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.