Are e-commerce valuations sustainable?

A moot question that is being asked as investment activity touches Rs 20,000-cr in a year

With every round of funding in e-commerce, the valuation bar has only been raised. Nothing surprising there given the potential of the sector. According to Gurgaon-based consultancy Technopak, the Rs 13,800-crore (or $2.3-billion ) Indian e-tailing market is expected to touch Rs 1.92 lakh crore (or $32 billion) by 2020 and account for 3% of India's overall retail market.

While this will mean more investments into the country's fledgling e-commerce business, what has surprised many is the eye-popping valuations that companies across the board have commanded in the span of a year.

According to Grant Thornton, the nearly Rs 20,000 crore investment activity that e-commerce saw this year so far was driven in part by sky-high valuations.

Consider this: In May, Flipkart acquired fashion portal Myntra in a deal valued at around Rs 1,800-2,000-crore. Six months on, Amazon is speculated to be making its first acquisition in India, of fashion portal Jabong, at over three times the amount that Flipkart coughed up for Myntra: At Rs 6,000-7,200 crore.

Flipkart itself is seeking its third round of financing at a valuation of Rs 60,000 crore (or $10 billion), media reports have said. And Snapdeal got a Rs 3,762-crore (or $627 millon) funding at an estimated valuation of around Rs 18,000 crore ( or $3 billion) recently.

Interestingly, it isn't the marquee names alone that are making the valuation cut in the e-commerce business. Niche players such as CBazaar (clothing), Pretty Secrets (linegrie), Happilyunmarried (lifestyle products), Fashionandyou, Firstcry (baby products), Limeroad (fashion), Pepperfry (online furniture), Housing.com, Zomato (food & restaurant listings), Bigbasket (online grocery, Urban Ladder (online furniture) have all raised anywhere between Rs 1 crore to Rs 60 crore in multiple rounds valuing each of them at nearly 2-2.5 times their gross merchandise value (GMV) or total sales value of merchandise sold over a period of time.

"I frankly do not understand the basis of these valuations," says Arvind Singhal, chairman, Technopak. "It defies logic. While looking at future growth and potential is fine, valuations have to be sane," he says.

“Smaller players don’t have big funding as the poster boys of the industry do and that is why these niche companies come up with great products and services to build their own foothold in the growing sector. In the coming years, we will see more such niche players growing at a staggering rate,” says Mohit Bahl, partner, transaction services, KPMG India.

Industrialists such Rata Tata, Azim Premji and Narayana Murthy have all rushed to make the best of this boom, backing big players such as Snapdeal, Myntra and Amazon respectively at one end (Premji is also an investor in Snapdeal) and smaller entities such as Bluestone, Urban Ladder and Yebhi.com ( the first two by Tata and the last one by Murthy) at the other.

"There is an untapped potential for internet access and also goods and services which are not accessible in tier two and three cities. I would expect valuations in the short term to go up as it is the demand and supply mismatch that is pushing up these levels. There is more demand for services and less supply of e-commerce companies," says Sushanto Mitra, founder, Lead Angels.

Navroz Mahudawala, founder & MD, Candle Partners, a Mumbai-based investment advisory firm, says, " The current e-commerce funding wave is very similar to the enthusiasm that one witnessed in the Indian retail sector between 2002 and 2007. Several retail sector companies got funded by PEs at exorbitant valuations. Profitability even at that point in time was a casualty and so is the case now."

How long will this bubble last? The broad consensus is that it could last for another two to three years.

"Yes, at least for another two to three years, we could be seeing valuations running up aggressively before it begins to stabilise. By which time, the smaller players will either fall by the wayside or be acquired by the bigger giants," says Harish HV, partner, Grant Thornton.