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E-commerce Valuations In India: The Burn Will Hit You, Not The Fraud

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Sandeep Amar, Head (Marketing, Audience and Pre-Sales) at Indiatimes writes about the debate on e-commerce valuations in India. He blogs at sandeepamar.blogspot.com. The views expressed below are his personal views.

We have seen couple of articles (read this and this) which suggest that the Indian E-commerce industry in India is committing an accounting fraud, implying that valuations are unreal, and this is going towards a bust.

While I agree that there is a case of more excitement in valuations than what the companies deserve, it is not going to bust. I did an independent research through reliable sources in all leading E-commerce firms and this is what I found: we are looking at minimum of 30,000 – 40,000 transactions per day for just the sites selling mobile phones, computers, accessories for computers and mobiles and so on. Apart from this, over 20,000 transactions happen on the deals sites every day, and this data does not include travel and other online commerce. Now these are real numbers and I think most people in industry will agree with these numbers.

Another important issue raised is that the products are being sold at prices lower than available in offline market. That is not correct in 90% of the cases. Yes, there are coupons and schemes, wherein some promotional deals are pushed which are better than the deal available offline but that percentage is a maximum of 10%. If you are deal hunter and are ready to go extra mile offline you will get a better deal than any online site. My personal experience may not be believable but my local travel agent beats any online travel site for air ticket and hotels 90% of the times, and he is my “go-to-guy” for all my travel needs.


At the same time, there is a generation in India that does not want to haggle or go the extra mile: they want the convenience of buying the products and services online. The mechanics of this trend is the fact that online prices are better than the first quoted prices at your nearest stores. Big Bazaar and other retail players have started the discounts over normal grocery stores, and that is why they got the preference. I never get any discount on Pepsi from the local store but almost always get it cheaper in Big Bazaar and other stores. The online trend is similar, but not exactly the same: the consumer is getting a fair price, home delivery and all the convenience that modern-day generation looks for.

So on the premise given above, here are some facts:

FACT 1: E-commerce is real and here to stay. Consumers are buying online and transactions are real and growing.

FACT 2: The financial engineering may be happening – the expense capitalization may be there but I am not sure they can make this fly with VCs. The example quoted in earlier reports is of the product being acquired at Rs 100, and price kept at Rs 120 and sold at Rs 90 after a discount/coupon. The problem here is of invoicing and recognizing revenue – firstly you cannot invoice for Rs 120 as per US GAAP (which international Venture Capitalists look at), and if someone is doing it, the audit will make it difficult for them. It also has little chance of getting through SEBI any time that they apply for IPO. Even then, given the the kind of financial engineering we see in public limited companies, this is kid stuff. Please talk to any financial analyst to confirm my point.

Another example is of transferring margins within products and services; you may show more products selling on margins by transferring margins. This is done by transferring costs within business units/categories – just to make sure only a few products are bleeding – the cost and revenue is misrepresented. But the overall numbers stay the same. These are exercises to show better financial optics.

FACT 3: DO NOT BELIEVE THE VALUATION NUMBERS AND FUNDING NUMBERS BECAUSE SOMEONE REPORTED IT. This is the biggest part of the story – the last funding flipkart.com raised was $20 million, at around $230 million dollars as per industry sources. Within months someone reports it to be $1 billion and a funding of $150 million. This can happen in the future, and we get the signs that bigger funding will come in India, but this is where people should not get excited looking at these numbers: there is more misappropriation in these numbers than the financial fraud people are claiming.

FACT 4: Valuations are real and could be inflated by 50% or so. But in new markets, this does happen. The VCs want to get the pie of the growing markets early at any cost and invest heavily. India has not seen big investments as yet; we haven’t seen a single tranche of over $50 million dollars. The India story is flying – there is lot of money in the market, looking for avenues to invest, the excitement is natural.

FACT 5: Valuations basis is growth, acceptability and returning users (buyers). The word to focus on is “Growth”. Number of transacting consumers is more important than GMV (gross merchandise value), and the number of transactions a consumer does over a month, and returning buyers – organically or via mailers/sms of deals – matters more. Profitability does not matter so much at this point in time; growth, scale, returning buyers and product portfolio matters more. So even if there is no financial engineering, and the loss is over reported by 30%(as that example claims) – the valuations will not be very different. Venture Capitalists are not fools. They do make money from investments and have some sound logic.

