UltraTech, billionaire Kumar Mangalam Birla’s most valued company, cannot match the valuation e-tailer Flipkart has created in the past eight years. At an estimated valuation of $12.5 billion (Rs 77,500 crore), based on its recent fund-raising, Flipkart would be the 27th most valued firm in the BSE 200 list, above giants such as Mahindra & Mahindra (28) and Tata Steel (63).
At a valuation of $5 billion (Rs 31,000 crore) Flipkart’s five-year-old rival, Snapdeal, would rank 66th, above another Birla crown jewel, Hindalco Industries (71) and behemoths such as Tata Power (97) and Ashok Leyland (100).
It isn’t only e-tailers that are able to attract such high valuations in such a short time. Last week, taxi aggregator Ola raised $400 million from its investors, valuing the firm at an estimated $2.5 billion (Rs 15,500 crore), which would put it at the 114th rank on the list, above Indian Hotels (158) and Tata Chemicals (138).
“The mindset that you need to have physical assets to create value needs to change,” says Rachna Nath, leader (retail and consumers), PWC India. “Digital is creating disruptive models without any physical assets and the opportunity is so big that private equity funding is driving its valuations high,” she says, adding in growth-businesses, valuations in the short term seemed high, while in the long term, these were inexpensive.
In a year, Ola has increased its presence and size from 10 cities and 10,000 cars to 100 cities and 100,000 cars, respectively, without owning a single vehicle. “We believe in technology, not piling up assets; this helped us grow faster,” says Anand Subramanian, director at Ola. “Valuation is based on market opportunity and the command a company has over it.”
In India, such an opportunity has existed for long — only three per cent of the population own cars, against 70 per cent in the US. Also, India lacked a robust public transportation system.
As such, cab operators sensed a good business opportunity here. And, the rapid penetration of smartphones led to an opportunity for those providing mobile platforms without actually owning assets.
The heavy discounts provided by e-tailers to attract customers to their platforms has led to fear of a bubble in the making. In a recent report, however, global investment bank UBS dispelled such doubt. "Investor concerns about e-commerce being a bubble in India are misplaced," said Gautam Chhaochharia, analyst with UBS, adding their analysis of the supply chain in off-line retail implied adequate margins for e-tail. He argued an inherent operating leverage in this business and 700-basis-point lower discounting (as percentage of gross merchandise value) would lead to operating profits for the sector by 2020.
"When we compare the implied valuations for e-tailers, based on our industry model and recent funding-implied levels, the latter appear rich. Grocery is a much bigger part of retail in India than in other markets. Success in this segment would imply an upside to our valuation estimates," he added.
Evidently, this hasn't gone unnoticed by major conglomerates. The Tata group plans to launch a marketplace-based e-tail venture this year, while the Aditya Birla Group plans to launch an online fashion retail venture for apparel, footwear and accessories, taking on existing players such as Jabong and Myntra.
"It is clear established business houses have missed the boat, as these don't have disruptive mindsets for new-age technology businesses," says K Ganesh, entrepreneur and partner, Growthstory.in. "They are bogged down by a legacy mindset. As they need to protect and grow old businesses, their outside-the-box ideas are very limited."