Domestic e-tailers such as Flipkart and Snapdeal have become household names in the country, forcing analysts to take a closer look at the e-commerce sector. Flipkart, which started in 2007, notched up its first billion dollar in sales (measured in gross merchandise value or GMV) in March 2014, but it took the company less than a year to increase its GMV by four times to $4 billion.
The rapid expansion of these e-tailers is being funded by a large number of institutional investors, venture capital firms and hedge funds; Flipkart raised $2 billion last year, while Snapdeal got funds worth over $1 billion, according to reports. Investors are vying to put in more money because of the huge potential for future growth in the e-commerce space, which according to consulting firm Technopak is estimated to be worth $32 billion in 2020, more than 10 times its value of $2.3 billion in October 2014.
Bangalore-based Flipkart is expected to double its GMV to $8 billion by the end of this calendar year. Its rival Snapdeal, currently India's second largest e-tailer, plans to dislodge Flipkart from its pole position and is aiming at a GMV of $10 billion by December, according to media reports.
Rising GMV has fuelled valuations of internet companies to astronomical levels. Flipkart is reportedly being valued at around $15 billion (Rs 90,000 crore at 60 rupees per dollar), nearly 10 times more than its $1.5 billion valuation in October 2013. If Flipkart was to list on stock exchanges, it would have rivalled companies such as Maruti Suzuki and Kotak Mahindra Bank, which have a market cap of around Rs 1 lakh crore.
A look at the price earnings ratio of listed internet firms reflects the kind of valuations such companies command. Justdial, a search engine company has a trailing twelve month PE of 74 times, while Info Edge, which owns portals such as Naukri.com, trades at a PE of 160 times, according to Reuters data. Flipkart and Snapdeal make losses, so it's not possible to compute their PE ratios.
Astronomical valuations and widening losses have turned analysts cagey about e-commerce start-ups; some have even equated the current sharp growth in these firms with the dotcom bubble of late nineties (1997-2000), which resulted in the collapse of many internet companies worldwide.
"What do you call valuations of Indian internet companies? Kehte hai isko hawa hawaii, hawa hawai, hawa hawaiiiiiii," tweeted Singapore-based fund manager Samir Arora, who's often criticized the high valuation of domestic e-tailers.
What do you call valuations of Indian internet companies? Kehte hai isko hawa hawaii, hawa hawai, hawa hawaiiiiiii.— Samir Arora (@Iamsamirarora) March 5, 2015
Billionaire investor Rakesh Jhunjhunwala recently questioned the business model of Flipkart. "I want to know how the company will become profitable... Look at any company in the world, the real companies that have given return to investors have been built by cash flows of those businesses and not by investors' money," he told a news channel.
Flipkart and Snapdeal mostly earn money through listing fees, but they often finance discounts to attract buyers, analysts say. Large discounts are good for business as sales (or GMV) go up, pushing up valuations (for internet firms, valuations are linked to GMV). However, discounts eat into profitability.
"When an internet company boasts about GMV, remember it is not Gross Merchandise Value, but Grossly misstated value," Mr Arora said in another tweet.
When an internet company boasts about GMV, remember it is not "Gross Merchandise Value" but "Grossly misstated value"— Samir Arora (@Iamsamirarora) February 5, 2015
Another fund manager Sandip Sabharwal tweeted, "Instead of giving only steep discounts, if I give steep discounts plus cash with each order will get customers faster, more losses, higher valuation."
Instead of giving only steep discounts,if I give steep discounts+cash with each order will get customers faster,more losses,higher valuation— sandip sabharwal (@sandipsabharwal) March 16, 2015
According to Techcircle, Flipkart is losing Rs 2.23 for every Re 1 in net revenues. This means the company is losing a huge amount of money to acquire new customers.
Weak financials and high valuations tend to make analysts nervous, but funding for domestic e-tailers is unlikely to dry up any time soon despite rising valuations, other analysts say, citing the case of Amazon - US biggest e-tailer, which continues to attract money despite not posting a profit for the last 20 years. (Read)