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New Delhi - Stuffing cash in your mattress is an age-old strategy for preserving wealth. This, as it turns out, may make less sense than it appears.
An understanding of the time value of money sheds light on how with every snore you lose some more.
India supplies the Brics bloc (Brazil, Russia, India, China and South Africa) with its vowel, and a visit to India Inc supplies the visitor with a sensory symphony of sound, smells and locomotion.
With a population topping 1 billion and a nippy gross domestic product (GDP) growth of 7.5%, this marching elephant is growing in clout and complexity.
Driving through the streets of metropolitan Delhi the sheer diversity of modes of transport is mind-boggling, not to mention the logic-defying mode through which these bicycles, rickshaws, auto-rickshaws, dinky cars and squished minibuses navigate the traffic governed by an invisible hand which honours traffic rules more in breach than compliance.
India's oligarchs provide entertainment by driving Lamborghinis on streets where sweat flows faster than traffic.
Auto-rickshaw or autos as they are known locally provide mass transport, and if you happen to take a ride you will commonly experience the driver offering to wait for you while you run your errands for a nominal fee.
This culture which celebrates nothing-else-doing-ness provides an eclectic backdrop for demystifying time value of money.
Corporate finance attracts many mathematical whizzkids due to the complexity and compensation which it offers to successful practitioners; its the intricacies, however, can be distilled into simple concepts.
At the heart of any financial instrument are two components, risk and reward. Risk is self-explanatory: what are my chances of making or losing money? Reward is more oblique since it includes the time dimension, which is where an understanding of the time value of money comes to the fore.
Sanjeev drives his auto-rickshaw across the toll gate between Gurgaong and Delhi with a can of $1 tomato soup in hand. If it takes Sanjeev six months to get through the traffic, how much is Sanjeev’s dinner worth upon arrival?
Let’s assume Sanjeev could have invested that $1 at the Indian GDP growth rate of 9.1% risk-free, compounded semi-annually, making his soup’s value $0.96 upon reaching the dinner table in Gurgaong.
Sanjeev essentially "lost" 4 cents along the way. That in a nutshell is the time value of money.
Alternately, if Sanjeev was versed in tomato-soup-o-nomics and anticipated the traffic jam, he could have invested $0.96 in a zero coupon bond before his trip and bought the soup at home on arrival for $1, the bond's future value.
Bharti Airtel, India's telecom behemoth, is headquartered around the corner from the Gurgaong toll gate navigated by Sanjeev's auto. It is a stellar example of a company reinventing the telecoms industry by innovating in its business model through applications of the time value of money on a strategic level.
Bharti received much press coverage in SA during the ill-fated wooing process with MTN Group [JSE:MTN]. I enquired into the nature of this fallout with a member of the senior management team and was informed that it was just not meant to be and as it so happened, the acquisition of Zain turned out to be a better opportunity.
Upon entering the headquarters of Bharti you would be forgiven for mistaking your location for Palo Alto, with a child daycare centre, mini market and Costa Coffee branch inside an ultra modern glass atrium.
Bharti pioneered the strategy of outsourcing capital intensive infrastructure, a historic irony given India's proclivity for being the traditional outsourcee.
This strategy has enabled Bharti to deploy resources towards higher yielding functions and maintain lower overheads in a fiercely competitive race to the bottom in India's telecom sector.
Upon analysis, this strategy is simply an application of the time value of money.
Bharti took the traditional build-your-own infrastructure business mode, which is the status quo in the industry, and turned it upside down.
By redefining the traditional discounted cash flow model used in the industry, Bharti has left the low yielding hardware component of the business to the manufacturers of this equipment while it focuses on its profit drivers.
The distilled strategy is clear: in telecoms, infrastructure is expensive and has a long finance time horizon.
It doesn’t drive profits, so its strategic value is low and utilitarian - outsource this burden and free up current cash flows to allocate towards strategically high value generating items such as market penetration, customer attraction and retention.
A dollar today is worth more than a dollar tomorrow, so if you are in a high growth cut-throat industry like Bharti Airtel, lean and streamlined isn't merely good advice for maximising shareholder value - it's a survival mechanism for operating in a flat world.
