Poised To Revive The IPO Market

The Indian equities are soaring and making new highs at almost every trading session. It seems that it is defying all the rules of gravity and only inching northwards. The reason for such highs is quite simple, it is the strong FII inflows which helped the equity indices sustain these high levels. And when the secondary markets are trading in such a strong zone, it is but obvious that the primary market also gets a good amount of traction. The history suggests that it is in such favorable condition that the primary markets bloom. It is also true that the situation is usually favourable to the issuer and not the investors.

The equation is quite simple, every promoter wants to take advantage of the upbeat markets to maximise the value of their stakes. Hence historically it is been seen that when the secondary markets bloom the promoters want to time their primary market offerings.

With the Indian secondary markets remaining un-certain in past two years on account of various factors like policy paralysis, slower GDP growth, rising inflation and depreciating currency, even the primary market remained almost dormant. Rather, FY14 has witnessed the lowest amount of funds raised through the primary market route in last 10 years (Refer Table – IPO Issuance since FY04). 

Just the put the figures in perspective, FY14 ended with a mobilisation of only Rs.1205 crore, it was one of the worst year for the Indian IPO markets. Here Pranav Haldea (Managing Director, Prime Database) states that, “There was just one main-board IPO during the entire year that is Just Dial which raised Rs.919 crore (As against 9 IPOs for rs.6,289 crore in FY13)”. He further added that, “FY14 however continued to witness a flurry of activity on the SME platform”.

If we take a look back, at the market in general, it has not been IPO-friendly for last three years due to a variety of factors. This includes overall poor sentiments, secondary market volatility, promoters not getting the valuations they think they deserve (Or even what they want), apprehensions of regulator’s views on valuations, lack of appetite for equity of big-time issuers from the infrastructure sector (especially power), telecom and real estate. In addition, the UPA government did not carry out even a single divestment of an unlisted PSU in the last two years. The last PSU IPO was that of NBCC in March 2012.

However with the secondary market witnessing a revival the primary market is likely to witness a good amount of traction. Here Haldea adds, “The new fiscal 2015 is expected to see a revival of the IPO market. There is a lot of pent up demand as far as issuers are concerned with numerous companies in dire need of equity infusion. There are also scores of companies where PE firms or other institutional investors are desperately looking at an exit”.

Apart from that the current factor which is providing support to market is a feel good factor of a strong government post-elections, which will completely revive investor sentiments and with it the IPO market in the second half of this financial year. The secondary markets are already extremely buoyant and the bull-run is expected to continue, a usual pre-requisite for revival of the primary markets.

Globally too, the IPO markets have been very active for several months now, and hence we feel the global investors will also have an appetite for Indian IPOs. It is also expected that several unlisted PSUs will also finally enter the market during the year. Just to quantify, as per PRIME database, there are over 900 companies that have made announcements of their IPO intentions.Presently, however, there are only 14 companies planning to raise Rs.2796 crore which are holding SEBI approval, while another 4 companies intending to raise Rs.2700 crore which are awaiting SEBI approval.
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Private Equity Deals Soaring

While this is a scenario with usual IPOs, there is a lot of activity occurring on the Private Equity front (Look Table Top Investment Bankers and Deal Value in CY2013). While there are lot of PE deals happening in various sectors there has been dominance shown by the E-Commerce companies and the healthcare sector. Just to talk about E-commerce companies, a chunk of money has been poured in to companies like Flipkart, Lenskart, Quikr and Snapdeal etc., to be mentioned from the long list.

Private Equity Highlights for 2013

Private equity investments increased 11 per cent in terms of deal value from USD 9.49 billion in 2012 to USD 10.5 billion in 2013. Deal Volume on the other hand decreased 12 per cent to 660 deals as compared to 754 deals in 2012. The median deal amount was a notch higher at USD 4.5 million from the USD 4 million in CY2012.

• The average deal value increased by a third from USD 16 million to USD 21 million.

