Tag: aswath damodaran

Aswath Damodaran on Adani

Self-recommending!

I’m outsourcing today’s post to Prof. Damodaran, to everybody’s undisputed advantage šŸ™‚

On Valuing Zomato, But Don’t Stop There

If you are a student of economics, you should be able to understand the basics of valuation. It is up to each one of us to determine our level of expertise, but at the very least, we should be able to understand valuations that others have arrived at.

And a great way to learn this is to devour, as greedily as possible, every single blog post written by Professor Aswath Damodaran.

Here’s an excerpt from his blogpost on valuing Zomato:

Eating out and prosperity don’t always go hand in hand, but you are more likely to eat out, as your discretionary income rises. Thus, it should come as no surprise that the number of restaurants increases with per capita GDP, and that one reason for the paucity of restaurants(and food delivery) in India is its low GDP, less than a fifth of per capital GDP in China and a fraction of per capital GDP in the US & EU.

http://aswathdamodaran.blogspot.com/2021/07/the-zomato-ipo-bet-on-big-markets-and.html

Read the whole thing, and if it is your first time reading about this topic, read it three times. I’m quite serious! Also download the spreadsheets, and play around with the assumptions in them. It is a great way to teach yourself Excel and valuations at the same time. Excel and valuations is also a great way to understand the concept of complementary goods, and I’m only half joking.

So, ok, you have now got a little bit of a grip on valuation. That’s great, but you shouldn’t stop there. Valuing a company is fine, but how does one think about the valuation of this company (Zomato) in the context of this sector (online food delivery)?

Here are some facts. Zomato raised $1.3 bn through an IPO which was oversubscribed 38 times and which valued it at $14.2 bn. At about the same time, its competitor Swiggy raised $1.25 bn in a Series J fund raise which gave it a post-money valuation of $5.5 bn.
The post-IPO public market price discovery of Zomato shows that Swiggy is 2.6 times under-valued.

https://gulzar05.blogspot.com/2021/07/some-observations-on-zomato-and-swiggy.html

Also from that post, a great way to understand how to start to think about the price one can get in the market. That is, you can learn all the theory you want about valuation, and pricing and what not. At the end of the day, the price you command in the market is about so much more than that:

4. But, if markets stay as frothy as it’s now, Swiggy’s promoters and investors need not worry. Unlike Zomato’s promoters who, judging from the first day pop left huge money on the table, Swiggy’s promoters could rake in much more by pricing its IPO closer to the comparator market price. Swiggy and other could benefit from the later mover advantage.
5. There appears to have been a first mover disadvantage for Zomato in leaving money at the table and not maximising its IPO takings. Conversely there may have been a first mover advantage for its investors in maximising their returns.

https://gulzar05.blogspot.com/2021/07/some-observations-on-zomato-and-swiggy.html

And you shouldn’t stop there either! Valuing a company is fine. Thinking about that company in the context of its competitors is great. Thinking about the IPO rush in the start-up world, and what it means in the context of the overall economy is fantastic.

The Indian startup scene has been set ablaze by the spectacular IPO of Zomato. In a largely conservative market this constitutes a huge collective leap of faith since the company has consistently made increasing losses and several questions hang on its profitability. With some more blockbuster IPOs lined up, the party is likely to go on for some time. Some high-profile boosters even think of it as a new dawn in risk capital raising. The problem is with those left standing when the party ends, as it must. And it’s most likely to be not pretty.

https://gulzar05.blogspot.com/2021/07/the-startup-ipo-bubble-reaches-india.html

The worldā€™s unicorn herd is multiplying at a clip that is more rabbit-like. The number of such firms has grown from a dozen eight years ago to more than 750, worth a combined $2.4trn. In the first six months of 2021 technology startups raised nearly $300bn globally, almost as much as in the whole of 2020. That money helped add 136 new unicorns between April and June alone, a quarterly record, according to cb Insights, a data provider. Compared with the same period last year the number of funding rounds above $100m tripled, to 390. A lot of this helped fatten older members of the herd: all but four of the 34 that now boast valuations of $10bn or more have received new investments since the start of 2020.

https://www.economist.com/business/2021/07/19/technology-unicorns-are-growing-at-a-record-clip

Why is this happening now? Is it because of loose monetary policy the world over? Is it because of optimism about what the world will look like post-covid? Neither, and something else altogether? Or both and something else also? What might the ramifications be? How should that influence your thinking about the next three to five years in your life – when it comes to going abroad to study, or starting an MBA, or being in the job market?

