SWVL: The Numbers For Pakistani Operations Help Comprehend The Mobility Startup’s Exit From The Country

SWVL: The Numbers For Pakistani Operations Help Comprehend The Mobility Startup’s Exit From The Country
The year 2022 has been disappointing, as far as Pakistan’s startup ecosystem is concerned. Some big names have closed shop during the year, and self-acclaimed ‘unicorns’ have wound up in a matter of days.

The recent casualty in the series of unfortunate startups is SWVL. After a three-year run, the mass transit startup bid farewell to the Pakistani market in November after pausing its intra-city rides earlier this year.

The company operated three verticals, namely, Intercity rides, Intra-city rides and Corporate solutions. The Pakistani operations were part of the SWVL Inc. group that operates multimodal transportation networks in Egypt, Kenya, United Arab Emirates, Saudi Arabia, Jordan, Malaysia, Spain, Argentina, Chile, Germany, and Turkey.

Yet, the question arises what drove the Nasdaq-listed company out of Pakistan which was one of its largest markets in terms of revenue? The answer, probably, lies in the historical performance of the company in the South Asian nation.

The number games

To get some perspective, let’s take a look at SWVL’s performance globally. The company reported a loss of $161 million for the first half of this year, almost double the amount from the same period last year.

Further, its revenue stood at $38.3 million in 2021 and $17.3 million in 2020 while the losses amassed were $141.8 million and $30 million respectively.

The Pakistani subsidiary showed a similar trend. As per its audited financial statements for 2021, the company incurred a loss for the year amounting to Rs1.63 billion in 2021 and Rs873 million in 2020. The accumulated losses at December 31, 2021 amounted to around Rs3 billion which resulted in negative equity of Rs2.3 billion.

Further, for the global company, gross loss as a percentage of revenue showed significant improvement in 2021 at 28 percent against 53 percent in 2020.

The Pakistani operations also followed a similar trajectory with gross loss margins of 41 percent in 2021 against 178 percent in 2020.

While churning out huge losses is nothing new for startups, the path to profitability is pretty much defined by the unit economics of the business. That’s the reason why turning around the gross losses would have been a top priority for SWVL.

The business model for the company is simple, it rents buses with drivers to operate on fixed routes. Therefore, this is the major component of direct cost. As per the 2021 audited financials of Pakistan operations, 76 percent of the direct cost was bus rentals and associated charges.

But, the problem with this approach was that it restricted the company’s ability to achieve positive unit economics both at the global level as well in the local market.

The ride-sharing giant gradually shifted to corporate clientele and reduced its focus on business-to-consumer (B2C) business. Almost 50 percent of the company’s revenue came from the corporate segment in 2021 while as per its CFO, Youssef Salem, the figure had grown to 70 percent by August 2022.

The reason for a shift to corporate customers is straightforward, the segment offers longer-term contracts thus, aids in financial planning and ensure better utilization rates (vehicle occupancy). Hence, translating into cost savings.

Yet, the revenue mix for Pakistan was quite different. Only around 14.5 percent of the topline in 2021 comprised of corporate clientele while travel booking (City to City) had the lion’s share at 75 percent of gross revenue.

The losses, however, were not something unexpected. Ride-sharing and Ride-hailing businesses are known for their bad unit economics. The high customer acquisition costs alongside driver cuts, bonuses, etc. makes it extremely difficult for a ride to be profitable. Even giants like Uber, Careem and Lyft are suffering on this front.

The added challenge in countries like Pakistan is the relatively weak purchasing power of the population which incentivises the customer to shift to an alternate at the slightest of rate hikes. While commenting on the issue in a recent investors call, SWVL’s global CFO said, “We continue to expand in countries with high purchasing power in line with the objective to turn cashflow positive by 2023.”

Though the aforementioned factors explain SWVL’s exit from Pakistan. What still needs some clarification is the reason for the urgency behind the move. After all, the parent was willing to finance the subsidiary.

According to the audited financials of the Pakistan operations, “Interest-free loan was obtained from SWVL Incorporation (the parent company) under the credit facility agreement amounting to USD 50 million, out of which an aggregate USD7.210 million (2020: USD8.588 million) equivalent to an aggregate Rs2,587.291 million (2020: Rs1,351.891 million) has been utilized. This loan is unsecured and repayable at any time after a period of three years from the date of drawdown.”

The answer to this, perhaps, are the series of events that unfolded after SWVL’s IPO on Nasdaq.

The IPO debacle

In March 2022, SWVL went for an IPO on the Nasdaq through a SPAC (explained later) with a valuation of $1.5 billion. The initial offer price for its share was $9.95. However, soon, the share price and valuation went into a free fall with the company’s share value eroding by almost 99 percent within 6-7 months.

Further, adding to the woes of the Egyptian giant were the Nasdaq regulations. In an official communication by the bourse on November 4, SWVL was warned of de-listing as its share traded below the $1 threshold for over 30 consecutive days. As per experts, the company is likely to opt for a reverse stock split to boost the share price in the short run and mitigate the risk of de-listing.

What transpired might have been writing on the wall from the beginning as in hindsight it seems clear that SWVL’s IPO (that too via SPAC) was not that great an idea.

As per Bloomberg, “When a SPAC finds a private business to buy and then merges with it, what it's really doing is helping that company go public without some of the oversight and cost of a conventional initial public offering.”

“Tumbling stock prices — especially those of more speculative, early-stage companies — have wiped out billions of dollars in value for shareholders who held SPACs after their acquisition deals. Some companies that went public via a merger with a SPAC have fallen so far that they've been bought by private companies or competitors at far lower prices,” the article further added.

Therefore, it can explain why SWVL is so desperate to turn cashflow positive and closed operations in Pakistan to minimize the cash burn.

However, this might not be the end of the road for the ride-sharing giant in Pakistan and a comeback is still possible.

"If any market will not be profitable by 2023, we need to shut it down now and re-launch it in 2023 rather than use additional capital from the market," SWVL’s, Youssef Salem told Reuters.

The writer is a Business and Economy Journalist for TFT and also works as a Financial Analyst. He can be reached at ahtasamahmad@yahoo.com.