Business Valuation

End Term Examination

04 September 2020

Submitted to: Prof. Rajesh Madhavan

Individual Submission

Submitted By: Simran Kothari

Roll No: B045

SAP ID: 80203190188

The impact that the Global Pandemic, Covid-19, has caused on life and businesses in
general, is unprecedented by any stretch and will likely to be unchallenged in decades,
perhaps centuries to come. However, what it has managed to do is force businesses, in
specific, to re-strategize their business models, their supply and value chains and the very
idea of doing business - to survive and sustain this double whammy of economic slowdown
coupled with troubled human health and mental well-being. It isn’t a surprise anymore to see
businesses winding up overnight and witnessing large, multinational organisations
scrambling to cut costs and reduce losses. The true spirit of the age-old phrase, ‘Survival of
the fittest’ couldn’t have been proven truer but for this pandemic – this holds valid not only
for living beings but is convincingly becoming apparent for businesses as well.

The disruption caused due to the pandemic has been so colossal that there has been a
complete turnaround in the way of engaging and transacting that was never even thought of.
This has led to questioning of the fundamentals of businesses, so much so that,
organisations are now looking at how they could remain profitable without being dependent
on capital or borrowings as funds have plunged on tangents never seen before – not the
Great Depression of 1929 or the Economic crisis of 2008 even!

Revenues have dried up, thanks to the slowdown in global economy and fuelled by the
impounding lockdowns globally, while costs have remained more or less the same making
sustaining difficult by the day. The working capital assumptions of organisations have taken
a severe beating as circulation of money witnesses a steep fall even as recession slowly
starts taking over even the largest of the largest economies. Given the sudden desolation
caused by the pandemic, companies were caught off guard and consequently resulted in
blockage of sufficient precious capital in optimistic projects/expansionary activity which they
had considered would help them grow their business. However, given the pandemic and its
impact, most of these projects have now been stalled or the launch has been deferred as the
consumer demand is yet to revive and there is no sight of the demand shaping up in the
near short term. Tangled in this fund crunch situation, companies are desperately divesting
assets in the need of funds to survive, albeit at tanked valuations – wiping off decades of
effort and profitability!

This has led to an important question – whether companies must choose to remain asset
heavy and block capital in anticipation of higher profitability or choose to be asset light and
reconcile to moderate profits with higher sense of satisfaction and better return on assets
and capital employed?

While empirical evidences have been put forth time & again that with higher risks comes the
probability of gaining higher returns and this has so far more or less remained undebated.
Companies look at being in multiple parts of the value chain to gather synergies, boost
profitability, reduce dependency and consolidate brand value and consequent gains.
Owning assets also helped in boosting investor sentiments and achieving higher valuations.
Conventionally, large corporations have been able to effortlessly grow and expand their
businesses as it is easier for an asset heavy company to mobile funds for further expansion.

However, with the change in the attitude of the millennial population of not owning assets,
further drastically fuelled due to the pandemic, there is merit to consider operating on an
asset light business model. While the asset light business model may come at lower
profitability (due to higher rentals and dependency on third party operators), what it provides
on the flip side is more essential – tremendous elasticity in business operations as the
business is not tied down to assets hence making it easier to move along product segments,
geographies or on to a new peripheral. Further, given the dearth of sources of capital, being
asset light helps in easier access to conducting business and reduces dependency on the
much-needed life blood of business – finance! Additionally, among several things the
pandemic has taught us, prominent is the need for businesses to be able to adapt and
evolve as per the dynamism in the economy and that flexibility is dearly missed when a
business is knotted down to assets unless the organisation is agreeing to divest assets at
tanked valuations. Notwithstanding the above, another unique aspect of the asset light
approach to businesses is that their essentially provide much higher returns on assets and
capital employed as the denominator (base) is substantially smaller while the numerator
(returns) are more or less the same. Further, even unforeseen circumstances, such as the
pandemic, do not impact valuations as drastically as those of asset heavy models given the
lack of baggage which provides a cushion in the asset light model as opposed to asset
heavy organisations which lose out due to the overall downturn in external factors.

Investors, are increasingly, appreciating and moving towards asset light models which has
further been accelerated due to the pandemic – across sectors such as Real Estate, Non
Food – Retail, Education, Entertainment etc have witnessed alarming disruptions and
therefore asset heavy organisations have been the worst impacted with no sign of recovery.

However, asset light models come with a pinch of salt to an organisation as they severely
increase dependency on third parties and, performance, in most cases, is contingent on the
completion of the obligation of the third party.

In light of the above, any organisation worth its salt, would do well to compare the upsides
and downsides under each of these two models and evaluate the effectiveness in the
specific context of its operations as these are not thumb rules that could be implemented on
a clean slate.

What Covid-19 will leave behind for businesses is that sustainability is linked to the ability to
adopt and evolve – the new normal would be to be able to cushion the organisation
irrespective of the situation and retain its valuation foundation and fundamentals.