Are e-commerce valuations sustainable?

This is a question most are beginning to ask as investment activity touches Rs 20,000 crore in the span of a year

The e-commerce valuation bar is rising with every round of funding, not surprising given the sector’s potential. Gurgaon-based consultancy Technopak reckons the Rs 13,800 crore ($2.3-billion) Indian e-tailing will reach Rs 1.92 lakh crore ($32 billion) by 2020 and account for three per cent of the country’s retail market.

This means more investments into the fledgling e-commerce businesses. What has surprised many is the eye-popping valuations for companies across the board in the span of a year. Grant Thornton figures the Rs 20,000 crore investment in Indian e-commerce this year is driven by sky-high valuations.

In May, Flipkart acquired fashion portal Myntra for Rs 1,800-2,000-crore. Six months on, Amazon is speculated to be making its first acquisition in India, of fashion portal Jabong for 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), according to media reports. Snapdeal received Rs 3,762 crore ($627 millon) funding recently, valuing it around Rs 18,000 crore ($3 billion).

The valuation cut in e-commerce is not restricted to marquee names. Niche players like CBazaar (clothing), Pretty Secrets (lingerie), Happilyunmarried (lifestyle products), Fashionandyou, Firstcry (baby products), Limeroad (fashion), Pepperfry (online furniture), Housing.com, Zomato (restaurant listings), Bigbasket (grocery), Urban Ladder (furniture) have all raised between Rs 1 crore and Rs 60 crore in multiple rounds of funding, valuing each of them at nearly 2-2.5 times their gross merchandise value (GMV) or total value of merchandise sold.

“I frankly do not understand the basis of these valuations," says Arvind Singhal, chairman of Technopak. "It defies logic. Looking at potential is fine, but valuations have to be sane,” he adds.

“Smaller players don’t have big funding and that is why these niche companies come up with great products and services. In the coming years, we will see more niche players growing at a staggering rate,” says Mohit Bahl, partner, transaction services, KPMG India.

Industrialists Rata Tata, Azim Premji and Narayana Murthy have rushed in to make the most of this boom, backing Snapdeal, Myntra and Amazon at one end and smaller players like Bluestone, Urban Ladder and Yebhi.com at the other.

“There is an untapped potential for internet access. Also goods and services are not accessible in tier two and three cities. I expect valuations in the short term to go up as the demand and supply mismatch is pushing them up” says Sushanto Mitra, founder, Lead Angels.

Navroz Mahudawala, founder and  managing director, Candle Partners, a Mumbai-based investment advisory firm, says, “The current e-commerce funding wave is similar to the one witnessed in the Indian retail sector between 2002 and 2007. Several retail companies were funded at exorbitant valuations. Profitability at even that point was a casualty.”

How long will this bubble last? The broad consensus is another two or three years. “Yes, at least for another two to three years, we could be seeing valuations running up aggressively before they begin 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.
BUBBLE WAITING TO BURST?

• At Rs 20,000 crore, e-commerce has seen one of the fastest rates of growth in investment  activity this year
• This has been led by sky-high valuations, which is unlikely to cease in the next two to three years
• Experts cite demand-supply mismatch for the valuation escalation
• Gross merchandise value is the metric used for valuations
• Potential of the sector is also taken into account in addition to where the player stands in the pecking order
• Players such as Flipkart are estimated to have a valuation of $10 billion today, while rival Snapdeal is estimated to be valued at $3billion