By most accounts, it is clear that the world economy is going through one of the most challenging phases since the Second World War, and that the contagion is likely to worsen before a recovery sets in. In India, for some time, many pundits optimistically believed that the Indian economy is not really coupled with the rest of the world and that its internal growth potential will keep the growth rate ticking at 9 per cent or higher rates for years to come. Even today, many remain in a state of denial and are confident that GDP growth may still top 8 per cent and then get on a higher trajectory once again in the next fiscal. The stock market, of course, does not necessarily think so even though it optimistically searches for positive triggers like the immediate bounce post the NSG vote despite there being no fundamental rationale for the same.
It is anybody’s guess as to when the global (and Indian) economy gets back on a firm growth trajectory again but it is unlikely to happen before the second half of 2009 if not well into 2010. This, by itself, may not necessarily be so bad for India since this could give a forced pause for our industrialists, budding entrepreneurs, analysts, policy makers, and major political parties to objectively reflect upon the health of the country and their own businesses and thereafter, hopefully, embark upon a much-needed course correction before gearing up for the next phase of growth.
While many distortions have crept in different facets of business (and public) life in the last decade or so, perhaps the one that has the potential to cause the highest damage to the very foundation of Indian industry — across sectors — is the blurring of distinction between “creation of value” and “creation of valuation”. It seems that just about no lessons have been learnt from the “dot.com” era of the not-so-distant past wherein exotic metrics were invented to estimate the value-creating potential of not-so-exotic businesses and thereby arrive at fancy valuations of such businesses. In the last few years, once again, such absurdities have struck root in the minds of analysts, investors, and therefore entrepreneurs and established businessmen.
The real estate sector, which is probably seeing the sharpest “correction”, came up with interesting valuation metrics such as “land bank” putting conventional business sense relating to demand - affordability - supply - location - pricing - yields on the back burner. Retail saw dizzying valuations on account of the mere amount of booked retail space (irrespective of the price and location and the revenue potential), aggression in terms of the number of different formats launched irrespective of proven and sustained financial success of even a single one, and vision in terms of different categories of consumer spending that such formats were addressing. Time-proven indicators such as absolute and temporal changes in net profit margins, inventory turns, financial productivity per unit of resource such as manpower or space, yield per customer or per transaction etc. were entirely disregarded. Airlines were, till recently, valued more on the capacity addition (in terms of seats, aircrafts on order, and expansion of network). Banks and financial services businesses were being valued on the proliferation and pace of their reach to institutional and retail segments with an ever increasing suite of conventional as well as highly exotic financial instruments. More recently, hospitals are being valued largely on the operational and planned number of beds rather than more fundamental operating parameters.
As a result, not unlike the excesses of the dot.com era, many businesses and entrepreneurs have been focusing more on sprucing up the current “valuation” indicators and metrics rather than spending their energy and money on creating businesses that deliver unquestioned value to their customer or the end consumer, and in the process, creating sustainable intrinsic value for themselves. If done successfully, investors will indeed value this highly, leading to the desired outcome of high valuation of the business itself. Wal-Mart, Tesco, Toyota Motors, General Electric, Coca Cola, AT&T, and IBM are among many whose strategies (and success in value creation) have been well documented for decades.
It is in this background that the current pricking of the valuation bubble led by the stock market (and private equity) may be highly desirable. While it may bring in the short term the pain of having to face enhanced difficulty in raising venture and conventional capital, it will encourage businesses and entrepreneurs to think and work harder to make their existing ventures more innovative and efficient, and to come up with paradigm busting new ventures that deliver more value to the customer or the consumer. A young and economically growing India will easily forgive course corrections from all businesses across different sectors, and the quality of Indian entrepreneurship and of the managerial talent and capability is not in question. Hence, unprecedented value can be created in India in the coming decades as long as the businesses and new entrepreneurs believe in and practice the very basics of value creation.
