India’s young e-commerce firms head for reality check

  • Nachiket Kelkar, Manu Toms and M Rajendran, Hindustan Times, Mumbai/Bangalore/New Delhi
  • Updated: Mar 09, 2015 18:27 IST

India's largest e-commerce company, Flipkart, is counted among the world's top five "billion-dollar"startups in the world. Its valuation, estimated at by industry trackers like Dow Jones, is around $11 billion - nearly Rs 70,000 crore — ahead of corporate giants like giants like BHEL, Sesa Sterlite and Dr Reddy's Labs.

For instance, BHEL, which earned a profit of almost Rs 3,500 crore last year, is valued at Rs 65,000 crore.

Bangalore-based Flipkart, counted alongside Airbnb, Dropbox and Snapchat in a league of world-leading startups, was founded by IITians Sachin and Binny Bansal only in 2007, and is pitted against Amazon and homegrown offline retailers such as Big Bazaar and Reliance Retail.

Its rival Snapdeal is valued at $5 billion.

These companies offer deep discounts and freebies aimed at building market share, and their valuations are a multiple of sales numbers- none of them is profitable yet.

But there is optimism in the air as hundreds of millions of Indians come online in a mobile Internet universe in which clicking on an app is like visiting a store. But those who have seen the Internet "dotcom" bubble circa 2000 are wondering if the valuations are justified.

Nitin Agarwal, director of Equirus Capital, says such valuations are driven by sales growth that promises future profits - and a lot of the current binge has to do with venture capitalists (VCs) rushing in not to miss the bus. More than 70% of IPOs in the past two years have seen valuations dip from VC levels.

"The valuations may not be sustainable as can be seen from the IPOs (initial public offerings) in the US," he said.

Flipkart alone has raised close to $2.5 billion so far and Snapdeal $1billion. India's e-commerce market is set to double to around $25 billion this year over last year and reach $90 billion by 2021, according to industry tracker eTailing India. In 2014 alone, investors committed $5 billion (Rs 30,000 crore) to fund Indian e-commerce companies.

"Given the market size for this sector is growing rapidly, a slowdown is not expected any time soon," said Sandeep Komaravelly, senior vice-president at Snapdeal.

"With valuations of e-commerce companies skyrocketing, there is increasing pressure from investor firms to cut down on discounts and concentrate on profits," a PricewaterhouseCoopers report said recently.

Being "online marketplaces" that offer platforms to other sellers than being direct sellers, these e-commerce firms rely on gross merchandise value (GMV) and listing fees as a proxy for sales. That needs a reality check.

Some reports say Snapdeal is aiming to surpass rival Flipkart's GMV by the year-end. Flipkart's annual GMV is estimated to double to $8 billion by December. Flipkart's GMV grew five-fold in volume in 2014 over the previous year and Snapdeal talked of a six-fold surge - but neither is willing to disclose details. Flipkart's CEO was not available for comment.

Flipkart's revenues in 2013-14 stood at Rs 2,846 crore - less than one-tenth of its current estimated valuation, while its loss stood at Rs 315 crore. Snapdeal's revenues were at Rs 154 crore, losses were even higher at Rs 260 crore.

"It will be two-three years before e-commerce firms which have been focusing on growth for the past 6-7 years to become profitable," said Prashanth Prakash, partner at venture finance firm Accel Partners.

Kishore Biyani, the promoter of Future Group, which runs the supermarket chain Big Bazaar, said last year that the e-commerce euphoria won't last beyond 18 months.

However, industry consolidation may help the big boys. Flipkart acquired in 2012 in a deal estimated at $25 million. Last year, it took over fashion portal in a deal valued at Rs 1,800-2,000 crore. Some weeks ago, acquired premium fashion retailer for an disclosed sum.

"Our goal is to bring on board like-minded, passionate entrepreneurs into our family, who can work in partnership with us," said Kunal Bahl, Snapdeal's CEO.

Others like Amazon, say the field is open. Amazon is planning to invest $ 2 billion to strengthen India operations. "Growth is at an inflection point and there is tremendous opportunity. There is room for multiple formats and players. It's not a zero-sum game," said Amit Agarwal, Amazon's country manager for India.

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