The Nutgraf : Two and two together

The Nutgraf is a 10-min newsletter sent at 10 AM IST every Saturday. It connects the dots and synthesizes one big event in business, technology and finance that happened over the week in India. In a way you’ll never forget.

This is a free edition of a paid newsletter that’s available exclusively to The Ken’s premium subscribers.

Just 10 mins long Free. Totally. Maybe not forever. Many memes also

Like an Indian startup’s plans for an IPO listing, I kept extending my deadline for writing this edition of The Nutgraf. My laziness was fortuitous, because some fun events happened late in the week.

Forget the falling GDP, forget the Telecom sector, forget SoftBank. Because ladies and gentlemen, we got ourselves a duopoly early this week.

And fittingly, later in the week, we got another.

Two sectors. Two duopolies.

Let’s dive in.


Acquisition fares are slightly higher due to increased demand

It’s not been a good year for Uber. For three simple reasons: 

  • For several years, Uber was seen as a crown jewel. At its highest point, private valuations pegged the company at $70 billion. Everybody wanted Uber. SoftBank famously got in late and didn’t care. Venture investor Chris Sacca brags about his investment in Uber every ten minutes on the TV show Shark Tank. 
  • Then in May, Uber finally went for an IPO. On the first day, the stock price fell by as much as 8.8%
  • It hasn’t stopped falling since. 

One can reasonably ask—why is Uber’s stock falling? Drivers are unhappy because they aren’t making money. Riders are pissed because cabs are either unavailable or on surge pricing all the time. The only person who should be making money in all this should be Uber. 

Well, no.

In 2018, over the entire year, Uber lost close to $1.8 billion. This year, in the three quarters since Uber listed itself, here’s what happened.

In the first quarter, it lost close to a billion dollars.

In the second quarter, Uber lost 5.2 billion dollars.

In the third quarter, Uber lost 1.3 billion dollars.

For perspective, Uber raised close to $8 billion when it listed. In three quarters, most of it is used up. it’s down nearly $7.5 billion.

In short, Uber isn’t burning money. Money takes time to burn. Uber is neatly arranging all its money in a pile, dropping a nuclear bomb on it from a great height, and dispersing the ashes in the Ganges.

However, Uber claims that things aren’t that bad. Recently, they started breaking down their revenue by business lines. Here’s what it looks like.

Ebitda profitability, or earnings before income, tax, depreciation and amortisation, is one indicator of profitability. And by that indicator, Uber’s ride-sharing business is actually profitable.

However, UberEats, the company’s food-ordering business, and its fastest growing business, is where the problem exists. In fact, UberEats is actually dragging Uber’s profitability down. For now.

But what’s the biggest reason for this?

I am glad you asked. Lots of analysts wanted to know, too. So let’s jump into Uber’s earnings calls over the last three quarters. 

Q1 Earnings Call. May 2019. Cautious Optimism.

This was an interesting call because, for the first time, Uber revealed what exactly was contributing to UberEats losses. From Uber CFO Nelson Chai’s prepared remarks:

Our Adjusted Net Revenue as a percentage of gross bookings declined 400 basis points year-over-year to 18% primarily due to Eats, which has a lower take rate than Ridesharing growing as a percentage of the core mix, in particular in India where increased incentives to consumers, drivers and restaurants drove nearly half of the year-over-year decline in Uber Eats take rate to 8% from 12% a year ago.

However, later in the call, Uber had fighting words.

India is an investment market for us, right? And so there’s 2 things going on there. It’s going quite — it’s growing very, very quickly. There are 2 competitors that are very aggressive on — including ourselves. We are doing well and holding our own, but it is a net market in that we are funding both the eater, the courier as well as the restaurant in terms of building the business.

Brave.

Q2 Earnings Call. July 2019. Guarded Optimism.

Don’t forget, this is the quarter when Uber nuked over five billion dollars. Lots of worried analysts asked lots of questions in the call.

I did a word search for India in the transcript. It came up eleven times. More than any other country.

This time, analysts were asking, ‘Okay we understand UberEats isn’t profitable, but what’s India’s contribution? What happens if you remove India?’

Here’s what Uber said.

Obviously, we’ll continue to watch India. So if you think about the fact that our take rate was 10.2%, ex India, it probably would have been another 100 basis points or so.

And later in the call, Dara Khosrowshahi, the CEO of Uber, in response to a specific question about UberEats’s strategy in India, said.

