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The steep markdown of Flipkart’s market valuation by investment firm Morgan Stanley would have come as a rude shock to India’s e-retail segment. Through 2014 and the first eight months of 2015, capital inflows to Indian companies had spectacularly accelerated — $6 billion in 2014, and $7 billion in 2015 — leading to valuations that looked too good to be true. Flipkart had pegged its market value at $15.2 billion but after Morgan Stanley’s devaluation, its worth, arguably, has plummeted to $11 billion, a steep 27 per cent fall. The astronomic projections of market valuations are in contrast to the actual size of the Indian e-retail segment. In 2013, the combined gross merchandise value (GMV) of Indian e-retail companies was $2.3 billion, which increased to $4.5 billion in 2014, and was projected at $12 billion in 2015. Contrast this to Flipkart’s claims of a US$15 billion worth and those of its rivals like Snapdeal which was recently valued at $6.5 billion. These are valuations not reflective of the current size of the Indian e-tail or e-commerce segment but may, at best, hold true some time in the future.
While many of the Indian unicorns are valued between four and 10 times its GMV, global majors like Amazon and Alibaba are valued at just 2.2 times and 1.2 times its GMV respectively.
The sky-high valuations and the easy money that came with it have helped many e-commerce companies embark on the risky path of discount-driven model of customer acquisition. As a result, Flipkart has seen its sales climb phenomenally but have also posted huge losses. In 2012-13, the company accumulated losses of Rs281.7 crore against gross sales of Rs1,345 crore. In 2013-14, even as sales rose three-fold, the losses also rose similarly to Rs715 crore. By 2014-15, Flipkart’s sales figures stood at an impressive Rs10,390 crore, but the losses were also significant: Rs1940 crore.
For Flipkart, which was looking to aggressively raise funds to the tune of $1.4 billion, the devaluation may not pose an immediate threat to its position as market leader but it could lead to a rethink on the growth-at-any-cost model.
Even if Indian e-commerce companies decide to forgo the discount-driven model, they will have to contend with the elephant in the room, Amazon, which has effortlessly outpaced the others in fund infusion. In 2014, when Flipkart announced that it had raised $1 billion in funds, Jeff Bezos coolly announced the next day that he was pumping $2 billion into Amazon’s Indian subsidiary. Unlike Indian firms who have to rely on multiple funding rounds from investors, Amazon has the comfort of big cash reserves that it can deploy to outspend Indian companies in the long run. With a 45 and 26 per cent respective market share, Flipkart and Snapdeal are prisoners of their overwhelming success. A loss in their market share will be construed by prospective and existing investors as a loss in their competitiveness and a sign of rivals gaining on them. A Morgan Stanley research report indicates that while the market share of the top three — Flipkart, Snapdeal and Amazon — fell from 91 to 83 per cent from 2014 to 2015, smaller e-tailers in the segment increased their market share from two to 10 per cent in these two years. The re-evaluation of companies for their actual worth by investors and the encouraging performance of smaller players is a healthy development in the long run. It will prevent a precipitous collapse of the e-commerce sector and force companies to take a hard look at their revenue inflows from sales and embark on a slower, but more sustainable and less riskier, growth path.