Time e-commerce firms revisited business models: Experts

Earlier this week, India’s poster boy of start-ups Flipkart saw two of its shareholders — Valic Co 1 and Fidelity Rutland Square Trust II — marking down its valuations by 29.4 per cent and 39.6 per cnet, respectively. At the calculations of Valic Co 1 and Fidelity Rutland Square Trust II, Flipkart is valued at $10 billion and $9 billion, respectively.

These valuations are compared with the $15 billion worth Flipkart was seen at when it raised $700 million in July last year.

This is not the first time Flipkart’s shareholders have cut its value on their books. Investors Morgan Stanley and T Rowe Price had, earlier this year, also reduced their valuations of the company.

After Morgan Stanley and T Rowe Price reduced their valuations, Flipkart co-founder Sachin Bansal had called it a “theoretical exercise” that was not based “on any real transaction in the space”.

“It is a theoretical exercise, which is not based on any real transaction in the space. We do not think valuations change because some small shareholders have changed their opinion. We do not worry too much about this. If we do not need to raise funds, it is not important what others think. In the long term, things will take care of themselves. Good times do not last forever and bad times don’t either. Things will keep changing and the learning we should take from this is when the good times come again — and they will — we should not fool ourselves thinking that it will remain constant and remember a downturn would come again,” Bansal had said at a recent event.

When contacted seeking a response on the latest development, Flipkart reiterated Bansal’s comment.

However, following two more similar actions by another set of shareholders, should the company see any reason for worry?

Experts suggest that in the longer term, Flipkart needs to revisit its business model and start making money for the investor.

“Indian e-commerce business has seen so much of flux and the transition is not in sight, so that’s where some argument of investors should be taken seriously. Promoters also need to realise that it’s some time now and the fact that you’re a leader, you need to start making the transition to the model where you’re making money,” said Ankur Bisen, senior vice-president with consultancy firm Technopak.

“But you can’t even take a very short term view, and start asking for immediate corrections from promoters, because then it becomes very harsh on the promoter’s story,” Bisen added.

An analyst with a leading consultancy and auditing firm, on condition of anonymity, said that in the shorter term Flipkart should remain unfazed with investors marking down valuations as it does not need to go out and raise money.

“For any company, a lower valuation is a problem when it needs to raise funds from the markets, and for now, Flipkart seems to have enough. It does not need fundraising right now, and therefore the reduction in valuations by shareholders should not come across as a problem that needs to be addressed immediately,” the analyst said.

Although, the analyst added that these exercises do indeed throw in a sense of “realism” for such companies, most of which have been burning cash by operating on losses. This sense of realism, experts say, is likely to trickle down to other e-commerce companies in form of sentiment.

“At the end of the day, any such exercise brings realism into the investing community. Many times when there is huge growth happening in an industry, and there is a lot of buzz around it, realism takes a backseat because there is a desire to invest before others do,” the analyst said.

Global investors, too, in light of macroeconomic headwinds have started bailing out of Indian start-up companies after infusing over $9 billion in the last two years. The industry has attracted investments from some of the biggest names in the world such as SoftBank, Tiger Global, Sequoia, etc.

Many of these companies have also taken the bullet and downsised operations, or in some cases shut shop. The food and grocery sector though bore the worst brunt, including Bengaluru-based Eatlo and Mumbai-based Local Banya which reportedly closed down in December. PepperTap also ended its operations this month. According to news reports, online grocery retailer Grofers had shut down operations in nine cities in January, and is also likely to add Kolkata to that list soon.

Online groceries, experts suggest, have been operating on very low margins. Some also say that these suffer losses on several of their transactions. The concern over sustainability of their models as well as other players that suffer losses is causing a stir among the investors too. But is it enough to make them question the India story?

“Sentiments will not go anywhere; it is the euphoria that will subside. Global investors know the India story; they know the potential India holds. The larger issue is that at what cost or at what valuations are these opportunities available. So funding is not suddenly going to dry up, but now they’ll be more careful and more critical about businesses, they’ll review their plans more sharply,” Bisen said.

“Much has been talked about the valuation of Indian e-commerce companies and private equity (PE) investors are really taking a hard look. So it is not only about Flipkart, but the larger e-commerce play and how these guys are invested in this sector. Valuation revisit is a tool to revisit your assumptions. So PE players right now are revisiting their assumptions with which they made these investment, and they should be doing so rightfully,” he added.

Even as promoters of e-commerce companies stay unperturbed about a shareholder or two reducing their venture’s values in their own books, Bisen said: “Whether they like it or not, this exercise is a reflection of how the investors are doing their business”.

Time to make money 

> After Morgan Stanley and T Rowe Price reduced their valuations, Flipkart co-founder Sachin Bansal had called it a “theoretical exercise” that was not based “on any real transaction in the space”

> However, following two more similar actions by another set of shareholders, should the company see any reason for worry?Experts suggest that in the longer term, Flipkart needs to revisit its business model and start making money for the investor

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