Stressing that successful businesses are the ones which deliver tangible profits, billionaire Kumar Mangalam Birla on Friday said “trusty old concepts” like gross margins and cash flows will matter eventually even while valuations jump.
The Chairman of the USD 44-billion Aditya Birla Group also said that ultimately unit economics will have to matter.
His comments come against the backdrop of high valuations being enjoyed by businesses amid a liquidity glut wherein firms like Zomato and Paytm have successfully raised money from the public despite not reporting profits.
Fund raising by companies at high valuations had led many to point out the lack of profits while those supporting the valuations are of the view that that it is the future potential which these businesses possess that should make someone overlook the conventional way of looking at a business.
Drawing from the diversified group’s businesses, Birla said in the long run, sustainable and successful businesses are those that generate tangible profits, prosperity, livelihoods quarter after quarter. “Valuation and business longevity will automatically follow”.
“Ultimately, my own view is that at some stage unit economics will have to matter. And trusty old concepts like cash flows and gross margins will guide behaviour and actions,” he said.
In his New Year message to employees, Birla acknowledged a shift in business where enterprises have come to creating a need for consumers which never existed rather than delivering goods and services helping one meet a need, and cited the example of a 10-minute delivery app to support his observation.
In the section titled ‘Valuations: Sanity over vanity’, Birla said competition for investment opportunities and the Fear Of Missing Out (FOMO) have driven up valuations of many fledgling companies to “stratospheric levels”.
He said the large waves of cheap capital will eventually erode entry barriers faced by entrepreneurs and once a business becomes successful and starts delivering profits, valuation and business longevity will follow automatically.
Mentioning about societal changes, Birla said hierarchies have ceased to be so important in the face of a 20-year-old building a billion-dollar business or a 50-year-old building a company in a new space.
A generation of entrepreneurs are now taking advantage of the 1991 economic reforms, and with the twin balance sheet problem of stressed loans and over-leveraged corporates behind us, the next decade will be one of a surge in investments, Birla said, terming it as a “capital mahotsav” which awaits India.
The private sector is firing on the twin engines of conventional and the new-economy, Birla said, calling this as a ‘double engine growth’.
He, however, stressed that ‘sunrise sectors’ should be a wider phrase which should also include conventional industries like cement, steel, power and auto.
The industrialist said “recent experience” has taught us not to declare victory or even the beginning of the end but hoped that the pandemic will become a far less virulent irritant in our daily lives in the new year.
There is a renewed understanding on the importance of supply chains. While efficiency wins in the short term, resilience translates to value in the long term, he said.
Near shoring, reasonable inventory holding, multiple supplier alternatives and more sophisticated supply chain solutions will be the changes one will see because of the realisation, he said.
Underlining the importance of gratitude, the industrialist said, “we must be thankful towards health workers in PPE kits and delivery partners on two wheelers for keeping the economic wheels moving through the last two years” Birla also mentioned that he longs to listen to the rock band U2 even in the metaverse era.
Equanimity in accepting both adversity and windfall gains is essential, he noted, borrowing an optimistic phrase from the ‘cryptosphere’ to say that ‘we are all gonna make it’.