The sky is not the limit

Do you feel that e-commerce companies are attracting valuations that are not justified? Well, you may be missing the woods for the trees, is the expert view.

The valuation may seem sky high if one applies conventional metrics such as price-to-earnings, price-to-sales or even new-age ones such as visitors and repeat customers. Take the case of Make My Trip, which is listed on Nasdaq; the company is yet to make profits, but its market capitalisation of $2 billion is “larger than that of all the major airlines in India put together,” observes N Muthuraman, Director, RiverBridge Investment Advisors.

While valuation is a “judgement” call, it is driven by the perceived exit opportunities for e-commerce companies. And for those with a long investment horizon, there seems to be enough reason to be bullish on online sales.

The optimism is topped by the e-commerce industry’s growth potential. Sample this: China’s web sales, according to research firm EMarketer, stood at $133 billion in 2013. The Indian market is currently around $3.5 billion, according to Gartner. And this is estimated to be less than 1 per cent of the country’s overall retail market of $500 billion.

The number of customers also has room for growth. “There are only 15-20 million online shoppers currently, compared with a near-term potential of 150 million,” notes Rama Bethmangalkar, Principal, Ventureast. The vast market, with potential for 50-100 per cent annual growth in the next few years, is a factor that is boosting valuations.

Rapid growth is also why Chinese major Alibaba is valued higher than Amazon, the world’s biggest e-commerce company by revenue. Amazon’s sales are projected to increase by 20 per cent while Alibaba’s are likely to grow by 33 per cent in the coming year, according to Bloomberg .

So, while Amazon, which clocked $74.5 billion revenue in 2013, has a market capitalisation of $144 billion, Alibaba, with $8.6 billion revenue for the year ended March 2014, listed with a market capitalisation of $168 billion. In comparison, India’s largest e-commerce company Flipkart, with revenue of around $250 million in 2012-13, was valued at $7 billion in July 2014.

“Unlike the US and China, the Indian market is heterogeneous,” says Bethmangalkar. So, companies that “embrace” the differences in customer needs and offer differentiation in their product will be valued higher.

One aspect to consider is how well companies can widen their customer base by shifting offline shoppers online. While a few factors such as broadband penetration and mobile internet are already happening, others such as ease of payment are still in-the-works. Muthuraman says that the sharp price differential between online and offline stores could lead to wider use of credit card and debit card payments. “If a sizeable number of people become comfortable with making online purchases, the e-commerce market will take off in a big way”, he says. Bethmangalkar says that apart from cash-on-delivery, financing options will aid further growth. For instance, onemi.in helps buyers to get instant credit for their purchases.

But customers who are attracted by coupons and easy payments may not be “sticky” and could switch loyalties. So, holding on to clients requires giving them a good shopping experience. Here is where technology can be a “key differentiator”, says Chinnu Senthilkumar, Partner and CTO of Exfinity Technology Fund. He suggests that besides metrics such as customer reach and sales, operational efficiencies and content experience must also be factored in when valuing e-commerce portals. The reason is that shoppers need help in choosing the right product. One way to do this is to offer expert advice on style, trends and product reviews. Another way is to reduce hassles such as product return. He gives the example of finding a shoe that goes with the clothing, which also fits well. Typically, there are lots of shoe returns and companies such as findmeashoe.com are tackling this tricky issue, he says.

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