Funding squeeze causing stricter evaluation of eComm models

According to Kotak Institutional Equities' Internet Monthly report, 'E-commerce story - bumps in the road', a tightening funding environment has prompted stricter evaluation of business models.
eCommerce Story of India

A tightening funding environment has prompted several developments in the Indian eCommerce ecosystem, read a Kotak Internet Monthly report.

According to Kotak Institutional Equities’ Internet Monthly report, ‘E-commerce story – bumps in the road’, a tightening funding environment has prompted stricter evaluation of business models with possible addition of new income streams, and shutdown of companies and consolidation.

The research said that the tight funding environment has led to consolidation and hyperlocal grocery/delivery segment seems to be worst-hit by the development. Hyperlocal grocery delivery company, Peppertap has shut its grocery delivery business and is now focusing only on logistics business, and hyperlocal delivery company, Roadrunnr is merging with food-ordering app Tinyowl. Media reports have also reported that several other portals such as Foodpanda, Jabong and Housing are on the block.

Focus on profitability is spawning changes in business models
Lack of fresh funding as well as stricter focus on profitability by investors is leading to swift business model changes by companies, said the research. Snapdeal has incorporated various services such as flight/bus/hotel booking, food delivery, and personal services in its app. It has also stated that instead of tracking GMV, it would track the number of daily transacting customers as a performance metric.

Flipkart is also shifting gears. First, it abandoned its app-only strategy for both Flipkart and Myntra; second, it has opened its logistics vertical Ekart to other eCommerce companies, and launched ‘Brand Hub’ on its app to allow brands to create their own stores, using its data analytics and other support services.

Reduced valuations: A steep bump
The hyper-valuations seen in successive funding rounds in 2014-15 seem to be correcting, added Internet monthly report. Fidelity has marked down its holding in Flipkart by ~40% as of Feb 2016 (compared to Aug 2015), implying that the firm’s valuation may now be significantly lower than peak valuation of US$15.2 bn attained in CY2015.

Rocket Internet’s Global Fashion Group’s (Jabong’s parent) valuation plummeted by ~67% during its last fund raise in Apr 2016, and Fabfurnish was acquired by Future Group for ~US$3 mn, at a substantial discount to funds raised of US$28.5 mn.

Amazon stable amid markdowns
Amazon’s commentary pertaining to India has been remarkably stable in its past 4-5 quarterly conference calls, with the company reiterating its stance of investing heavily in India, the report further added. The company is continuously innovating to improve buyer experience, setting up a new 10-acre campus in Hyderabad, and continuing with several programs such as ‘Tatkal’ to expand seller base.

The road ahead
“As noted in our earlier notes on losses of Indian eCommerce companies and imminent consolidation, we believe the current wave may intensify, leading to fewer, stronger players emerging within each category. Low valuations may prompt brick-and-mortar companies to take over some eCommerce rivals, in a bid to make an online presence for themselves (such as Titan’s purchase of Caratlane and Future Retail’s purchase of Fabfurnish),” it read. Further, recent government regulations clamping down on discounts and dependence on single large vendors may necessitate further changes in strategy, and could impact sales growth in the near term.

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