SVKM’s Narsee Monjee Institute of Management Studies -

Bangalore

Business Valuation
End-Term Examination

4 September, 2020

Submitted to: Prof. Rajesh Madhavan

Submitted By:
Gunjan Agarwal
Roll no: A016
SAP ID: 80203190004
The COVID-19 pandemic is today's leading global health issue and the world's biggest
humanitarian problem. The virus has spread globally, and the number of cases is growing
daily as governments try to limit the spread. COVID-19 has sparked a profound economic
crisis along with an unparalleled human toll. The entire world was under lockdown and many
countries are still under it, with certain relaxations. For example in India, a national, 21-day
lockdown with the aim of flattening the curve was introduced in late in the month of March.

The coronavirus pandemic's economic impact has highlighted the inefficiencies in the way
many firms do business, forcing them to adopt new operating models in order to remain
relevant, productive and ultimately floating. One of the major dilemma that executives face is
to determine the asset weight.

Asset Light Model

 An asset light company is a company which owns lesser capital assets and more of
operational assets.
 A lot of start-ups and growing businesses have taken to the Asset-light business
model due to various reasons like
o Lack of capital
o Lack of space
o Existing burden of Finance Costs
o Unpredictable future
o Lower costs incurred in the long run by outsourcing.
 There are many other advantages of going asset light – like better Return on Assets,
lesser profit volatility and higher competitive advantage.
 But at the same time, there are a few drawbacks of going asset light like they can be
really tough to manage. Also, there is a risk of Intellectual Property (IP) getting
leaked or secrets going public.
 Another important point to be considered is that in businesses which require high
levels of speed, know-how and coordination, asset-light business models may not
work very well.

Asset Heavy Model

 An Asset heavy company is a company which owns a lot of heavy assets or fixed
assets or Plant Property and Equipment in its Balance Sheets.
 This creates barriers to entry for players to enter the particular industry, like
locomotive erection, steelmaking, artillery production, mining etc. which are
traditional examples of asset-heavy industries.
 The reasons why companies choose to go asset- heavy are:
o Low Production Costs
o Tax benefits
o Seeking to grab the benefits if cheap finance
o Asset valuation increases, leading to a higher valuation of the company
  But the major drawbacks of being asset-heavy are the blockage of cash, and low
liquidity.

Many of the existing companies are jumping on the bandwagon of going asset-light. For
example, in the hotel industry many companies own less real estate and focus on the
operating of current hotels. Uber is another example to show that a company can become the
best in its field without owning a single direct asset. Store.se, a Bengaluru based online
grocery shopping platform has recorded a 20% week-on-week growth after they started
operations, early this year.
However, with a lot of pressure mounting as the economy dwindles, leaders are
coming to terms with the fact that the old way of doing business can no longer be continued.
There is also the additional pressure created to increase efficiency and cut costs due to
dwindling consumer demand which is caused as a result of the lockdown, unemployment,
and fear of recession.

Important points to be considered:

 Due to the shrinking consumer demand and reduced disposable income, asset-heavy
industries are facing a massive under-utilisation of assets.
 In asset-light industries such as rental, real-estate and service, consumers pay for a
service as most of these businesses revolve around the ‘as-a-service’ model.
Therefore, in the wake of the economic uncertainty that is currently prevailing – most
of the businesses and consumers are not willing to spend on such things.

As we can see, there is no one way of going about this and the decision of asset-weight is not
something that can just be taken. A lot of factors need to be considered and the industry is a
major deciding factor for this.
The problems mentioned above have led to the business leaders’ interest in two
transformational business models:

 For Asset-heavy industries, asset fractionalisation which refers splitting of the assets
into multiple parts which can then be divided and further distributed. Blockchain
Technology can help bring liquidity to asset heavy industries by allowing them to
utilise ill-liquid assets such as industrial machineries, by helping them create
additional revenue streams.
 For Asset-light industries, outcome based pricing can seek to make previously
difficult-to implement business models more feasible.

Thus, in the debate between asset-light and asset-heavy, it is advisable to go for a midway
path, that is owning only absolutely necessary assets; and considering other options like
leasing, outsourcing or franchising. This way cost of production will go down, and there will
also be cash in hand which will ensure liquidity.