• Private Equity deals under USD 50 million accounted for 71 per cent of total deal volume in 2013, with big ticket deals (USD 100 million+) accounting for another 3per cent.

• Big-ticket deals (USD100 million+) constituted 54 per cent of the total private equity capital invested in 2013.

 • In 2013, 18 India dedicated private equity funds were launched targeting a combined corpus of USD 3.3 billion.

 • Limited Partners committed USD 2.8 billion of capital across 33 India dedicated funds during the year.

• Private equity investors liquidated investments to the tune of USD 3.76 billion across 158 deals.

Investors are pumping huge sums of money in yet-to-be profitable e-commerce firms in India, in the hope that these companies will gain sizeable market share as more young people with higher disposable incomes start buying online over the next five years, say analysts. Already, this year has seen 10 transactions worth USD 288 million (around Rs.1785 crore) in the space, according to VCCEdge, a deals tracker. What has added to the excitement of the investors is the emergence of Alibaba.com on the horizon for its maiden listing on the US bourses. Alibaba is one of the largest online retailers in the world and is the largest in China with its revenues of around USD 4.1 billion in CY2012. Investor’s might be confused what is the relation between an E- commerce companies getting listed in the US markets with the Indian E- Commerce companies?

The answer is frankly a no brainer, the kind of higher valuations these global companies enjoy on the bourses it would be easier for the Indian promoters and even the PE players to make an exit at good valuations. As a result, a good amount of traction has been witnessed in Indian E-commerce companies also. With many deals happening in the segment and the secondary market witnessing a bull phase, it is now expected that many PE investors would try to make an exit. So, it is important to find an answer to what valuations the companies can get?

However before entering the discussion about what valuations these companies can get, it is important to understand how deep the Indian e-commerce market is?

The Indian E-commerce (Online market) is currently pegged at USD 3.1 billion. And with a strong CAGR it is likely to touch the levels of USD 8 billion by 2016. With such strong growth prospects, no wonder there are lot of companies which are expected to tap the primary market floor.

Going ahead we provide you with the information on some of the leading companies which are the poster boys of the Indian E-commerce segment. (Table: India’s E-commerce Portfolio)

Lenskart

The founder and chief executive of Valyoo Technologies, which runs a string of e-commerce firms that range from selling eyewear and bags to watches and jewellery, is now arms deep in repositioning his company’s operating model, as it strives towards profitability and a public listing. We guess it was the call of private equities (from whom the company raised funds) which asked the promoters to focus on Lenskart.

Peyush Bansal (Founder, Lenskart) and his team have decided that it is Lenskart, Valyoo Technologies’ online eyewear brand that will drive growth and catapult the company to profitability. They are leaving no stone unturned to ensure the same by fiscal 2015.

In one of his interviews Bansal had categorically stated that, for them to sell watches and bags is very different from running Lenskart. According to him e-commerce and LensKart is something else and hence his team wants to innovate and build Lenskart. As for Lenskart, it is important to understand that, eyewear is a business which is also dependent on repeat orders. Hence satisfying the customer is of utmost importance. As of today IDG Ventures and Unilazer Ventures have invested in the company. However the valuations of the company are still undisclosed and even the management stake in the company is not disclosed. The company is expected to post sales turnover of around Rs.50 crore in FY14.

Firstcry

The story of Firstcry is also very interesting. It was in 2009, that Supam Maheshwari (Founder, Firstcry) decided to take a break. Two years earlier, he had sold his e-learning company Brainvisa to Indecomm Global Services for about USD 25 million (`155 crore) and his lock-in contract was over. But true to his ability as an entrepreneur he could not sit idle and hence in 2010, Maheshwari along with Amitava Saha, an IIM-Lucknow graduate, who led sales and business operations at Brainvisa, launched babycare site Firstcry.

