appreciation.

A piece of real estate may be valued on it’s demand, but it serves a purpose of housing an office block or a factory or providing residence to people, and creating inherent value in doing so. And as long as that core functionality keeps growing, the demand and hence, the value of the real estate asset also grows.

What you see in these examples is that while, value is decided by the demand, the demand itself is not based on people’s fascination and interest to hold that asset, but rather, on basis of a core value that the product is enabling to create.

Which is why, I am unable to reconcile putting much of my money in gold (irrespective of the history of price and demand growth, whether it will continue to do so, in a changing scenario of bitcoins, NFTs etc. remains a question mark) or in sports cards or similar limited edition items (irrespective of NFTs!).

I feel more comfortable putting money in equity knowing that my money is contributing say, to more medicines being manufactured to serve the sick of the world, or to producing food stuff to feed our millions, or to entertain people with their sports or video games etc.

I know that my financial advisor is not very happy, as she shares her conventional wisdom of distributing my assets into different classes, including gold. But as you can see, somehow, I am not fully convinced.

March 31, 2021 Posted by Sanjay Mehta | Uncategorized | Leave a comment

Why is Ola getting into 2-wheeler EVs manufacturing??

Few days back, I caught the news about Ola’s plans to get into EV manufacturing at a very large scale.

While the idea is undoubtedly impressive and it is clearly a project at scale, I was wondering about why Ola would get into something like this.

As I understand their core business, it is an Uber look-alike. A cab-on-call, a business that connects freelance cabbies to passengers who need a cab, wherever, whenever. To scale that business itself across the country has been an amazing achievement. To add nuances like tying up with regular yellow-black taxis and getting these traditional taxis into the Ola system, or introducing auto-rickshaws also into Ola, or even enhancing the service to include 2-wheeler pillion seat hops, is all a great thing to do. And all of these make for the most natural enhancement of the services.

So, what are the essential elements of business that Ola has mastered in doing this?

• A very good consumer app, with the right UX / UI,
• A great back-end software that keeps the complex operations going, connecting drivers, passengers, ratings, payments, refunds, etc.
• An ability to connect across large groups of potential drivers and motivate them with the right policies and incentives, to join the Ola movement,
• Continuing engagement with government bodies, municipalities, trade unions etc. to manage the permissions and policy matters, around their services,
• Investors and investment management, since a business of this kind, with the scale they are driving at, and while keeping consumer rates to a reasonable level, would keep demanding investments and cash burn for a long time.

At a different level, one can say that the business is about efficient consumer mobility management, and doing all that it takes, to manage this operation.

This being the core, and being the skill strength that the business would have built over time, ideally, an expansion of their services, which plays to these same strengths, and continues to provide them scale growth opportunities, would be ideal to pursue.

What kind of such expansion opportunities, then, come to mind?

• Getting to other modes of transport – say, small aircraft, helicopters, yachts, luxury vehicles like limousines, etc., maybe. With the same fundamental intent of consumer mobility management
• Getting to other geographies, maybe, beyond India
• Perhaps investing into driverless cars as their business dependence on drivers is huge; some day, even in India, driverless cars can be a thing (hard as it may be to visualise that today!)

There is significant ground that Ola needs to cover in its current business and then there are these other ones that make for more natural extensions, that Ola could get into.

What then, makes them get into 2-wheeler EV manufacturing, and that too at a scale that is way bigger than their own needs, as a mobility service provider?? As far as I can see, this is a completely independent, new project, and has almost nothing in common to whatever businesses they are currently in.

Let’s consider other companies who make such moves. Put in large investments and get into business areas, that appear to be vastly away from anything that they are into, at that point.

Companies like Reliance, or the Tatas come to mind in India.

The thing with these industrial groups though, is that they are otherwise into traditional, organic growth kind of businesses, which are currently driving nominal single or low double digit growth rates. And yet, due to their business size, and earlier reserves in their balance sheet, they are sitting on large pools of cash, that need to be deployed.

In such cases, the concerned industrial groups do consider and invest into completely new areas of business, as a means to diversify and perhaps looking for higher growth rates in such businesses, compared to their current areas of business.

Any company with significantly large base of reserves, earned out of profits over the years, can potentially contemplate such completely new and diversified areas of investment. Names like Microsoft and Apple come to mind, as companies who may have the luxury to get into new areas of business, on account of the large pools of cash they are sitting on. But in reality, even they choose their battles with care, and are generally seen to go into areas of relevant interest and extension.

A company sitting on a large pool of cash that it has got in the form of investment capital (and not accrued out of its profits) does not sound like a perfect candidate for someone who should be putting that cash into completely new areas of expansion! Ordinarily, the investors who have put in their moneys, would find this to be a problem. They would have put the money with the idea that the company is going to thrive in their identified area of focus and leadership, and not into something totally new!

Which is where this move of Ola seems to be a surprise, to say the least.

Why would the investors agree to let a mobility business to get into hardcore manufacturing in this manner??

Maybe the major investors, including Softbank, want to make 2-wheeler EVs in India, and use this as a hub, to supply these to other geographies? And think of using Ola as a vehicle (pun unintended!) to be that manufacturing hub? While I am trying to digest this possibility, I still find it questionable since the investors would typically prefer China as a manufacturing hub, rather than India?!

If that is not the case, WHY should Ola be getting into this??

2-wheeler EVs may be thought as a very exciting business to get into. But why should a company specialised in a consumer business like Ola, with software skills, skills of managing drivers and trade unions, and managing payment gateways, etc., be thought of as the perfect business / management, to handle a large scale manufacturing facility, with assembly lines, robots, supply chains, battery tech, sales distribution logistics, etc. etc.??

Yeah, everyone’s response to such questions is that if Elon Musk can straddle an EV company, a space vehicle business, a batteries business and what not, all of which are at high growth, why can’t Ola do so too? Fair question. But it’s like the typical question we marketers get asked that if Apple can manage such fandom and get traction for their brand and business, from its consumers, why can’t their business do so too? Just like Apple is exceptional, so is Elon Musk. One cannot make that as a reference, and reckon that “we too can do it”. And at least not until the point that your own core business provides enough growth opportunities that you have not fully exploited and until you have not given a profitable return to your existing investors!

So, clearly the move by Ola to get into hardcore 2-wheeler EVs manufacturing surprises me, and I would be happy to hear logical perspectives to some of the points raised by me, here, to challenge my thoughts on the subject.

March 9, 2021 Posted by Sanjay Mehta | Uncategorized | 2 Comments