End of honeymoon for etailers in India

It could be an end of honeymoon for online retailers (e-tailers), who have splurged crores of rupees on discounts and marketing to expand their market, as private equity funding — their mainstay — gets further tightened.


According to India Ratings and Research (IndRa), e-tailers are exposed to funding risks as their access to easily available private equity (PE) funds are getting tighter.

The rating agency believes that the funding through the conventional bank lending is highly unlikely due to previous years losses, lack of visibility of positive cash flow in the near term and absence of material collateral. “So e-tailers would be required to look for specialized institutional investors, who have a high risk appetite, for bridge finance,” it said.

E-tailers, which were flushed with PE funds up till 2015, have had lesser fortune this year, with muted deals during January-April 2016.

The funding concerns have arisen at a time when e-tailers are undergoing a structural transition in their business model, involving considerable capital expenditure. This, according to India Ratings, could also lead to home-grown players losing market shares to global giants.

According to the rating agency, online retailers are attempting to move out of the deep discounting model to a more sustainable business model, by offering lower discounts, improving efficiencies and focusing on improving loyalty among customers, which requires a considerable investment commitment.

As a result, the existing players have large planned investments in the value chain namely logistics, payment banking, fulfilment centers and omni channels with a primary focus on improving the active customer base, enhancing customer loyalty and value addition.

“Since these players have planned investments in the entire value chain, funding requirements are expected to still be sizeable. In the event of unsuccessful rounds of PE funding in the future, e-tailerswith high cash balances may have to use their cash surplus cautiously to fund growth in the short to medium term. This may jeopardize their organic growth and may result in losing market share to global giants,” it added.

This is expected to further impact the e-tailers valuations, which have recently taken a beating.For instance, several fund houses had marked down the valuations of Flipkart and Zomato.

“The PE activity will remain muted in the foreseeable future, especially after a series of mark down in valuations of e-tailers by investors.

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