Note the chain of thought in this blogpost: valuing a company, thinking about that specific sector, thinking about IPO’s in general, thinking about the overall economy… and getting all of that back to your life. Apply this to all of the news you read, everyday, and you’ll soon start to build your own little picture of the world. That is, you’ll start to see the world like an economist. And trust me, that is a superpower. šŸ™‚

Graduating in 2021

Until this year, I used to think batches graduating in 2009 and 2002 would have found the employment market tough going.

2021/22 puts all other years in the shade, and that is an understatement.

One of the students graduating this year from the Gokhale Institute, Devansh, asked if I have any advice to share for their batch.

Here it is, make what you will of it:

  1. A quote that is usually attributed to Mark Twain goes something like this: swallow a live frog first thing in the morning, and nothing worse will happen to you the rest of the day. We don’t know if he actually said it (probably not), but the one good thing about graduating this year, of all years, is that the same principle is at play. Might not seem like it now, but in the long run, graduating this year will stand you in good stead.
  2. If the future is about working remotely, you stand half qualified already. We have had lectures, examinations, seminars, job interviews all move online, and we’re now veterans when it comes to having your work be online. Exploit this fact to your advantage while landing a job, while in your job, and for moving across jobs.
  3. At the margin, you’ve probably (and hopefully) learnt that there is nothing especially sacrosanct about learning from us professors in offline classrooms. In fact, you’ve probably confirmed a long-held suspicion: learning online is actually easier.
    A healthy dose of “what gives you the right to tell me?” isn’t a bad thing to have at the start of your career (please don’t ignore the adjective in this sentence!)
  4. You’ve also likely learnt how to hunt down the answer to your question online. This trend has been around for a while, but the pandemic has accelerated it. Get better at it than you already are, and try and do this everyday.
  5. Think like an economist. Understand that the supply of certificates for having completed online courses has gone up, and that exponentially. Therefore, there is a reduction in the value of those certificates. Get them if you must, but there is not much value in flaunting them.
  6. Continue to think like an economist. What is in short supply is work experience. There is a glut in showing that you have learnt. The doing, in other words, is in short supply. So do! Take publicly available data and crunch the numbers in MS-Excel. Put it up for public consumption. And that is just one example – there are literally millions and millions of things you can do.
    I’m not buying the “But I’m not Professor Damodaran!” argument. There is only one Musings on Markets, and nobody is expecting you to be as good as him. But begin by recreating his files, if nothing else. What works for writing works for spreadsheets as well!
  7. This year will teach you to think like a hedger, rather than a speculator. There is a lot of merit to taking care of the potential downsides first. Remember this lesson, for it is a valuable one.
  8. Your batch will, more than any other, appreciate the value of a face-to-face meeting. It’ll be that rarest of rare years where folks (eventually, not right now) will want offline meetings to take place. I look forward to learning from all of you about the underrated aspects of meetings. And I mean that quite seriously.
  9. Pay it forward. Cast your mind back to the start of this academic year, July 2020. Think about how daunting this year has been, and think about how you could have done with a steadying hand on your shoulder. Your juniors are going to be in the same boat a couple of months from now. Reach out to them, mentor them, and let them know that there’s help available if its needed. Who better than you to know the feeling? What better way to build out your network?
  10. Finally, all the best! God knows you guys have earned all the luck that will come your way.

What should you read to learn more about fixed income markets?

Akash (I hope I got the spelling right, my apologies if I didn’t!) writes in to ask what he should read to learn more about fixed income markets. As he puts it, everything from basic to intermediate!

That might make for a long (and by definition) and somewhat less than comprehensive list, but the good news about a blog post is that it can always be edited! If anybody has additional links, send them along, and we’ll keep updating this post.

In terms of a very simple introduction to the topic, begin here. Very basic, very introductory, and therefore a good place to start. Wikipedia is a modern miracle, and an invaluable gift.

So, what very basic text should you begin with if you want to start learning about fixed income securities? More advanced folks might turn up their noses, but I think there is still something to be said for Investment Analysis and Portfolio Management, by Prasanna Chandra. Never trust my memory, but I think the fourth section deals with fixed income securities in India. If you are an absolute novice, begin there.

Ajay Shah and Susan Thomas have a book that is a very good introduction to financial markets in India in particular, and the book has two separate chapters on fixed income securities in India, one being devoted to the government securities market, and the other to the corporate bond market. Perhaps a little out of date now, but still worth a read.

