Stay Clear of These Misleading Metrics and Managements!

May 23, 2016

In this issue:
» Beware of these growth stories
» No takers for stressed asset sales
» Market roundup
» ... and more!
Richa Agarwal, Research analyst

If facebook was any place for spotting megatrends, one that would seem obvious is rise in travel. Rising urbanization, affordability, growth in middle class, travel discounts ... be it stays or flights... traveling is increasingly becoming a crucial part of lifestyle, and no more a luxury.

But it's not a megatrend that has not been exploited. Airlines, hotels, portals like Make My Trip, Cleartrip, Airbnb... we all have our mail boxes flooded with discounts and offers on travel.

Tracking megatrends is a logical approach to spot good companies likely to grow and rise with the trend. However, doing so without a diligent analysis of the individual companies (that one bets on) could be a disaster. An interesting piece published in proves just that.

The write up is about a startup firm, popular as Oyo, seemingly a beneficiary of rise in travel trend. Most of you would be familiar with its logo, especially while choosing budget hotels. It is a platform that connects customers to hotels (unlike ITC where property is owned and rented). The hotels that it ties up with are co-branded with the Oyo brand. Through this, Oyo apparently guarantees predictability and standardized room quality.

Oyo here makes money by charging a commission on the room rate. Amid rising competition, where an owner could tie up with multiple such agencies, Oyo has resorted to offering 'minimum guarantee'. It means committing a certain amount of business to the hotel and only taking a cut on the incremental revenue.

Apparently, the company executes this by paying upfront to the hotels for minimum number of rooms at the time of tie up. However, this bait has become a liability for Oyo. It is now struggling to fill rooms amid rising competition, especially during lean seasons. This has led the company to resort to fire sale.

Needless to say, this does little to boost revenues or profits. In fact, is detrimental to the business because of the upfront payment which is an expense.

Yet, the management seems unfazed. In fact, they are making tall claims. As per the article, SoftBank, that has invested in Oyo, has a graph that suggests that in the quarter ended December 2015, Oyo grew 34 times year on year!

Mind you, the metric is 'used room nights '... and has little to do with the revenues, profitability or earnings visibility of the company... something that a naive investor may not suspect. The metric could be inflated by giving away rooms for next to free! Or even for an hour leading to multiple bookings per day.

And that's not the only issue. With no loyalty (or liability) of the hotel owner, a lot of genuine customers who book the rooms have been disappointed for the lack of availability and quality issues - two prime value propositions that the Oyo claims to offer.

We are not sure about how true the allegations are. However, the response from the promoter Ritesh Agrawal in response to this article, though loaded with sentiments, does little to answer the grave issues highlighted.

Apparently there is more to this story. The author has compared the business model to Ponzi scheme. But we believe that even this much disclosure is enough to put off serious investors.

Is Oyo the only such case in the start-up boom where investors could be misled?

When I was reading this and the misuse of 'used room nights 'metric to claim market leadership (in hope of better valuations), I was reminded of 'gross merchandise value (GMV)'. This is the metric that e commerce companies have been using to crown themselves as market leaders.

There was a time when these firms would offer insane discounts to be the one with highest GMV and hence most valued firm. What is even more amusing is that they did manage to command mind boggling valuations on the basis of this one metric from Private Equity firms.

Until few months back, the owners of these firms were being hailed as geniuses and revolutionaries. However, as I had written in a recent edition of 5 Minute Wrap up Premium, there has been a U turn in that story. Regulatory landscape has gotten tougher. These firms are now believed to be collectively overvalued (not to mention yet to show profits). The firms that have invested in them have already written down a substantial percentage of the investment. Raising fresh investments at the valuations they once commanded has become a challenge.

With GMV not an effective metric anymore to lure investors, even the promoters are singing a different tune now. In a recent statement (to Economic Times) which was nothing less than a revelation, Kunal Behl, Chief Executive Officer, Snapdeal, said:

  • "We believe that GMV (the value of goods sold) is an important metric. But it's an outcome metric. It's not what you chase as a company." He further added- "GMV by itself is not necessarily a good metric that demonstrates anything else outside the value of goods transacted."

If you thought that just unlisted companies are likely to misguide potential investors, you could not be more wrong. In various meetings with the managements across the length and breadth of the country, my team and I have realized that there is no dearth of companies where managements cook stories and bluff . However, with a little bit of cross questioning and scuttle butting, it becomes obvious that the picture is not as rosy as they paint.

While large cap companies are still relatively safer, thanks to wide coverage, regulatory oversight and enough disclosures, such risks are higher in case of small cap companies. It is for this reason that irrespective of strong financials and attractive valuations, not a single small cap company gets recommended in Hidden Treasure where the team has not met the management and is not convinced of its competence and quality. We do not promise a 100% success ratio despite the robust process. Yet we can claim to have avoided toxic stocks...Cases where insights from the meeting led to a different conclusion than what the numbers and media suggested.

So next time when you hear or read about a growth (and investment) story that seems great, do not step out of your circle of competence. Do bother to look deeper and understand if the claims by the management are reflected in returns and cash flows. And when in doubt, avoid.