Pune based Firstcry is the leader in the babycare segment and recently raised `92 crore from Vertex Venture Management and existing investors. According to Maheshwari, an IIM-Ahmedabad alumnus, the team is the most important element in an organisation. It is no wonder that, not a single person from his top team of about 12 people have not quit yet. Today the management holds around 25 per cent stake in Firstcry and can easily enjoy 3-4 times valuation of its sales. However the company has kept the revenues under wraps and hence providing actual valuation of the company seems quite difficult. Till date the company has raised around Rs.205 crore.
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HealthKart

It is said that, for most graduates from Ivy League MBA schools Wall Street is a natural destination. However the story was different for Prashant Tandon. With a degree from Stanford University’s much-lauded Graduate School of Business, Tandon decided to use the experience and expertise to launch his own venture.

HealthKart is the Gurgaon-based online pharmacy network, founded by Tandon and Sameer Maheshwari, a graduate from IIT Delhi and Harvard Business School. HealthKart provides customers with access to consumer health products and services. It has also branched into selling prescription drugs. A natural extension for services it offered.

The concept of the business is very good as healthcare in India is an underserved and underpenetrated market. There is a huge demand. Now one different aspect the company’s management provides is, while most of E-commerce companies are only thinking about the sales revenues and are almost ignorant about bottomline. Tandon makes no bones about the fact that while growth is important, profitability ranks alongside. Till date the company has raised more than USD 20 million (Rs.120-130 Crore) from a list of investors like Kae Capital, Sequoia Capital, Intel Capital etc. We feel most o them would be looking to make a profitable exit. The company is likely to post a topline of Rs.120 crore in FY14.

Myntra

If we talk about the founders of Myntra.com, Mukesh Bansal is known as focused, determined and a good leader. It is no wonder that these attributes have helped him make Myntra not just the leader in the online fashion category, but also an organisation with strong processes and systems. For Bansal, an IIT-Kanpur alumnus like his co-founder Ashutosh Lawania, building processes was as important as growing the business. He spends a lot of time initially putting the checks and balances in place. Bansal has worked for seven years at a series of tech start-ups in the United States after a short stint at consulting firm Deloitte. He returned to India and set up Myntra as an online retailer of customised apparel. His risk-taking ability came to the fore when three years later he switched his business model. That decision has paid off. Myntra is targeting sales of Rs.1500 crore in fiscal 2015.

The company has set the target that, in 18 months, it wants to become the largest fashion retailer in the country. Till date the company has raised around Rs.780 crore and is targeting sales of Rs.1500 crore by FY15. As on the valuation front, the company is valued between Rs.1400-1600 crore. However we feel that, if the sales revenues are achieved in FY15, the valuations would get a booster. Hence the PE players would not like to exit soon and would wait for next one year.

Flipkart

Flipkart is undoubtedly the king of Indian E- retail and the burden of being the founder and CEO of the most successful ecommerce start-up in the country rests lightly on Sachin Bansal.

As stated earlier, since its launch in 2007, Flipkart is now counted as the flag bearer of Indian ecommerce, selling everything from books to apparel and targeting USD 1 billion (Rs.6200 crore) in sales next year.

The founders, Sachin Bansal and Binny Bansal (not related), have had to keep pace with this rapid growth. The two worked at Amazon India before launching Flipkart out of a small flat in suburban Koramangala in east Bangalore. Today, the company’s 10,000-strong workforce is spread across over six offices and multiple warehouses.

According to Sachin, the biggest learning was to step back and not get involved with every decision. And rather than becoming the bottlenecks, the founders remained outside. To ensure fast expansion, the founders empowered their senior management team as well. And the results are clearly seen with Flipkart today shipping about one lakh orders daily. Today the company has a valuation of around Rs.10000 crore with management holding little less than 20 per cent. Flipkart has raised funds to the tune of Rs.3360 crore from the likes of Naspers, Morgan Stanley Investment Management, Tigre Global and Accell Partners. As stated earlier the company is planning to achieve sales of around Rs.6200 crore in FY15.