Right now the market is very, very competitive. There are a few very strong competitors there. Generally, I would tell you that we want to be the #1 or #2 in every single market. Right now in India, we’re the #3. And so the team knows there’s a big lift ahead of them, but we’re on the game.

And I think India, what’s great about India is we have a local team there. We’ve got a great engineering team there. We’re kind of a local company in India. We’ve proven our ability to win in rides, and my expectation is the same on the Eats side.

Local team?

Okay. I guess.

Q3 Earnings Call. November 2019. Guarded comments.

In this call, Ross Sandler, a Barclays analyst, asked the question that was on everyone’s mind.

“…what does that [breakeven] barbell look like, if you take like Australia on one hand and India on the other hand, how wider the goal post in each business in terms of profitability?”

He’s basically asking how far away is UberEats from profitability in multiple countries. Specifically India. And what Uber was planning to do to get there.

Nelson Chai had a surprising answer:

As you know, the Eats take rates in the top five cities. In Q2 it was kind of  8% to 16%, and you see us continuing to make improvement there at least in Q3. And so there’s no magic to it. It is a little bit based on the competitive situation and then we are taking the right actions as Dara said. And then, we’re very committed to really being one or two in all the markets and you’re going to see us take action accordingly to get there or not. And so I think what we did in South Korea is also indicative.

Dara Khosrowshahi made some additional points around the importance of competition, margins and breakeven for UberEats.

Nothing about the strength of UberEats India’s local team was mentioned.

You might be thinking, what’s South Korea got to do with all this?

Here’s a Reuters report from September 2019.

Uber Technologies Inc’s restaurant delivery business will terminate its service in South Korea, Uber Eats said on Monday.

“After two years’ partnering with local restaurants to offer convenient, reliable food delivery, we have made the difficult decision to discontinue Uber Eats in South Korea at the end of October 14, 2019,” Uber Eats Korea said in a statement, without elaborating on the reasons for the withdrawal.

Basically Uber was saying that if it doesn’t look like we’ll be the first or second in a market for UberEats, we’ll pack up our bags and go home.

Three earning calls. With one message : We’ll try to make UberEats work. If it doesn’t, we’ll be willing to leave markets where food delivery competition had gotten unsustainable. Right now, our worst market is India.

There’s a famous saying in journalism: One is a rumour. Two is a coincidence. Three is orchestration.

Okay, I made that last part up. There’s no such saying. 

But my point is, all signs point to only one outcome for UberEats in India.

Three suitors in India

  • Back in February, the Times of India reported that UberEats was in talks with Swiggy for an acquisition. Zomato was also said to be involved, but Swiggy appeared to have the upper hand.
  • Two months later, The Economic Times reported that talks had fallen through because the companies “could not agree on the financial terms and taxation clauses of the proposed deal.”
  • Then in July, Business Standard reported that UberEats was in talks with Amazon. Yes, Amazon. Which also plans to launch a food-delivery service in India.
  • Then last week, the Times of India reported that UberEats was now in late-stage talks with Zomato.

Like a famous man said, one is a rumour, two is a coincidence, but three is orchestration.

Anything may happen, but if this deal materialises, the food delivery market will become a duopoly. Swiggy and Zomato.

But we aren’t quite done with Uber.

Because more news broke on Friday.

Comedians in two cars ordering coffee on their apps

The government of India is working on a proposal to regulate Uber and Ola in India. On Friday, the major elements in that draft proposal got leaked. Here’s what it contains.

  • A maximum cap on commissions, or take-rate, by Uber and Ola to 10%. You take a cab. It costs Rs 300. Uber and Ola get Rs 30. Max. 
  • Above this, state regulators can impose additional charges on Uber and Ola if they please. 
  • Surge pricing is proposed to be capped to a maximum of twice the base fare. Oh, also, a maximum of 10% of daily rides undertaken by a driver can be subject to surge pricing.
  • Both riders and drivers can be penalised for cancelling rides. The penalty is in the range 10-50% of the total fare not exceeding Rs 100.
  • Uber and Ola will also be obligated to verify a driver either through facial recognition or biometrics every three hours to ensure that the identity of the driver matches with the registered person.

Look, this is just a draft, and there’s some way to go before regulations kick in, but we can argue about this in two ways.

