Is India An Ecommerce Bubble

Is India an E-commerce Bubble?
June’15
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Executive Summary
 The E-commerce space in India is rapidly evolving, with a slew of changes occurring within a very short span of time:
 A host of new vertical specific start-ups are coming up at an unprecedented rate catering hitherto unexplored areas by
offering niche products and services
 Many specialised companies in the areas of logistics, payment technologies, data analytics are coming up to help broader
eco-system scaling up at a faster rate
 The exponential growth rate of 30-40% shows no signs of decline as more and more consumers move towards online
shopping
 The sector continues to be the darling of the investors, with majority of VC and PE funds flowing into the Indian
E-commerce space
 All these favourable factors have resulted in unprecedented valuations of E-commerce firms, with a sizeable number of
E-commerce start-ups achieving billion dollar valuations in less than decades of their existence
 In recent times, this skyrocketing valuation has led to increased scrutiny of key financials and business models of
E-commerce firms, to find answer to the question - How realistic these valuations actually are?

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Content Outline
1. E-Commerce in India
2. Sky High Valuations of Key Players
3. Factors Driving Such High Valuations
4. Business Valuation of E-commerce Firms
5. Key Financials of Leading E-commerce Firms
6. Conclusion

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Indian E-commerce Overview
Major E-commerce Players in India
Mainstream E-commerce Players Vertical Specific E-commerce Players
Marketplaces Real Estate Furniture Fashion Education Transport Miscellaneous
 Flipkart  Housing.com  Urbanladder  Myntra  Edukart  Ola  Paytm

 Snapdeal  Magicbricks  Pepperfry  Jabong  Meritnation  Uber  Freecahrge
 Amazon  99acres  Zansaar  Yepme  Edureka  Taxiforsure  Coupondunia
 Ebay  Commonfloor  Fabfurnish  Zovi  Toppr  Carzonrent  Myrecharge
 Valuations for leading E-commerce players in India, both the mainstream and the vertical specific, have grown at an exponential rate,
nearly 4-5 times since their inception
 Growing market backed by improving consumer lifestyle, increasing internet access, expanding consumer base, rising disposable incomes
etc. have led to the astronomical valuations for the leading E-commerce players in India
 Skyrocketing valuations in the Indian E-commerce space, have often been a point of contention between the proponents of E-
commerce and a large segment of conservative investors, who argue that the current valuations are not in sync with the underlying
fundamentals
Note: The report primarily focuses on the e-tailing segments and excludes travel e-commerce websites
Sources: Dion Research and Analysis

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Content Outline
6. Conclusion

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Sky High Valuations of Key Players
 In a short span of time, many leading E-commerce start-ups in India have achieved billion dollar valuations, with investors pumping
in more and more money to this space convinced by its growth potential
Current valuation Current valuation Current valuation Current valuation

$US11 bn $US5 bn $US2 bn $US1.6 bn
Total
funding Total
funding Total
funding Total
$US2.7 bn funding
$US1.0 bn
$US267 mn
$US150 mn
Sources: Hindustan Times, Dion Research and Analysis

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Content Outline
6. Conclusion

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Factors Driving Such High Valuations
 The skyrocketing valuations are primarily driven by the anticipated growth potential of the Indian E-commerce space, which is still at
a very nascent stage, accounting for a mere 0.5% of India’s overall retail industry and approximately 8% of the organized retail
segment
 E-commerce enablement services, such as payment gateways or logistics, are rapidly evolving in parallel and thereby a complete
eco-system is taking shape, making global investors further bullish on this space and taking valuations to new highs
Primary Drivers of Such High Valuations

