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August 18, 2015

On Indian E-Commerce Valuation

In an interview to Mint, Aswath Damodaran - the well known US-based valuations expert  - has opined that India’s e-commerce and consumer technology start-ups "may be collectively overvalued". "The size of the macro story may not justify the micro-valuations," he says.

Economic Times (in its Corporate Dossier supplement) had earlier featured the views of two local practitioners - Sharad Sharma, Angel Investor and Jacob Mathew, Founder of MAPE Advisory - on the same topic.

Sound Byte from Sharad Sharma:
"Unfortunately, due to just one individual - Lee Fixel of Tiger Global - Flipkart has gone from being a poster child to being the single biggest risk to the technology ecosystem." 

His main argument:
Right now, Flipkart is valued at about $500 per transacting user. This is comparable to what Vodafone paid for Hutch in 2007 - the most expensive mobile operator acquisition ever. Built into the Vodafone offer at that time was a belief that the hockey stick subscriber growth would happen in the coming years. And indeed, that did take place. The Vodafone subscriber base has grown from 22 mn in 2007 to 173 mn today. E-commerce players like to point to this mobile growth story to justify their current sky-high valuations. India is not China. There are only 50 mn households in India with disposable income of Rs 3 lakhs or more. And, offline retail isn't going away like landlines. It's a lot stickier than we imagine. In US, even today 10 of 11 dollars are spent offline and this share isn't shifting dramatically. Given all this, further valuation growth in Flipkart from here would be in completely uncharted territory. After all, Flipkart is already at a 2-3X multiple on GMV compared to Alibaba's 0.7X. 
Sound Byte from Jacob Mathew (quoting a friend) :
"Earlier, enterprises were about selling to consumers and giving dividend to shareholders; current mood is all about selling to shareholders and giving dividend to consumers." 
His main argument:
Valuations are too much into the future and are based on humungous assumptions. You can justify the Flipkart valuation if you assume that by 2020 the Indian online market will be $100 bn and they have 60 per cent market share and that they are making EBITDA margins. Will the current $5-6 bn market actually jump to $100 bn in 5 years? Will the leader have 60 per cent market share and that too in a market like India where not much consolidation is happening? Will the topline hold when you are charging all costs plus a small profit margin to the customers? 
Forget valuation, at times the business model itself is problematic. Will buyers pay 2 per cent commission for buying/renting a house in India where the touch point is only online? How can you use a car to home deliver restaurant food with ticket sizes of less than Rs 500/order? Just because somebody has downloaded your shopping app in his/her smart phone, can you start talking about the lifetime value of a customer? 
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