- Fin24
Fin24 user Jarred Myers doubles up as a guest columnist in this series.
An understanding of the time value of money sheds light on how with every snore you lose some more.
India supplies the Brics bloc (Brazil, Russia, India, China and South Africa) with its vowel, and a visit to India Inc supplies the visitor with a sensory symphony of sound, smells and locomotion.
With a population topping 1 billion and a nippy gross domestic product (GDP) growth of 7.5%, this marching elephant is growing in clout and complexity.
Driving through the streets of metropolitan Delhi the sheer diversity of modes of transport is mind-boggling, not to mention the logic-defying mode through which these bicycles, rickshaws, auto-rickshaws, dinky cars and squished minibuses navigate the traffic governed by an invisible hand which honours traffic rules more in breach than compliance.
India's oligarchs provide entertainment by driving Lamborghinis on streets where sweat flows faster than traffic.
Auto-rickshaw or autos as they are known locally provide mass transport, and if you happen to take a ride you will commonly experience the driver offering to wait for you while you run your errands for a nominal fee.
This culture which celebrates nothing-else-doing-ness provides an eclectic backdrop for demystifying time value of money.
Corporate finance attracts many mathematical whizzkids due to the complexity and compensation which it offers to successful practitioners; its the intricacies, however, can be distilled into simple concepts.
At the heart of any financial instrument are two components, risk and reward. Risk is self-explanatory: what are my chances of making or losing money? Reward is more oblique since it includes the time dimension, which is where an understanding of the time value of money comes to the fore.
Sanjeev drives his auto-rickshaw across the toll gate between Gurgaong and Delhi with a can of $1 tomato soup in hand. If it takes Sanjeev six months to get through the traffic, how much is Sanjeev’s dinner worth upon arrival?
Let’s assume Sanjeev could have invested that $1 at the Indian GDP growth rate of 9.1% risk-free, compounded semi-annually, making his soup’s value $0.96 upon reaching the dinner table in Gurgaong.
Sanjeev essentially "lost" 4 cents along the way. That in a nutshell is the time value of money.
Alternately, if Sanjeev was versed in tomato-soup-o-nomics and anticipated the traffic jam, he could have invested $0.96 in a zero coupon bond before his trip and bought the soup at home on arrival for $1, the bond's future value.
Bharti Airtel, India's telecom behemoth, is headquartered around the corner from the Gurgaong toll gate navigated by Sanjeev's auto. It is a stellar example of a company reinventing the telecoms industry by innovating in its business model through applications of the time value of money on a strategic level.
Bharti received much press coverage in SA during the ill-fated wooing process with MTN Group [JSE:MTN]. I enquired into the nature of this fallout with a member of the senior management team and was informed that it was just not meant to be and as it so happened, the acquisition of Zain turned out to be a better opportunity.
Upon entering the headquarters of Bharti you would be forgiven for mistaking your location for Palo Alto, with a child daycare centre, mini market and Costa Coffee branch inside an ultra modern glass atrium.
Bharti pioneered the strategy of outsourcing capital intensive infrastructure, a historic irony given India's proclivity for being the traditional outsourcee.
This strategy has enabled Bharti to deploy resources towards higher yielding functions and maintain lower overheads in a fiercely competitive race to the bottom in India's telecom sector.
Upon analysis, this strategy is simply an application of the time value of money.
Bharti took the traditional build-your-own infrastructure business mode, which is the status quo in the industry, and turned it upside down.
By redefining the traditional discounted cash flow model used in the industry, Bharti has left the low yielding hardware component of the business to the manufacturers of this equipment while it focuses on its profit drivers.
The distilled strategy is clear: in telecoms, infrastructure is expensive and has a long finance time horizon.
It doesn’t drive profits, so its strategic value is low and utilitarian - outsource this burden and free up current cash flows to allocate towards strategically high value generating items such as market penetration, customer attraction and retention.
A dollar today is worth more than a dollar tomorrow, so if you are in a high growth cut-throat industry like Bharti Airtel, lean and streamlined isn't merely good advice for maximising shareholder value - it's a survival mechanism for operating in a flat world.
- Fin24
Fin24 user Jarred Myers doubles up as a guest columnist in this series.
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