Enabling E-commerce Ecosystem Growth Potential of E-commerce Profitability in the Long-run
 The E-commerce ecosystem in India has  Given that E-commerce constitutes only
 Though Indian E-commerce firms have
evolved over the past few years with a host about 0.5% of total retail market size in
been reporting losses since their inception.
of companies in the field of logistics, India, the headroom for growth is
this has not been a hindrance to their high
analytics, and payment technologies have enormous
valuations
joined the bandwagon in the recent past
 India’s online retail sales is expected to
 In the long-term, they are expected to turn
 These ancillary service providers have grow at a rate of 40-50% per annum over
profitable just like their global peers
created an enabling ecosystem, helping the next few years
Amazon and Alibaba, who took years to
firms to scale their business up at a faster
break even
rate - driving high valuations  Enormous growth potential keeps the
investors interested in this sector and
 The expectation of profitability acts as a
drives up valuations
driving factor for high valuations
Sources: The Economic Times, Dion Research and Analysis

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Content Outline
6. Conclusion

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How is an E-commerce Firm Valued?
Valuation Methods  In addition to standard financial parameters, various other
E-commerce specific metrics such as, conversion rate, value
Business per visit, average order value, churn etc. are also applied for
Valuation business valuations of E-commerce firms
Methods
Conversion Rate
 How efficient is the platform at closing the deal starting
Some E-commerce Specific

from registration to checkout
Valuation Metrics
Average Order Value (AOV)
DCF Relative Contingent
 AOV is the total sales revenue divided by the total number
Valuation Valuation Claim
of sales; more the AOV, better is the outlook for the firm
Valuation
Value per Visit
 Valuation of unlisted E-commerce firms such as Flipkart,  This metric provides the value every visit to the website,
Snapdeal is generally estimated using relative valuation by dividing total revenue to the total number of visitors
method
Churn
 In this method, value of an enterprise is projected by looking
at the market prices of similar or comparable assets  Churn is the percentage of customers who do not opt for
repeat purchase
Sources: Hindustan Times, Dion Research and Analysis

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Are Indian E-commerce Firms Overvalued?
Business Valuation Using Revenue Multiples
 Business valuation of Flipkart and Snapdeal,
estimated using revenue multiple metrics come out to
be US$7 billion and US$3.1 billion respectively
Multiples
Revenue
 Strictly based on the relative valuation approach, 17.2 2.5 4.8
valuations of Flipkart and Snapdeal seem to be on the
higher side, as they claim to be valued at US$11
billion and US$5 billion respectively by their investors
 However, business valuations of emerging sectors like
Average of Revenue
E-commerce substantially take into consideration
various subjective aspects, e.g. expected higher
Multiples
growth rates in coming years, which may vary from
one calculation to other and also not taken into 8.2
consideration in revenue multiple approach
 More, since the online market at present accounts
for less than 5% of India’s retail business, there still
is a huge untapped space in e-commerce
Value = Projected
Sales X Revenue
 In recent years, E-commerce firms have reported
Estimated Enterprise Value Estimated Enterprise Value
multiple
improving operating margins and steady growth rate
of 300-400%, which re-inforced investors’ belief on = US$ 7 Billion = US$ 3.1 Billion
higher valuation estimates

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Content Outline
6. Conclusion

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Key Financials of Leading E-commerce Players
Snapdeal: Net Revenue and Losses Flipkart: Net Revenue and Losses
(US$ Million) (US$ Million)
30.0
28.0
4.5 1.7 4.9
1.3
2012 (1.6) 2013 2014 2012 2013 2014
(3.2)
(18.8) (19.7)
(52.0)
Net Revenue Losses Net Revenue Losses
(68.0)
Myntra: Net Revenue and Losses

(US$ Million) 6.9  Net revenues of all the leading Indian E-commerce
players have grown at a CAGR of 300-400% between
3.3 2012-14, underpinning the enormous growth potential of
0.5 the sector
2012 2013 2014  Simultaneously, the net reported losses have also
(0.8)
(2.0) increased dramatically, as these firms are resorting to
(2.7)
bulk discounting method to acquire new customers,
massively impacting their bottom-line
Net Revenue Losses
Sources: Dion Research and Analysis

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Content Outline
6. Conclusion