FACT 6: It is not the fraud – it is the burn that will kill you – Yes, selling at a loss can be problem, if it is widespread. But the bigger problem is the burn – the marketing, manpower, technology and other costs with such thin margins in high competition.

If you are an investor who wants to invest in the E-commerce space, and want to have a foot in the door with 5-10 million dollars – stay out! This battle is going to go up to $80-100 million – even early investors should know it. I know there are multiple investors sharing the burden, but it still needs lot of depth. Most players are going to be burnt in this field. All firms are showing a 3 year break-even plan, but this won’t happen in the name of competition, scaling and so on.

Not only the fringe players but beyond the top 5, it is going to be really tough to stay in business.

If you have insight, an opinion or business practice details to share with our readers, please do send across your contribution to nikhil AT medianama DOT com. Do take a look at our guidelines for guest columns

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  • Hi Nikhil,I am agree with you all information about the e commerce business.but i think some time wrong things happen in all business.

  • Atul Yadav

    Rightly said (from the accounting and investors perspective)
    And yes Flipkart raised $20M and not $150M – many still don’t know this

  • Rahul

    Nikhil ….clear strategy for Flipkart is to sell the growing business to Groupon in India.Period. A smart VC would do so and thats what Tiger Global is eyeing for.

    • The deal model is not a sustainable one. You build brands to create a positive preference to your brand which in turn allows you to draw out better margins. The deal model does not help you do that. It will end up like newspaper coupons (like in the US)

      • sandeep

        You are right Sir!

      • RAHUL


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  • Totie

    Sandeep, amazing article, full of grammatical errors and kindergarten thought. 

    • Sandeep

      But not the accounting errors which others are claiming! Good enough for me.

    • Saale Totie, Tera naam bhi fake hein and blaming others about grammar and errors. You should go and teach English in Harvard :D

      • Sandeep

        Thanks Asim but no problem let him say anything. “Apna Apman sehne ki shakti to badana hai” – Anna Hazare. I am learning from the great man!

  • Ranjith

    I was initially stumped by the $1 billion valuation of flipkart. Quickly realized that it was a fake propaganda probably done by 1 fool named Prateek Dayal (sorry Prateek) supposedly close to the flikpart Bansals’. It seems to me that it was a hype generated for marketing the flipkart name after reports of Amazon ditching them.

  • Flipkart does good social media stunts like postingt 145 fake reviews in mouthshut  http://www.mouthshut.com/diary/gddgptlqs/Why-we-deleted-some-fake-reviews . A company lossing 5-6 crores a month with 1500+ employees with total internal chaos. God save flipkart- An employee who just quit from flipkart

  • reality

    flipkart is an overhyped ecommerce player. the indian ecommerce market is going to have 2 big players viz. 1 international player (amazon is commencing operations) & another indian retail company with strong supply chains (future bazaar could become this). The 2 players will own 60% of the mkt, the remaining will be fragmented among 5-6 players (maybe including flipkart or without :P). It is very early in the market and the 1 billion valuation of flipkart is a PR stunt, just ignore and move on. Off-topic have you watched the TV commercials of flipkart and myntra? They are pretty sad… Flipkart has a mouse running on a wheel WTF is that? Myntra has young people running around with ski boards… does any1 in India know what a ski board is? Aren’t these ads triggered by the “I have plenty of VC money, let me play a bit”. These ads are real mediocre just like our accounting fraud Sachin Bansal

  • Anonymous

    Makemytrip.com books 12,000 tickets in a day, 12 million comments are being posted on the net as we speak. Digital is here!

  • Sparsh

    Finally after all this brouhaha , the actual funding figures have come out in VC community. Flipkart got a valuation of 480 million dollars and 75 million USD  for 34% stake with very stringent conditions attached. Flipkart is doing lot of ads and publicity stunts to generate that kind of growth which is 8X more than last year. Either this will become a very successful company or will shut down shop pretty soon because they are losing money on every SKU sold. Checkout the same SKU in flipkart, lets buy, infibeam and hmeshop18 and the flipkart prices are still higher. God save flipkart

    • Sparsh

      Moreover the 1 billion valuation is a clear PR stunt that flipkart did once again and stupid media just believed  it without inquiring about the facts. Hope they will show same skills in solving the screwed up architecture of their finances :D

    • nas

      Cannot see how the math works – 75MM on 480MM (post) should mean 15.6% stake and not 34%. I am not sure that sparsh is right.