One way to look at it is that this is a good thing. Drivers will get a bigger share of a ride. This will give them greater bargaining power and incentivise more of them to join Uber and Ola. Which will fix their supply problem. This will fuel more demand, and rides will go up. So everyone wins. Including the sub-contractor picked to manufacture an elaborate facial recognition system in all cabs.

The other way to argue about this is that the government shouldn’t be in the business of fixing prices. Price-fixing inherently lowers the efficiency of the market for all players, and everybody ultimately loses. Leave it to Uber and Ola, and if they want to, they’ll solve this problem in a way that it works for everybody.

You can argue either point. Just fire up WhatsApp and launch into a discussion, either with your friendly economist, or your uncle. One of these two points of view will emerge.

But there’s one point that’s inescapable.

Regulations always favour the incumbents. And if these regulations come through, there will almost certainly never be a third ride-sharing app in India. Under these terms, nobody in their right mind will enter the ride-sharing business.

So inadvertently, a second duopoly was created last week. This time, Uber and Ola.

More regulatory news, this time from Shreedhar.


Tata Steel bearing bad luck 

2007 was a great year for Tata Steel. In spite of the impending global recession, to quote from their business results announcement, “the Company achieved the best ever sales turnover and profitability during the year under review.”

That same year, Tata Steel entered the European market after acquiring a British steel company.

Tata Steel Europe (TSE), as the new company was called, has made operational losses in 9 of the 12 financial years since. Cumulatively, the company has lost Rs 48,000 crore in the last 10 years. Steel production is half that of 2007. So are the number of employees. Last week, TSE announced that it was going to cut jobs further—almost 3,000 across Europe. What awaits are gruelling negotiations with strong European labour unions.

But bad luck comes in threes. So, of course, this isn’t all for Tata Steel.

Before it could finish announcing the job cuts in Europe, Reuters accessed a report from the Competition Commission of India (CCI). The antitrust body found Tata Steel guilty of colluding with four other companies to artificially inflate prices for bearings during the period from 2009 through 2011, at the very least.

Once the CCI is done pondering over its investigation, Tata Steel can expect to be hit with a significant fine.

Two down. One to go.

The economic slowdown was bound to affect Tata Steel. Fewer automobiles are being made, fewer electronics are being bought, and less infrastructure is being built. Both consumption and production of steel have consequently fallen, and so have steel prices.

Like we said, threes.

But it’s still sales season in India, and Tata snagged a buy 3, get one free deal.

This month, India’s Supreme Court resolved a dispute over how bankrupt Essar Steel’s creditors would need to be reimbursed. This judgement paved the way for ArcelorMittal, the world’s largest steel producer, to finally acquire Essar and enter the Indian market.

Tata Steel is “confident” of competing with ArcelorMittal in India, just like it always has in Europe. But that hasn’t been going too well, has it?


SBI’s monster credit limit

Forget minimum balance.

The credit card unit of SBI (State Bank of India), India’s largest bank, is preparing for a $1.3 billion IPO. It will be the fifth largest IPO of all-time in India.

This is insane in itself. But it gets more insane if you consider who wins as a result of the IPO.

74% of SBI Cards is owned by SBI, while Carlyle Group owns the remaining 26%, a stake which it bought in 2017 from General Electric for about Rs 2,000 crore ($300 million).

Once SBI Cards lists itself, Carlyle Group will make seven times its money. In less than two years. It’s not even selling its entire stake.

Who needs SoftBank when you have private equity? And credit card interest rates?


What We Are Reading

Imagine a book that explains Economics in the simplest terms possible. Like you’d to a layman. You don’t need to know economics to read it. You don’t even need to know mathematics.

That’s what Naked Economics is all about.

Here are some questions it asks and answers:

Why are some countries poor?

Why doesn’t Brad Pitt sell auto insurance?

I could go on. But pick it up, read it, and by the end, you’ll have a better understanding of concepts like supply-demand curves, trade wars and much more.


Oh, one last thing. A couple of weeks back, in The Nutgraf titled ‘Five point palm exploding heart technique’, in the context of the government receiving lower revenue due to falling tax collections, I wrote that the I-T department was responsible for GST collections. This is of course, incorrect, as a reader pointed out. My apologies for this.

That’s about it from me this week.

Take care. I’ll see you soon.

Oh, by the way, in case you don’t know, The Ken is hiring. Reporters. Editors. Developers. Marketing Folks. So head over to our careers page and recommend someone you know. Help make us better.