BackInfibeam’s uncharacteristic boldness may unnerve IPO investors
Infibeam is the oddball of the e-commerce industry: its revenue growth is glacial, as compared to Flipkart, but it has managed to post profit. But with the IPO, it has thrown caution to the wind
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Infibeam Inc. Ltd is an oddball in the e-commerce industry. Its revenue growth is glacial compared with larger competitors such as Flipkart although, unlike them, it turned in a marginal profit in the first six months of this financial year.
And far from being a spendthrift, it has been cautious both with fund-raising and expenditure. In the past three financial years, it has raised less than ₹ 200 crore through various preferential issues, and its total balance sheet size stands at ₹ 225 crore. In fact, there’s much to like about its business model, although more on that later.
With its IPO (initial public offering), however, Infibeam appears to have thrown caution to the wind.
It plans to raise ₹ 450 crore through the issue, to add to the ₹ 70 crore worth cash it already has on its books. Note that Infibeam has cumulatively spent only ₹ 88.5 crore in the preceding five years as capital expenditure. The company’s version is it is now well-placed for the next stage of growth, for which it needs to invest in a cloud data centre, new software and a new office. Additionally, it plans to set up 75 logistics centres, in addition to the 12 it currently has. This giant leap vis-a-vis past trends may unnerve investors.
Another factor that could put off investors is news that Kotak Mahindra Capital Co. Ltd and ICICI Securities Ltd have reconsidered their decision to market the issue as lead managers. Investment banking sources say this was because of differences with the company on both the pricing and timing of the issue, although Infibeam has denied this.
To be sure, valuations of Internet companies have corrected lately. In the listed space, Alibaba Group Holding Ltd has declined by 15% since mid-December 2015. Flipkart’s valuation has also been marked down by 27% by one of its investors.
Infibeam, which had valued itself at ₹ 425 per share for each of its preferential allotments, has sought an IPO valuation of between ₹ 360 and ₹ 432. While it’s true that the lower end of the price band represents a 15% discount to its earlier valuations, the recent choppiness in the market will add to the challenges in marketing the issue.
Valuations are far from cheap at 4.4 times estimated FY16 revenues (pre-money valuation at the midpoint of the price range). Besides, the IPO pricing suggests that returns have been poor for all existing non-promoter and non-employee shareholders—all of them bought Infibeam shares at ₹ 425, with some buying as early as June 2012.
Its business model, meanwhile, is far removed from the ‘winner-takes-it-all’ mentality that drives business decisions of nearly all other e-commerce companies in the country. In fact, the reason it has managed to turn in a profit already is its strategy of providing e-commerce services to other companies rather than merely acting as a one-stop destination on its own website.
Some of its customers such as Panasonic India Pvt. Ltd, Hidesign India Pvt. Ltd and Crossword Bookstores Ltd use Infibeam’s online storefront solution called BuildaBazaar for their own e-commerce platforms. While some of them offer a per transaction commission to Infibeam, some others pay fixed retainer fees. Additional services such as mobile applications and promotions result in greater monetization of these relationships. This business reported earnings before interest and tax margin of 58% in the first six months of the current fiscal and 60% in FY15.
Infibeam’s own e-tail website, expectedly, runs losses; although the redeeming factor is that even here, the company had a gross margin of 1% in the first six months of the year. This business is growing at a relatively slow pace, while the profit-making services business has grown in triple-digits.
Lately, the company has managed to bag two international customers for its online storefront solutions. The company seems well-placed, therefore, for steady growth in revenue and profit, as it has in the past four years.
The large fund-raise, however, will lead to a jump of three times in its balance sheet size. This will raise concerns about whether Infibeam will remain the tight operation it has been thus far.
mobis.p@livemint.com
The writer does not have positions in the companies discussed here.
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