Uber and Ola, battered by the virus, stare at uncertain future

India’s top ride-hailing apps - Uber and Ola - fought a bruising market share war for years to capture a large market that could decide the future for them and their investors. Billions of dollars later, in a post-COVID-19 world, that large market itself may be questionable.

India was a fertile market for homegrown Ola and its American rival, Uber, given the broken public transport systems, rising disposable income, and drivers willing to plug into the sharing economy. However, the consumer behavior that has changed virtually overnight due to the coronavirus, poses a challenge to the business models and growth plans of these firms.

The common use cases of Ola and Uber include going to and from work, shopping, movies, and eating out. Experts expect all these activities to fall off a cliff until there is a vaccine to cure the virus.

"For the next three years, until we have herd immunity or a vaccine, we are going to see significantly less consumerism than before as consumers will value savings even more, socially distance from others, avoid visiting large public places like shopping malls, department stores and sit down restaurants, and skip public events, especially indoors that are subject to recirculated air,” said Anindya Ghose who teaches business at the New York University Stern School of Business.

Some companies, such as Facebook and Twitter, have permanently let many sections of employees work at home. Many other companies, however, are actively considering similar moves as working from home has become the new normal. This dents the potential numbers for ride-hailing apps.

Until March, both Ola and Uber were doing upwards of 14 million rides a week each in India. Ola told online news portal Entrackr it had 28 million bookings a week in March.

While the core proposition of Uber and Ola is still valid and may find takers, the scale of the business - based on which Ola has raised over $3 billion dollars in venture capital - is uncertain.

The core business, irrespective of valuation, may find takers because of the needs of consumers. The millennial working population and urban consumers - whom Ola caters to - do not have a better option, said an investor in the ride-hailing space, requesting anonymity. For safety and comfort, after the pandemic, a cab may still be better than public transport, only rivalled by purchasing your own vehicle.

“The final value of this business is very uncertain today, but they (Ola and Uber) have done enough to make sure they will be around and relevant, even if in a smaller way,” the person added.

Ola was valued at $6 billion when South Korea’s Mirae Asset invested $35 million in 2019, according to a person directly aware of the matter. This valuation factored in years of revenue growth and eventual profitability in India, and growth in other markets such as the UK and Australia, where Ola has launched. The valuation concerns apply more to Ola since Uber has already faced these issues as it went for an IPO last year, following which its shares tanked.

For FY19, Ola’s operating revenue rose 37% to Rs 2543 crore, while its losses fell 9% to Rs 2593 crore, according to regulatory filings. It has not filed its FY20 numbers yet.

Three people close to Ola said that it may have to see its valuation reduce significantly if it has to raise a large round of funding again as a private company. Till then, at least on paper, it still commands a valuation of $6-7 billion.

Ola did not respond to detailed queries from Moneycontrol while Uber declined to comment.

Ola also laid off 1,400 employees, or 25 percent of its workforce in May because the COVID-19 pandemic pulled revenues down by 95 percent as companies scrambled to survive. Uber laid off 6,700 people, or 25 percent of its workforce globally, including 600 people in India.

“A decrease in consumerism, a reduction in travel and an increase in work from home will lead to a decreased demand for ride-hailing. I don't see Uber or Ola getting back to their pre-COVID-19 numbers anytime soon, at least for the next year or two. Their valuations will have to see a recheck,” said Ghose.

Valuation rechecks are also part of a larger trend expected in the startup ecosystem, generally seen during a downturn and after years when startups burnt money in the pursuit of growth.

“For most startups, especially the unicorns, prices do not represent what the companies are worth. Pricing- which is what investors do, and valuation, are two different things,” said Santosh N, the managing director in the valuation practice of Duff and Phelps - an advisory firm.

“So the billion dollar valuations or rather price, represent what investors are willing to pay, and may not be the actual worth of the company,” he added.