Zomato

The story of Zomato is also quite interesting. But before talking about it, we would like mention that when we contacted Zomato Management, it categorically stated that- we are not an E-commerce company. However with the kind of funds it has raised in the past few years it definitely deserves a mention in our story.

Whenever IIT-Delhi graduate Deepinder Goyal likes the food at any new restaurant, he makes sure to collect or photograph its menu. It was this flair for pinning food menus at his office desk for ordering lunch that made the former Bain & Co associate start an online site called Foodiebay.com in 2008 with his colleague Pankaj Chaddah. Over a period of 1-2 years, the bundle of menus became so large that it took the form of a company, which in 2010 was funded with USD 1 million by Info Edge India, and was re-branded as Zomato. Goyal till date continues his hobby, whether sampling pizzerias in Testaccio, Rome or Chinatown, New York. In one of his interviews Goyal had stated that, he loves to hire former entrepreneurs. Reason being entrepreneurs rarely complain about stuff, and are always in the state of fixing things which are broken.

The start-up was funded with USD 37 million (Rs.231 crore) last year, the largest investment in its category. Now till date the total funds raised by the company are around Rs.330 crore and the total valuation of the company stands at a whopping Rs.1000 crore. With revenues of just `40 crore in FY14, the valuations surely looks stretched. But with hardly any competition and being a different business model, many feel the valuations are right.
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Snapdeal

It was the denial of an H1B visa to work in the US, while working for a software major, that led Wharton graduate Kunal Bahl, 31, to return to India and try his hands at a discount coupon business in 2008. The business pivoted into an online deal site called Snapdeal in 2010, which finally became an online marketplace in 2012.

Even while in the US, Bahl used to call up his schoolmate and IIT Delhi graduate Rohit Bansal, who was working in Gurgaon, to discuss start-up ideas. The determination to remain in the game has made Snapdeal revolve many times. And it finally hit pay dirt last year, when the biggest investors in the game such as eBay, Recruit Corp (Japan), Intel, amongst others pumped in about USD 50 million. The management today holds around 35 per cent stake and the company has raised funds to the tune of Rs.636 crore. As for the sales volumes, it is also expected to post Rs.6200 crore in revenues in FY15. On the valuation front, the recent study by a leading valuation company pegged it at Rs.1000 crore. We feel the valuation would soar up as the company reaches the critical mass in terms of sales revenues.

Where India Stands On Global E-commerce Map?

If we consider the valuations of global E commerce companies, there is huge gap between valuations. Naturally it is also true that the kind of online market that exists in countries like USA and China, India is not even close to that. With the USD 230 billion and USD 210 billion (in 2013) the online market place in USA and China are far ahead of India’s USD 3.10-3.20 billion. In 2013, revenue from online sales in China was between USD 190 billion- 210 billion, a close second to the American market, worth USD 220 billion – USD 230 billion, according to a survey conducted by McKinsey.

Hence it is no wonder that the global peers enjoy a larger canvas and also the premium valuations. If we consider Alibaba.com and if the e-commerce giant’s IPO falls through properly, it will command a whopping USD 152 billion in market capitalisation. Now this would be around 23 times of its annual sales. If we compare this with the already listed players like E-Bay and Amazon, Alibaba seems to be highly valued. According to Bloomberg the market capitalisation of Amazon (largest online retailer in the world) at USD 173 billion is just 2.3 times of its sales.
 As for E-bay which is also holding interest in few of the Indian E-commerce companies, has a market capitalisation of USD 73 billion and trades at 4.6 times of its annual sales.

Now there are various parameters that create a distinct between Alibaba and others. First and the foremost is the bottomline aspect. Amazon, founded in 1994 has never been profitable since inception. In contrast, Alibaba has had a far smoother road to profitability, given that it does not own any of the products that are sold on its flagship websites, Taobao and Tmall.

