Why Value Value?

This was the title to Professor Sanjay Bakshi's first class in SABV at MDI Gurgaon, batch of 2000-02. The presentation had the case of EG Corporation and areas in which we could unlock value. (pls email me for the ppt)

Likewise, I had an interesting conversation with Saurabh yesterday on "value". We've, in the last many discussion on blogs, have explored value primarily from an EPS (visible) or investments (hidden) perspective. However in today's complex investing field some new areas of value have come forth. Database is one of them.

In other words, your customer records can be one of the primary value creators for companies. A number of Indian companies are exploiting their large business presence by selling a multitude of products e.g. ICICI Bank, Tata (with Trent, Tata Teleservices), Reliance (Retail, Telecom). Infact Reliance Energy's acquisition of BSES if looked just from a database viewpoint adds 25 million customers in Mumbai, Delhi, Goa and Orissa. 25 million customers - who can now be cross-sold mobile phones, credit cards, insurance, mutual funds, home loans, auto loans etc. etc.

Two thoughts came across -
a) What is the probability of a company utilising this database?
b) What is the monetary value that can be attached to this database?

a) As more companies join alliances (read: co-exist), the need for leveraging each others resources will increase. Database will be an obvious choice. And hence, cross-sell. For service companies, this "probability" will be much higher as compared to single product-institutional buyer companies. Professional managers will soon exploit this opportunity.

b) Adding a monetary value may be a bit difficult. Lets try a different tact here. The number of financial products a customer has in India averages 9 (this includes your LIC, savings a/c, credit card, car finance, home loan, NSC certificates, mutual fund, demat, PF, PPF, EPF etc.). Total middle class household in India is estimated at 180m. At an average annual income of 4000 USD (or Rs. 2 lacs) and a savings rate of 26% and an investible %age of savings at 35%, we can conculde that 1 HH in India spends just Rs. 18,200 per month on investments. While commission rate can be from 0% to 30% .. we would assume a middleman rate of 4% for ease. So, 1 Indian HH can earn Rs. 728 per month for a middleman. So the entire opportunity set for BSES (25m customers) is 11.55 billion rupees or rupees 1155 crores of income (not sales). Simple telemarketing gives a response rate of 2.5%, and assuming a 500 seater setup - the annual profits from this simple cross-sell activity should give an additional income of Rs. 32 crores for the year.

Sounds rather complicated, but an additional 32 crores based on an inexact science (with enough upside) is food for thought.

Other "value" areas will be patents, brand name and now, CEOs (imagine the distortions in stock price of a Virgin Atlantic with a Richard Branson and one without him)