I’ve not enrolled in, or finished either of the two courses on Coursera I am about to recommend right now. Nor is there any particular reason to recommend courses from Coursera alone. There are plenty of other online courses available. But I tried to put myself in the shoes of somebody who is just beginning their journey in this field, and selected courses from the Coursera website keeping this in mind. That led to the two courses below:

  1. Bonds and Stocks, by Gautam Kaul at the University of Michigan
  2. Introduction to Financial Markets, by Vaidya Nathan, at ISB.

As I mentioned, there is no reason to limit yourself to just Coursera, or just these courses. But these seem to be decent introductions. Here are two links to the syllabi of courses taught at the NYU Stern School of Business that deal with our topic:

  1. Debt Instruments and Markets, by Bruce Tuckman
  2. Debt Instruments and Markets, by Ian Giddy.

A useful thing to do is to go through the course outline, get yourself a copy of the textbooks they recommend, and try and read through the recommended course structure on your own. If you will allow me to be a bit heretical, might I suggest not worrying too much about not following everything all at once? Just read through it haphazardly, all higgedly-piggedly, and keep coming back every now and then to topics that seemed particularly abstruse. By the way, speaking of every now and then, have you considered spaced learning?

 

As a thumb rule, if you are interested in finance, always read everything written by Aswath Damodaran. Visit his homepage, click open whatever links grab your fancy, and read. I am not joking. Here are some blogposts to get you started:

  1. Dividend Yield and the T-Bond Rate.
  2. His favorite novels on financial markets.

All that besides, watch his videos, read his books, read his papers – be a greedy, greedy pig when it comes to devouring stuff written by him. My personal favorites are his attempts to value Uber and Tesla, but it is a long, long, long list.

 

 

Another useful resource is Ajay Shah’s blog. Again, some links to get you started:

  1. Difficult questions about the bond market.
  2. A presentation about developing the corporate bond market in India.
  3. A presentation about the bond-currency-derivative nexus.

I hope this helps, Akash – thank you for asking the question.

 

 

Tech:Links for 18th June, 2019

  1. “”I did my first valuation of Tesla in 2013, and undershot the mark, partly because I saw its potential market as luxury cars (smaller), and partly because I under estimated how much it would be able to extract in production from the Fremont plant. Over time, I have compensated for both mistakes, giving Tesla access to a bigger (albeit, still upscale) market and more growth, while reinvesting less than the typical auto company. In spite of these adjustments, I have consistently come up with valuations well below the price, finding the stock to be valued at about half its price only a year ago. This year marks a turning point, as I find Tesla to be under valued, albeit by only a small fraction. Even in the midst of my most negative posts on Tesla, I confessed that I like the company (though not Elon Musk’s antics as CEO and financial choices) and that I would one day own the stock. That day may be here, as I put in a limit buy order at $180/share, knowing fully well that, if I do end up as a shareholder, this company will test my patience and sanity.”
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    The forever excellent Aswath Damodaran on his latest valuation of Tesla, and now he even has skin in the game. If you want to understand how to value a company, you can’t do better than Prof. Damodaran, and if you want to begin with a particularly challenging, but inevitably interesting company, you can’t do better than Tesla. For both of these reasons, worth reading in some detail.
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  2. “Since it began operations in 2010, Uber has grown to the point where it now collects over $45 billion in gross passenger revenue, and it has seized a major share of the urban car service market. But the widespread belief that it is a highly innovative and successful company has no basis in economic reality.An examination of Uberā€™s economics suggests that it has no hope of ever earning sustainable urban car service profits in competitive markets. Its costs are simply much higher than the market is willing to pay, as its nine years of massive losses indicate. Uber not only lacks powerful competitive advantages, but it is actually less efficient than the competitors it has been driving out of business.”
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    Speaking of tech and automobile companies, this article is an extremely bearish take on Uber – with fairly convincing reasons to boot. A very long, but ultimately very convincing (and depressing) read. The party ought to end soon.
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  3. “Uber also has a very limited ‘network’ effect, because drivers can and do jump to whatever platform offers them the best terms – indeed most Uber drivers use all available platforms, and they accept rides from the platform offering them the highest rates – and customers can do the same (most customers have multiple ride-hailing apps on the phones, and can easily choose the cheapest). This means that even if Uber survives, it will likely always remain an extremely low margin business.”
    ..
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    Another take on the same issue – I don’t necessarily agree with all the economic arguments made in the piece – for example, I think the cost of owning a car as opposed to hiring one for a drive is under-emphasized – but the broader conclusion is all but inevitable.
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  4. “The Tesla position would presumably be that the addition of LIDAR would not have materially avoided the car accident and loss of lives, but this is going to be tough to showcase since in theory any use of LIDAR is going to incrementally improve the safety odds, assuming it is used wisely, and so itā€™s another part of the uphill climb by Tesla to avoid getting summarily dinged for their lack of LIDAR.They also cannot make the argument that they did not know about LIDAR or were somehow unaware of it, which is quite obviously not the case, including that their self-offered anti-LIDAR rhetoric acting as their own admission that they knew about LIDAR and made a deliberate decision to intentionally exclude it.”
    ..
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    Read this article to get a sense of what LIDAR is, and why it is important (or not) in the world of autonomous driving – but also read this article to get a sense of how cost-benefit arguments work in the real world, along with a great way to understand opportunity costs.
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  5. “Americans associate electric cars with the luxury of Tesla, the unrivaled conveyance of choice for the Sand Hill Road set. But these newly assembled vehicles, part of a family of SUVs called the Tang that retails from about 240,000 yuan ($35,700), are aimed squarely at middle-class drivers in the worldā€™s largest electric vehicle market, China. Their manufacturer, BYD Co., is in turn the No.ā€‰1 producer of plug-in vehicles globally, attracting a tiny fraction of the attention of Elon Muskā€™s company while powering, to a significant extent, a transition to electrified mobility thatā€™s moving faster in China than in any other country. Founded in Shenzhen in the mid-1990s as a manufacturer of batteries for brick-size cellphones and digital cameras, BYD now has about a quarter-million employees and sells as many as 30,000 pure EVs or plug-in hybrids in China every month, most of them anything but status symbols. Its cheapest model, the e1, starts at 60,000 yuan ($8,950) after subsidies.”
    ..
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    Uber, Tesla, sure. But have you heard of BYD? Or put another way, China had to come up sooner or later.