As for valuations, Alibaba is expected to use Twitter’s November IPO as a barometer of investor appetite for technology shares. Twitter’s sizzling debut raised around USD 2.1 billion and the firm ended its first day with a market capitalisation of about USD 25 billion. This made it larger, out of more than half the companies in the S&P 500. On Facebook’s debut it sold 42.12 crore shares to raise USD 16 billion, giving it a USD 104.2 billion market value.

Where Do Indian Companies Stand Today?

If we try to put the Indian players in line with these major companies, the overall Indian market is itself lower than the sales posted by these companies. And though India is a growing market, it would still be difficult to compete with China and US which are almost 100 times larger markets than India. Hence it would be quite difficult for the Indian companies to compete with the global retailers in terms of size. Further the global players are profit making entities while the Indian players are still bleeding at bottomline levels. Though it is a case with most of the E-commerce companies, it is important for the companies to generate cash flows. Till date it is only Just Dial (a partially E-Commerce player) which enjoys a market cap of Rs.11162 crore (around USD 1.85 billion). However it is a profit making entity with consistent cash flows. Though the Indian E-commerce companies are up-beat about getting profitable in the next two years, there are various road blocks ahead.
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Some Issues - Infrastructural, Reach, Trust and Regulatory

The first challenge for e-commerce retailers in India is collecting payment. Less than 2 per cent of Indian consumers own credit cards and 90 per cent of all retail transactions are conducted in cash. As a result most e-commerce sites are forced to offer a Cash-on-Delivery (COD) option. Eight out of ten online transactions are conducted on a COD basis. However, as per one estimate 45 per cent of all COD orders are rejected at the point of delivery by the customer. This is clearly expensive and not a very sustainable business model. The problem is compounded by the fact that most e-retailers also offer free shipping to acquire and retain customers.

The second challenge is dealing with the actual logistics and delivery of goods ordered online. This is both inefficient and unreliable due to poor roads, traffic congestion and an overall weak transportation infrastructure coupled with India’s vast size. In fact much of the investment into E-commerce companies is going into logistics. Many companies are setting up their own warehouses and delivery centers to extend their reach and streamline operations.

Other factors that are making it harder for E-commerce companies to survive include razor thin gross margins due to deep discounts and intense price competition. In fact many items are sold at a loss to attract customers. No wonder the companies are yet to turn profitable. Profitability is also negatively impacted by high customer acquisition costs, free shipping and the high rejection rate of COD orders. It is no wonder then that most e-retailers are losing money and are being propped up with investor capital. The largest player Flipkart is yet to churn a profit. All of this has inevitably led to a high mortality rate and consolidation in the segment. Of the 193 E-commerce companies that were launched, almost half or 87 have ceased to exist, having either been acquired or shut down as investors cut their losses and trimmed their portfolios.

What’s The Road Ahead?

For nearly a year now, some of the world’s most renowned investors have poured in big money to get a slice of the action in India, one of the fastest-growing markets for ecommerce. This surge of capital from a plethora of sources, including risk capital funds and business conglomerates, is directed at a select group of online commerce companies, those who are leaders in their categories and have demonstrated a track record of capital efficiency. What we want to indicate is, the deals have happened in handful of companies. And even for them the real test is ahead, as there would be pressure from the investors to perform better as they could unlock the value. IPOs seem to be the right way. The moot question is what valuation they could enjoy. If we consider the global perspective, the companies can enjoy anything between the four-six times of sales. Why we are providing a higher valuation as compared to the global players is, India is a growing market and as the mobile and especially internet penetration increases in India, the E-Commerce opportunities would surge ahead only.

But will the E-commerce companies tap the primary markets soon? Our answer is, it would be too early for the companies to tap the primary market floor. Hence the secondary deals for PE investors would be the right exit strategy. But by the end of FY15 one can expect a bunch of E-commerce companies to tap the primary market floor. It would be only after Alibaba get listed on the US bourses, the Indian E-Commerce market could enjoy some traction on the Dalal Street.