High valuations of listed e-com firms draw PEs

E-commerce companies have never had it so good. Take, for instance, Indian travel portal MakeMyTrip. Early this month, its market value crossed the $1-billion (about Rs 6,200-crore) mark for the first time since November 2011. The market value of MakeMyTrip, listed on the Nasdaq, shot up by 40 per cent since January this year even as it recorded revenues of around $70 million (Rs 435 crore) in the December quarter.

It's not just MakeMyTrip. Local search engine Just Dial, which earned Rs 119 crore revenue in the December 2013 quarter, has a valuation of Rs 9,637 crore on the BSE. Similarly, the market value of Info-Edge Ltd of Naukri.com is Rs 5,845 crore, while its revenue was just Rs 123 crore in the December quarter.

No wonder, then, that private equity players are falling over each other to invest in e-commerce companies. According to Bain & Company, out of the 225 IT & ITES deals in India in 2012, as many as 98 were in the e-commerce space. (BULLISH ON E-COMMERCE)

Are the high valuations drawing Indian private equities to e-commerce companies? Yes, says Sandeep Singhal, co-founder of Nexus Venture Partners, which has invested in OLX and Snapdeal. "The e-commerce represents less than a per cent of the total retail in India - there is no reason why it can not go to 7-10 per cent levels seen in the UK, the US or China. The growth potential is huge and some of that is being reflected in the results," says Singhal.

According to Macquarie Research, the Indian e-commerce has shown strong compounded annual growth rate of 30 per cent since FY09 and it is expected to become an attractive Rs 1 lakh crore ($18 billion) opportunity by FY15. "We believe India will continue to witness high growth rates in e-commerce due to rising internet penetration, a 300-million strong population, increasing mobile penetration, and low levels of e-commerce activity," say Macquarie analysts Atul Soni and Nitin Mohta in a report dated January 13.

With only two listed internet companies in India and one on Nasdaq, analysts expect more e-commerce firms to tap the capital markets within the next 18-24 months. "E-commerce has a winner take all characteristic, and each segment may see three to four leaders capture a bulk of the market share. Due to that, market leaders are being valued highly - it is not only based on current results but also based on future potential," says Singhal.

Analysts warn that not all companies will deliver this future promise but those who do, will give very good returns to their investors. The challenge will be to choose the right company at the right time.