Q2) Covid 19 bought about a lot of uncertainties in the world and the global economy was

completely shaken up. Businesses were all cash strapped and have been struggling since
then to stay afloat. Given this context, in my opinion, going for an Asset Light business
model will bring a greater value proposition in terms of compounding. According to Warren
Buffet of Berkshire Hathway, we must focus on building “Value 3.0 Moats” which indicates
towards creating maximum wealth with minimum capital. In unprecedented times like
these, cash has been the only survivor of businesses, one needs to be in the race to win it.
Cash and lower operating expenses have helped companies fight through this pandemic.

 The new found breed of FAANG stocks, all belong to this category of keeping an
asset light model and are having the highest possible valuations with the huge
market capitalisation. Value investors love to hunt for bargains and track high P/E
companies which are available at below a metric of per share liquidation value.
 Companies need to focus on building and expanding market share through wide
chain of networks and land up becoming a “platform” company, which is
considered to be the new investment paradigm instead of an asset heavy fully
vertical integrated business with a lesser presence.
 The world is moving towards digitisation and post Covid these digital activities
including VR and AR have enhanced even more. Shared services are the future like
we see through Netflix, Uber, Swiggy, Spotify etc. Amazon doesn’t own any stores
and works through a good supply chain model. Acquiring fixed assets is getting
tougher and burdensome. Inventory depreciates and acquiring land for geographic
expansion is always not feasible. Hence the concept of renting what one needs is
preferred to ensure greater flexibility. Capital allocation needs to improve and
business models needs to be transitioned towards being light and more adaptable.

Valuation of an Asset light business

An Asset light business model helps firms to generate a sustainable competitive advantage
leading to superior performance. Looking at the Valuation Model, we see that Return On
Invested Capital (ROIC) = NOPLAT (Net Operating Profit Less Adjusted for Taxes)
IC (Invested Capital)
NOPLAT = EBIT*(1-T) and IC = (Net Working Capital + Fixed Assets) – short term liabilities.
It is important to ensure that ROIC > WACC for any business to be profitable.
Asset light business includes those light assets which are off balance sheet assets and can
generate net profit for the company. These light assets helps making excess returns which
is (ROIC – WACC – r), where ‘r’ is the risk-free rate of return. The Market Value of Equity
divided by the operating assets is better and overall the business generates higher P/E.
 The industry is divided into Four
Quadrants: Dreamers, Creators,
Builders and Servers
Dreamers – high multiples and
assets. Currently, there are no
such companies.
Post Covid, firms will try moving
towards the Creators category –
high multiples with low PP&E.
They have less fixed cost and
greater agility. Thus asset
light companies are a good
bargain in the future.

Asset heavy businesses require a lot of capital expenditure

upfront and one needs to invest/borrow huge sums of money to establish the venture. Given
the current scenario with a dynamic market, recouping this investment becomes a major
challenge. If we take examples of traditional asset heavy businesses, all of them are facing
severe losses in the current situation.

1. Airline/Aviation industry – they are suffering major losses, staff needs to take a pay
–cut and personnel are being laid off since travel has taken a major hit.
2. Telecommunications – here again majority of the players in the Indian market
except Jio, needs to pay longstanding AGR dues on Spectrum and are unable to do
so,since their business model being so costly.
3. Steel, Iron and Cement manufacturing – all of them have very low P/E ratios due
to high operating costs and huge capital equipment costs which might or might not
generate the future cash flows as projected. REIT’s is being used for Real Estate.

Yes, some asset heavy companies like Zara are doing well, however quite a handful of its
competitors like Forever 21, Victoria Secrets etc. have filed for bankruptcy. Surely, Tesla
being an electric vehicle asset heavy company stands all odds and beats the valuation game
at sky rocketing figures, however in case the venture does not turn out to be successful in
future , the bubble can burst soon. Overall the payback period is too long, it takes a lot of
years to break-even and one needs to go through a large negative initial cash flows while
calculating the ROI and companies with time might loop in to a debt trap.

Thus it is better to move towards Asset light business models which harness technology and
provide scalability, flexibility with improved returns and optimize the principle - “less is more”