Investment flows slow, valuations start to tumble
It was never clear from the very beginning why so many e-commerce firms were valued so highly given revenues are driven primarily by steep discounts and, therefore, not reflecting the true sustainable demand. Since huge amounts of cash have been used up merely to draw customers, most players are yet to break even and not a single one makes a profit. A study by Kotak Institutional Equities showed that combined revenues—for a clutch of 22 e-commerce players—grew 191% in FY15 while their total losses jumped 264% to Rs 7,900 crore. That was a year ago but by the look of things, little seems to have changed and business models remain, by and large, predicated on deep discounts. While convenience is an important aspect of e-retailing and there are some customer propositions which are very compelling, right now, it is attractive prices or deals that are driving the bulk of the buying. Also, the average size of purchases remains relatively small; for big ticket items, customers are clearly willing to drive down to the store. That could change as the market matures but, in the meanwhile, the cash burn is troubling investors, several of whom believe it is prudent to reassess the real worth of these enterprises.
After Morgan Stanley marked down the valuation of Flipkart in January from $15 billion to $11 billion, another investor T Rowe Price has also lowered the value of the e-tailer—it has marked the value of each Flipkart share at $120.69 per unit at the end of March quarter, as compared to $142.26 in the December quarter. Indeed, less sure about the profitability or even the viability of many of these e-enterprises, investors, who went on a binge in 2014 and a good part of 2015, are now writing out smaller cheques. Several top e-commerce players are reported to have been turned down by investors though a few like online grocer BigBasket have managed to mop up sizeable amounts. Nevertheless, private equity and venture capital firms infused just $1.15 billion in the three months to March, a good 24% lower than that seen in the December 2015 quarter which itself had seen investments drop by 48% over that in the September quarter, a study by KPMG and CB Insights showed. While there is no doubt the slowdown in the Indian economy would be a cause for concern, the bigger question is whether all e-retailers can build up large and loyal customer bases that will remain a strong catchment even if discounts are dropped or withdrawn, a must for the business to turn profitable. The internet shopping space is clearly crowded and while buyers continue to flock to some sites—Amazon, Flipkart and Snapdeal grew at nearly 500%in FY15—revenues at Askme barely grew in FY15. Investors must, therefore, choose carefully because in a competitive and dynamic marketplace what seems like a potential success today could easily turn out to be a flop. Not getting carried away by the hype is what will pay off in the end.