Surging losses make a good case for Ola-Uber merger2 min read . Updated: 15 Jun 2018, 12:07 PM IST
Be that as it may, it looks like the low-value Indian market does not have room for two large cab-hailing firms in Ola and Uber
Ola, India’s largest cab-hailing service, reported a sizeable jump in losses in fiscal year 2017 (FY17). While net revenue rose by ₹ 677 crore over FY16 revenue to ₹ 1,178 crore, operating loss widened by ₹ 911 crore to ₹ 3,731 crore. Losses, which exclude net interest income, tax and notional losses on derivatives contracts, were well over three times revenue.
In fact, as a proportion of revenues, Ola’s losses are far higher than other global cab-hailing service providers. In 2017, Uber’s operating loss was roughly half its net revenue, according to a report by The Information. Lyft, Uber’s main competitor in North America, is estimated to have ended the year with losses of around 60% of revenue.
Evidently, the low-ticket size in India, or low average fares in this case, is resulting in poor economies of scale. Investors may have been impressed with a sharp growth in app installations and the number of rides taken, but the fact remains that revenue is nowhere near levels needed to cover expenses. Besides, cost of operations is high, given the vagaries of keeping a large fleet of cars up and running.
Worse still, FY17 was supposed to be a time Indian e-commerce firms tightened their belts because of a funding crunch and a push from existing investors to cut losses. Even free-spending Flipkart curtailed operating losses by about ₹ 200 crore in FY17, although losses remained high at over ₹ 5,000 crore.
Ola doesn’t seem to have had any of those compulsions, as the sharp rise in its cash burn shows. Its cash burn rose 52% to ₹ 4,011 crore, which means the company burnt ₹ 3.40 in cash for every rupee it earned. Ola’s financials are based on ANI Technologies Pvt. Ltd’s filings with the ministry of corporate affairs, sourced from paper.vc.
In this backdrop of high losses and cash burn, it isn’t surprising that SoftBank Group, a common investor in Ola and Uber, has reportedly suggested a merger of the two companies.
Uber seemed to deny this in a recent interview with NDTV. The company reiterated its commitment to the Indian market, saying the sale of its operations in Indonesia was to help it focus on other markets such as India.
Be that as it may, it looks like the low-value Indian market does not have room for two large cab-hailing firms. All else remaining the same, Ola’s revenue needs to rise by well over four times from current levels to achieve break-even at the operating level. And much of this would need to come from an increase in fares; if, instead, the company relies on promotions to drive sales growth, losses will continue to expand.
There is no question of raising fares meaningfully or reducing driver bonuses when both companies are breathing down each other’s necks. For all we know, this may not even be viable with an Ola-Uber combine. It’s likely that if fares are raised, volumes will fall because of affordability issues; and if driver payouts are reduced, supply of vehicles may get affected, which can again affect volume.
Even so, the proposed merger is the best bet for both companies, provided, of course, the Competition Commission of India approves this pooling plan.