Battle #1 - Counterpunch by IIM Ranchi : Valuations in the Indian E-Commerce Industry Have Become Irrational

Consider the case of Flipkart. The GMV of Flipkart in March 2013 was $ 83 Mn. Taking a multiple of 2.5, the valuation arrives at the figure of $207.5 Mn. Let us see where the current valuation stands: $7 Bn. This can only be arrived at by using a multiple of 84.33!

Though the above quoted analysis by IIM Trichy seems sound and pragmatic with all the numbers and calculations, the projected valuation is NOT that inflated. The GMV is actually calculated in the following way for e-Commerce retail companies:

‘GMV or gross merchandise value for e-commerce retail companies means sale price charged to the customer multiplied by the number of items sold. For example, if a company sells 10 books at Rs 100, the GMV is Rs 1,000. This is also considered as "gross revenue"’. (Economic Times)

In March this year, Flipkart reported annual revenue of $1 Billion. This revenue was backed by sales amounting to 500 Crores INR, which roughly translates to $83 Million. From the gross revenue, it is a short step to deploying a "revenue multiple" between 5 and 7 to arrive at the price Flipkart is valued at in today’s market. Though the multiplier might seem high (the usual norm is 2.5), it is not unheard of.

So, the multiplier used to arrive at the ‘valuation’ is not as inflated as the team from IIM Trichy would have you believe. It is in truth a value that is very much in practice in India. (Business Standard)

 

When the total number of E-commerce users are estimated to be 100 million by 2020 (Nomura), this expectation seems irrational. Also the business model cannot be ramped up to meet such demand in such a short span. With the infrastructural issues that our country faces, it is not just optimistic, but unrealistic to expect billions of sales in the near future.

The claim made by our opponents that, the estimate of the number of e-Commerce users is ‘irrational’ is not justified. According to Communication and IT Minister Ravi Shankar Prasad’s 1 Lakh Crore INR ‘Digital India’ programme seeks to completely transform the nation into a digitally empowered-knowledge economy. This programme includes among other things a plan to provide high speed internet at Gram Panchayat levels. Additionally this programme envisages a mission to establish broadband highways throughout the country with ‘everywhere mobile connectivity’. All these point to a better infrastructure and a increasing number of internet users in the near future, which in turn will lead to increased e-Commerce activity.

 

Investors will not keep pumping cash into firms that don’t earn profits. When Private Equity (PE) and Venture Capital (VC) firms look for short-term investments of 5-10 years, they need a profitable exit route. This quest for profits will make the e-commerce industry undergo further consolidation and only the stronger players will prevail.

The above point is quite impertinent to the topic. It is market sales and valuation that are the topics of discussion and not the number of players driving the figures. In fact it is better for the industry as a whole if the investors make sensible decisions and pump money into potential profit guzzlers. This will further ensure that the loss making ventures are weeded out and the rest continue growing. Consolidations are thus welcome rather than being a point of debate.

 

 Also, with Arun Jaitley mentioning in his recent budget speech about “allowing foreign retailers, who manufacture products in the country, to sell via e-commerce platforms”, talks about this being baby steps for allowing FDI in e-commerce have begun. Pressures are rising and if someone like Alibaba enters this business, it is doubtful as to what extent these sky-high valuations will apply.

The opponents basically contend that competition from global players will endanger the survival of Indian players. However, it should be noted that we are talking about the Indian E-commerce industry and this includes or might include any potential foreign subsidiaries as well. For example Amazon, an US based company is operating in India and being counted as a part of the Indian industry. The same will apply if and when Alibaba enters the market. The competition thus generated will only aid to the growth of this industry, justifying the supposed ‘sky-high' valuations.

Moreover, FDI inflow is only a welcome sign as it will lead to huge investments to the tune of billions in ‘Indian e-Commerce industry’. The benefits of FDI have already been covered by us in the original article under Exhibit 1.

 

When these e-tailers will be forced to raise prices or reduce the huge discounts currently offered, how sure are we that the same users will purchase online? Is service such an important factor for the Indian consumer that she will be willing to pay a premium for it? Well, for starters, Flipkart recently removed its delivery charges for books, which it had started to charge some time back (For orders less than INR 500). What forced this change? Is there some other factor that all these valuations aren’t factoring in?

This is a flawed argument as it only asks open-ended questions without providing any concrete answers about the future consumer behaviour. We can’t possibly predict that consumers don’t or won’t be valuing services very highly. The same argument can be used for our point saying that consumers are indeed moving towards more service intensive companies as prices are becoming increasingly similar. This fact can indeed be corroborated by the huge spurt in sales for Flipkart in the past 3-4 years.

Flipkart removed the delivery charges for the most obvious reason - to counter the growing competition. This is definitely not a cover for something supposedly very shady. With improving infrastructure and better logistics Flipkart might be able to do away with delivery charges without aggravating its current losses.

Team Name: The Intellect Box (IIM Ranchi)

Team Members: Sayan Kar, Adarsh K A M.