Do you think investors need to be more cautious of the managements' narrative when it comes to investing in startups, IPOs and small cap firms? Let us know your comments or share your views in the Equitymaster Club.

2:30 Chart of the Day

The Reserve Bank of India (RBI) has decided to clean up the balance sheets of Indian banks that are collectively saddled with rising bad loans. Banks have been putting pressure on the corporates for repayment of loans. As such, the debt laden corporates struggling with interest payments have announced asset sales. But are there enough buyers? As reported in Business Standard, since April 2015, 33 deals worth Rs 8,200 bn to sell assets have been announced. However, just six have been completed as on date.

Today's chart of the day highlights the increase in the value of assets for sale by the Indian corporates.

Debt Ridden Coporates Find Few Buyers for Distressed Asssets

Note - * - assets on sale during March 2015;
Reliance includes, Reliances infra, Reliance power, RCOM and Reliance Defence;
For JSW, data includes JSW steel and Energy

Reportedly, two factors have led to poor demand for these assets. One - the companies do not intend to mark down the value of their assets to reflect their true market value. Second, investors are not interested to buy assets in the sectors that are witnessing cyclical downturn. As such, despite all the desperate efforts, the financial stress at these groups has intensified. In fact, most of them have seen further rise in debts.

It may take a long time before highly leveraged companies are able to sell these assets. Until then, these firms and banks are likely to remain vulnerable. And even after the asset sale, their problems might not be over as asset sale will impact cash generation ability of these firms.


By the way, it's not just private companies and managements that are talented at selling good stories. The economists are not far behind. A couple of days back, our colleague Vivek Kaul, editor of Vivek Kaul Diary wrote about how the Vice Chairman of NITI Aayog, economist Arvind Panagariya, is cherry picking data to show Modi Government in good light. Make sure you do not miss this interesting read!


After opening the day on a firm note, the Indian indices have shed their early gains and are currently trading on a flattish note. Sectoral indices are trading mixed with stocks from the telecom and FMCG sectors leading the gains. Realty and IT stocks are trading in the red. At the time of writing, the BSE Sensex was trading up by 8 points (up 0.03%) and the NSE Nifty was trading up by 7 points (up 0.1%). Both - the BSE Mid Cap index and the BSE Small Cap index - are trading up by 0.1% each.

4:40 Today's Investing Mantra

"What an investor needs is the ability to correctly evaluate selected businesses. Note that word 'selected': You don't have to be an expert on every company, or even many. You only have to be able to evaluate companies within your circle of competence. The size of that circle is not very important; knowing its boundaries, however, is vital." - Warren Buffett

This edition of The 5 Minute WrapUp is authored by Richa Agarwal (Research Analyst).

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6 Responses to "Stay Clear of These Misleading Metrics and Managements!"


May 26, 2016

Excellent article with equally interesting articles referred to in it. Fancy matrices and tall claims are a manifestation of unethical marketing. Least ethical group of people in the industry are from marketing - they are taught to tell lies, make the picture look rosier than it is and entice people to buy their product or service by making tall claims. Financial experts juggle the figures - create fancy products like derivatives or fancy matrices or simple swindle money by cooking the accounts. Some business owners are good at taking huge loans without having any intention of paying it back. They use the media effectively with paid investment advisers to act as pied pipers.



May 25, 2016

The one thing that glaringly comes out of your posts is cynicism and aggressive demeaning of the subject of your topic. Try to understand things and have an open mind. No business was built without failure. And when things go wrong, strategies need to be changed. Founders of e commercial sites are revolutionaries not for great business models but because they revolutionized the way shopping is done in India. And I am sure all working professionals would agree to it including you. Just as you justify how Hidden Treasure works despite having a good amount of users not satisfied with your services, businesses do the same. It is upto individual choice weather he wants to accept or reject the claims. PLEASE BE TRUE TO YOUR ANALYSIS INSTEAD OF PASSING VIEWS OR OPINIONS. A link to the original article would have done much good.



May 24, 2016

Any sane investor should never go with fancy metrics. Investing in stocks is investing in business which is about investing for a share in growth and profits which essentially are earnings.

Online portals and businesses need to be analysed in depth to understand the business model, earnings and profitability.

An investment in a business with high revenues might not be a sustainable and profitable investment. Only returns and/or earnings show the true picture.

Infact,there is higher possibility of the "naive" investor to invest in stocks with higher revenues which could be a trap.

As for the Oyo case, the below link explains the whole thing:



Shoibal Chatterji

May 24, 2016

Misleading metrics and managements are a poisonous concoction especially when these views are proliferated by banks, the first bastion of trust for the naive investor. A case in point is the IPO of Parag Milk Foods limited wherein the stock was priced way above reasonable valuations despite which banks like ICICI, BOB, PNB etc were encouraging customers to invest in the IPO and were even offering discounts on the price of the share. One look at P/E and P/BV ratios spilled the beans...


Ujjwal M

May 24, 2016

Excellent article from Richa, very well written with deep understanding of values that the great investors like Buffett have tried to teach us.


Shaad M

May 23, 2016

Another most common Vanity Metric used by Industries to boost their ego is 'Turnover'

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