Branding blues

SMARTSHARE

The illogical application of logic can lead to strange outcomes. One classic example from military history: Pearl Harbour did not happen because the Japanese wanted to wage war against America.

The Japanese wanted the oil and gas of the colony of Dutch Indonesia (Holland was occupied by the Germans). To invade Indonesia, they needed the US protectorate of the Philippines as a staging point.

Hence, they had to neutralise the US Pacific fleet, which was based in Hawaii. So, the invasion of Dutch Indonesia, some 5,000 km west of Japan, was preceded by an attack on the US, some 6,500 km east of Japan. Of course, even the Japanese knew that actually winning a war against the US was a near-impossibility.

Similar lunacies are sometimes perpetrated in business strategising. For example, a computer major conceptualises a new product, which it soft-pedals because it could compete against existing product lines. Others launch clones.

Very soon, the major is in trouble; it has low marketshare in the new product (and associated applications) while its own product range has been superceded. This is how IBM mishandled the PC. It will always be a mystery why IBM didn't realise its competitors would gain marketshare by cloning the machine it had developed itself.

Sometimes a company creates assets which end up being worth far more than its actual revenues. There are several classic signals of this.

One is a low return on assets ratio, another is a high book value coupled to low or negative profitability and comparatively low sales. Sometimes the assets are on the balance-sheet at purchase price, which is at great variance from current values and this confuses the matter.

This particular problem often occurs when real estate is involved. Unlike other assets, real estate doesn't depreciate. The worse case scenario is the mills of Mumbai and the rust-belt in Asansol where real estate of enormous value is locked up in bankrupt businesses.

The real estate is often on the books at purchase price "" multiples below current value.

This has also happened with companies like Bombay Dyeing and Bata. These were powerful retail brands and a huge reach was developed over many decades.

The businesses themselves ran into problems but the networks remain. Across prime locales in India, there are dedicated outlets of these two companies and others like them.

One way to value commercial real estate is in terms of market value assuming an immediate sale. The other is a projection of the revenues that can be created by utilising that space. While one may argue that the current market price should discount those revenues, in practice this correlation is very imperfect.

Apart from problems with the real estate market itself, the utility of commercial real estate is massively variable. You can take a simple rental as a proxy for returns on the asset but that may be much less than the returns available if you use the space to conduct a very profitable business.

The costs of creating a brand new network of this type is far higher than the costs involved in buying into it. A company which owns a network of this type is thus far more valuable than it appears.

It is an asset play, likely to be wooed by businesses that want access to the network. The actual current revenues are near irrelevant. I don't know if this logic will hold but if it does, such companies could be under-valued.