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Conclusion
 The Indian E-commerce space, since its inception, has behaved and evolved much like the way it has evolved in the developed
countries such as the US or emerging countries like China, for that matter
 In all these markets, the E-commerce sector was first disrupted by entry of a slew of innovative startups. such as the likes of Alibaba in
China, Amazon in the US or Flipkart in India
 Entry of these start-ups followed their rapid expansion at the cost of profitability, resulting in skyrocketing valuations
 This course of progress was doubted by a large segment of investors, who argued that projected high valuations defy the underlying
fundamentals of these start-ups
 However, the buzz surrounding the higher valuations of E-commerce sector in the US and China subsided when global majors
such as Alibaba, Amazon took the IPO route and eventually justified their earlier projected valuations
 Indian E-commerce majors are also likely to follow the same life cycles like their global counterparts, and it is expected that they
would be able to justify their projected valuations, once they file for the IPOs and turn profitable by 2020s

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About Dion Global Solutions
Dion (www.dionglobal.com) is a leading provider of research, information, and technology

solutions in the financial domain globally. Dion's approach involves developing customized
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The company draws on its presence across the financial markets, the depth of its global expertise
and the breadth of its product development resources to serve the specific and localised needs of
its clients. Dion continually strives to make available new solutions that deliver the value that
clients are looking for, both through in-house development and strategic acquisitions. As a result,
Dion is the single source for a comprehensive and developing range of solutions, from which
financial services firms can select those that meet their business needs both now and in the
future. The company has over 550 clients in more than 80 countries supported by a worldwide
staff of 600, including 200 in product development. Company provides solutions that span
investment, retail and commercial banking, institutional trading and investment and private client
wealth management and stock-broking.

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Disclaimer
This report and information contained in this report is solely for information purpose and may not
be used as an offer document or solicitation of offer to buy or sell or subscribe for securities or
other financial instruments. The investment as mentioned and opinions expressed in this report
may not be suitable for all investors. In rendering this information, we assumed and relied upon,
without independent verification, the accuracy and completeness of all information that was
publicly available to us. Dion global solutions limited and its affiliates shall not be liable for any
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our current opinion as of the date appearing in this report only and are subject to change without
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Is India An Ecommerce Bubble

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Is India an E-commerce Bubble?

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2. Sky High Valuations of Key Players

3. Factors Driving Such High Valuations

4. Business Valuation of E-commerce Firms

5. Key Financials of Leading E-commerce Firms

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Mainstream E-commerce Players Vertical Specific E-commerce Players

Marketplaces Real Estate Furniture Fashion Education Transport Miscellaneous

 Flipkart  Housing.com  Urbanladder  Myntra  Edukart  Ola  Paytm

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2. Sky High Valuations of Key Players

3. Factors Driving Such High Valuations

4. Business Valuation of E-commerce Firms

5. Key Financials of Leading E-commerce Firms

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Current valuation Current valuation Current valuation Current valuation

Sources: Hindustan Times, Dion Research and Analysis

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2. Sky High Valuations of Key Players

3. Factors Driving Such High Valuations

4. Business Valuation of E-commerce Firms

5. Key Financials of Leading E-commerce Firms

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Primary Drivers of Such High Valuations

Sources: The Economic Times, Dion Research and Analysis

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2. Sky High Valuations of Key Players

3. Factors Driving Such High Valuations

4. Business Valuation of E-commerce Firms

5. Key Financials of Leading E-commerce Firms

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Some E-commerce Specific

Value per Visit

Sources: Hindustan Times, Dion Research and Analysis

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Sources: The Economic Times, Dion Research and Analysis

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2. Sky High Valuations of Key Players

3. Factors Driving Such High Valuations

4. Business Valuation of E-commerce Firms

5. Key Financials of Leading E-commerce Firms

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Myntra: Net Revenue and Losses

Sources: Dion Research and Analysis

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2. Sky High Valuations of Key Players

3. Factors Driving Such High Valuations

4. Business Valuation of E-commerce Firms

5. Key Financials of Leading E-commerce Firms

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Sources: The Economic Times, Dion Research and Analysis

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Dion (www.dionglobal.com) is a leading provider of research, information, and technology

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