Links for 16th May, 2019

  1. “The other risk of a huge centrally planned response to climate change is that of a huge centrally planned response to anything: clumsy megaprojects chosen for their political or bureaucratic acceptability rather than because they deliver the biggest results for the lowest cost.”
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    In which the ghost of Pigou is found to be giving a contented chuckle. Pigouvian taxes is a term you should learn about, and read this article to find out how and why the idea continues to resonate.
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  2. “With casuals being the next wave of streaming adopters, their impact will increase. But despite being ā€˜more valuableā€™ they will also reduce royalties, because more streams per user means revenue gets shared between more tracks, which means lower per-stream rates. The music industry thus has an apparently oxymoronic challenge: it is not in its interest to significantly increase the amount of media consumption time it gets per user, but instead it will be better served by getting a larger number of people listening less!Current market trajectory points to more streams per user, which ā€“ for subscriptions, where royalties are paid as a share of revenue ā€“ means lower per-stream rates.”
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    Have you read The Long Tail, by Chris Anderson? Read it (or about it), and then read this article to learn about the problems that will arise in a world full of long tails.
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  3. “The answer is no and yes. The views of Piketty and Blanchard can indeed be reconciled, because they are talking about different interest rates. While Blanchard focuses on the rate on low-risk government bonds, Piketty is concerned with the return on risky capital investments. Because the two interest rates are separated by a risk premium of roughly five percentage points, it is entirely possible for the rate on government bonds to be below the economic growth rate, while the rate on capital is above it.”
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    Barry Eichengreen on the return (as he puts it) of fiscal policy. A short article, but a useful one to understand macroeconomics better.
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  4. “When historians in the distant future look back at our era, the name Alfred Sauvy may appear in a footnote somewhere. Sauvy was a French demographer who coined the term ā€œthird worldā€ in a magazine article in 1952, just as the Cold War was heating up. His point was that there were countries not aligned with the United States or the Soviet Union that had pressing economic needs, but whose voices were not being heard.”
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    The always excellent Tim Taylor on the nomenclature for “third world” countries – how it came about, what it means, how it might change going forward – and ends with a clarification about how it may not have been what we have thought all along!
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  5. “I have to tell you, Iā€™m a pretty lazy person, I donā€™t work more than 40 hours per week. What Iā€™ve discovered helps me is to not compartmentalize ā€“ because if I thought of my life as, ā€œthereā€™s teaching, thereā€™s research, thereā€™s writing on my blog, thereā€™s X, Y and Zā€¦ā€ then you very quickly run out of hours in the day. But almost everything I do spills over into almost everything else I do. So Iā€™m constantly looking for ways to take whatever I do and get it to serve three or four or five purposes.”
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    A fascinating interview with Aswath Damodaran – a person youĀ must know more about if you want to study finance. The entire interview is worth reading – but this excerpt is for you even if you are not a student of finance – his view about what qualifies as work, and what doesn’t.