Rahat Talreja
Vice President – CSS Central India
As I write this article, the news of the moment is the resignation of the Infosys CEO. A lot of analysts (which is surprisingly a big job these days, in grounded part of India we call it “Bol Vachan”) are giving their views that the per employee revenue is up, the new technology verticals under innovation& automation are shaping well etc.
But the real issue (which basically means ‘my point of view’, people add the word real to assert their own point) was that the standard of governance in the board was down and investors (including the marquee promoters) had lost trust in the working of the board.
Now I don’t want to talk much on it except the point I am making through the headline of my article, what is your business type?
Let us see what the levels on which these evaluations are done are:
a) Value based analysis
b) Financial analysis
c) Hybrid model of the a + b
Value Based analysis
Hello Old school: I think you already know this word and its meaning “Values”
Hello New school: Don’t know this word? No problem carry on..
In this, the prime importance is laid on the values on which the business is run and the clear, defined & written policies which form the benchmark for any evaluation.
Financial Analysis
This is the most important criteria in our times. But most have different understanding of financials and therefore the analysis may not be absolute, it is always relative. Let me illustrate.
We have all seen the recent emerging market rallies wherein even India and its benchmark indices are all lifetime highs. Most common reasons coming out are that it is a liquidity rally since other asset classes have lost relevance and printed money of the central banks didn’t trickle into real economies, so liquidity in the system went into equities the most besides other financial assets and instruments like bonds and debt market. The main point to note is that earnings growth has been flat to negative over the last 4 years.
In this bargain, even a lot of non performing companies have seen their valuations run up. And this is exactly what happens when businesses are liquidity driven and not profit driven.
See in our industry for example – the consolidation, forwarding and logistics industry. Even if you lose a million rupees a month, you need at least 5 years to blow up a meagre investment of example 5 crores. And the best part is you never have to pay those 5 crores. You only need to pay 5 lakhs interest on it each month.
So many in our business run it on liquidity. The moment the liquidity dies, they either raise new funds or run helter skelter looking for newer options.
This is a business where if you run it on profits, you don’t need any investment from day 1. And let me assure you that a lot of people hide behind this liquidity survival for many many years in the industry and get away with it.
Hybrid model
This is obviously the model that most are trying to follow today. At least trying.
The crux of the above segmentation is that we need to see what our real business type is. Are we emphasising focus on volume, value, profit, liquidity or nothing. You may think you are focusing on profit but your actions maybe not in line with achieving it.
Illustratively, one should always focus on rich clients. And what is the definition of rich? Not that the client has a lot of wealth, his cars, his phones, his properties etc. This is the start of wrong analysis. Rich for us is the client who has rich thinking. A thinking where he is rich to think that after he has made all that money , his long term vendors also deserve their pie under the sun. And you will see majority of them are more miserly for others once they have achieved their financial goals.
Their vendors keep visiting them in the same train, same bus, from the same house etc. but the clients keep getting richer, getting into bigger cars, bigger homes etc. These are absolutely poor clients let us first understand that. In fact most shun their own business and start focusing on what you do. So they will call for quotes from 10 different forwarders, squeeze all, delay payment and have all the fun.
Shift gears to rich clients. The ones who value you, your time, your effort, they are certainly not big themselves. They are rich for us. They are loyal, let you earn, pay you on time, give you respect when you visit them, value your relationship.
So friends, I used a few analogies so that we all realise that our analysis should be real, in line with our goals and only then our actions will help achieve those goals. This is the best way to move forward in my view and lets answer the first question in that direction today – what’s your business type?