Mobile phone penetration and internet usage has changed the way Indians communicate and transact. E-commerce heavily relies on usage of devises like computers, smartphones, tablets and technology like 3G /4G and is changing the way business was reaching its customers.
Business Valuation is driven by many factors and one of the key drivers is sales growth. Abnormal sales growth is a great indicator of wealth creation but it comes with two riders; first abnormal sales cannot be sustained for long as competition in the market would eventually lead to a normal sales growth and secondly abnormal sales growth needs to be financed with capital or debt specially when the business is not generating adequate operating cash flows. When the business risk is high, getting a loan for financing capital requirement is a challenge and this leaves the business to approach venture capitalist, private equity, hedge funds for funding requirements. Private capital comes at a cost, but the businessman has little choice. This funding requirement also leads to mergers and acquisitions activity specially when the entity has a cash crunch.
If we focus on emerging industries in India, we would be forced to take cognizance of the e-commerce players where sales growth is abnormally high and is growing at a rate of 35%.. E-commerce includes online travel, online retail, financial services, digital downloads etc.
Recently a little known company (LeEco) entered the Indian market and was able to sell 55,000 units of 4G enabled smartphones in 9 seconds and had 20 lakh registrations in the three flash sales that they conducted. As the e-commerce market is expanding in India, e-commerce players from developed countries are eyeing to get a stronghold as the sales growth in their home markets are not as exciting. World’s leading e-commerce players Amazon, E-bay and Alibaba are familiar names to Indians and with the internet user base of 354 million (IAMAI, 2015), adding around 6 million every month (VC Circle), there is a huge potential in the industry.
Global e-commerce player Amazon Inc., is the world’s dominant player with sales of $107 billion (Dec2015) and has a market capitalization of $272.3 billion (as on 2 Feb 2016) which is more than the combined market capitalization of top six Indian companies TCS, Reliance, Infosys, HDFC, ITC and Sun Pharmaceuticals. Alibaba listed on the New York Stock Exchange in September 2014 with a market capitalization of $231 Billion. If we compare the sales growth of two companies in USA, one which sells consumer goods in a conventional manner (Wal-Mart Stores Inc.) and the other which is an e-commerce company (Amazon Inc.), the results are very astonishing. For the year 2015, Wal-Mart Stores Inc. sales have increased by 2% YoY whereas for Amazon the sales growth is 20% YoY. Euromonitor suggested that in developing countries store based retail sales will increase by 10% whereas online sales will increases by 40%. All this put together makes us think on how the e-commerce industry is evolving and the change in which business is moving from brick and mortar store to online platforms.
Some of key e-commerce players in India are Flipkart, Snapdeal, HomeShop18, Jabong, Pepperfry etc. All of these companies are in the private domain, which means that they are not public listed companies. Source of funding for all these companies is private capital and since most e-commerce companies are incurring losses, the owner have to either infuse money at regular intervals or sell the company at a decent valuation and take out their capital invested.
Let’s discuss some mergers and acquisitions activity in the e-commerce space:
Flipkart founded in 2007 generates $1 Billion in gross merchandise value (2014). Flipkart has grown organically and inorganically by acquiring many e-commerce companies in the last six years. Flipkart acquired WeRead (2010), Mime360 (2011), Chakpak.com (2011), Letsbuy.com (2012), Myntra.com (2014) and Appiterate (2015). The company also made strategic investments in Ather Energy (2014) and Mapmyindia (2015). Through 12 rounds and 16 Investors, they have raised close to $3 Billion of capital and its estimated valuation is around $15.2 billion. Key stakeholders are Tiger Global, Accel Partners, Morgan Stanley Invt. , GIC, etc.
Snapdeal founded in 2010, has made a total 12 acquisitions and 8 acquisitions were done in the year 2015. Grabbon (2011), Esportsbuy (2012), Shoppo.in (2013), Doozton (2014), Wishpicker (2015), Smartprix (2015), Exclusively (2015), Gojavas (2015), Unicommerce (2015), Rupeepower (2015), Reduce Data (2015), Freecharge (2015). In April 2015, Snapdeal acquired Freecharge for $400 million. Approximate valuation of Snapdeal was done at around $7 billion3. Snapdeal went through 7 rounds of funding and has managed to raise close to $1.4 billion. Some of the key stakeholders are Blackrock, Temasek Holdings, Softbank, Alibaba, etc.
Ola Cabs founded in 2010, with a network of more than 2 Lakh cars, acquired TaxiForSure for $200 million in 2015. Ola is owned by ANI technologies and is valued at $5 billion.
Bookmyshow which is India’s biggest movie and event ticketing company acquired TicketGreen (2013) and Eventifier (2015).
Pepperfry was founded in 2012 and is into furniture and home products. After 4 rounds of funding it has raised $128 million from investors like Norwest Venture Partners, Goldman Sachs Group Inc. Zodius Technology Fund, etc.
Housing.com, founded in 2012 by 12 students of IIT Mumbai, raised four rounds of funding from Nexus Venture Partners, Helion Venture Partners and in the last 4 years acquired companies like Indian real estate forum (2015) and Realty BI (2015).
Some of the Indian leading retailers who did not have their own platform for e-commerce made strategic tie-ups with big e-tailors to increase their business. Future group (Kishore Biyani) signed a deal with Amazon to sell its private labels. Croma (Tata Group) entered into an exclusive deal with Snapdeal.
Many innovative start-ups are launching their services and creating a market by connecting the unorganized service sector to the consumer of service. One such example is Urbanclap.com, an online portal for customers looking for professionals in the service industry like wedding planners, yoga teachers, photographers, etc. Another start-up by the name of Timesaverz facilitates consumers by providing service relating to plumbing, electrician, pest control, cleaning, etc.
E-commerce companies are not just generating revenue for themselves but are enablers and dependent on technology like cloud technology, mobile applications, digital advertisements, search engine optimization, etc. They also depend heavily on logistic companies and payment gateways. They generate business for companies like DHL, Blue dart, Gati, FedEx for the delivery of products. For receiving payments, e-commerce companies rely on payment gateways which is a service that authorizes credit cards, debit cards or online banking in a secure manner.
Report of PWC indicates that online retailers have lost close to INR 10 billion because of their strategy to attract customers from physical stores to online stores by offering discounts on products sold on their platforms. Such discounts are not viable in the long run and all e-commerce companies have to start generating cash profits. Till then M&A activity trends would continue at a great pace. E-commerce industry is bound to scale up its operations and consolidate in the future.
– Dr. Ruzbeh J Bodhanwala, Professor, FLAME University.