E-commerce firms should look at profitability, not valuation: Deepak Parekh

His remarks come at a time when Snapdeal is all set to merge with Flipkart

Deepak Parekh, chairman of HDFC Ltd, struck a note of caution to India’s e-commerce companies looking at the valuation than business fundamentals, saying a model of changing ownership between private equity firms could hurt the entire ecosystem.

“There has to be a threshold level where the revenue stream and profitability have to become key considerations, rather than just focusing on gross merchandise value. Unless these companies post cash profits, how will they ever be self-sustaining?” asked Parekh at the Indian Institute of Technology Madras (IITM) on Wednesday.

“Otherwise the model is just based on going from one private equity fund to another and, at some stage, someone will be left holding the baby and this can have a domino effect across the entire system.”

Parekh’s comments comes at a time when efforts are on to sell  Snapdeal by its main investor SoftBank for a pittance after the company lost the battle against larger rivals, Flipkart and Amazon.

Snapdeal, valued at $6.5 billion at its peak, was burning money before its main investor SoftBank stepped in to cut losses. In February, the online marketplace shut business units, closed offices and sacked hundreds of employees in a last ditch attempt  profitability. On Sunday, its founders Kunal Bahl and Rohit Bansal told employees that its investors had put the company on sale.

SoftBank, which has written off  part of the $900 million it put in Snapdeal, is looking to merge the company into Flipkart. In addition, it is looking to spend as much as $1 billion to buy shares of Flipkart from its investor Tiger Global.

Earlier this week, Flipkart raised $1. 4 billion from Tencent, Microsoft and eBay at a valuation of $  11.6 billion, 23 per cent down from its peak valuation of $ 15.2 billion.

"While the e-commerce sector is poised to grow in India, what I do worry about is the financial model of these companies. I must caveat it here that I may be way too traditional in my thinking and approach, but I do feel that the valuation game may have run ahead of what fundamentals warrant," said Parekh.

 The veteran banker says that digital payments space in India is expected to grow as transaction costs come down on faster processing of payments.

"Digital payments have increased manifold. Total volume of transactions through credit and debit cards, e-wallets, mobile banking and unified payments interface in the month of March 2017 stood at around 400 million, representing a value of Rs 1.9 trillion. Of this, mobile banking dominates, accounting for 75 per cent in value terms. The future of digital payments runs on the premise of reducing transaction costs and faster processing.

"We are certainly going to see some radical changes and innovations in this space," said Parekh.