1/8/2015 ETailingInIndia:TheBestWayToPlayItIsMissIt|SeekingAlpha

http://seekingalpha.com/article/2754325etailinginindiathebestwaytoplayitismissit?page=2 1/8

Summary

GlobalinvestorsarescanninginvestmentopportunitiesinIndianetailingspace.Seehowthetopplayersareburningcashinthenameofpromotions.WhereistheheartofthematterandwhatarethechallengesintheIndianetailingspace?

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ETailingInIndia:TheBestWayToPlayItIsMissItDec.14,20144:36PMET|Includes:AMZN,BABAby:RaviParikh

Disclosure:Theauthorhasnopositionsinanystocksmentioned,andnoplanstoinitiateanypositionswithinthenext72hours.(More...)

1/8/2015 ETailingInIndia:TheBestWayToPlayItIsMissIt|SeekingAlpha

http://seekingalpha.com/article/2754325etailinginindiathebestwaytoplayitismissit?page=2 2/8

OneofthemosthotlydebatedtopicsinIndiathesedaysishowtoinvestintheIndianetailingspace,especiallyafterAlibaba's(NYSE:BABA)successfullistingontheNYSE.ThebrightestmindsarescanninginvestmentopportunitiesasglobalinvestorsarelookingtogetapieceoftheIndianetailingspace.Thepreferreddestinationforthesmartestmoney(PE/VC)isconfinedtothetopthreeplayersFlipkart,Amazon(NASDAQ:AMZN)andSnapdeal.

TheposterboyofIndianetailing,Flipkart,announcedinvestmentsof$1billionthisJuly.ThatroughlyvaluesthelargestIndianonlineretailerat$7billion.ItsvaluationismultiplyingwitheachpassingquarteraslateasMaythisyear,newsreportsvaluedFlipkartataround$2.53billionwhilethelatestroundoffundinginNovembersuggestsa$10billionvaluation.MerelyadayafterFlipkart'sofficialannouncementof$1billionfundraiser,theetailingGoliath,Amazonannounceda$2billioninvestmentintoitsIndianarm.Meanwhile,SnapdealropedinJapan'sSoftbankasitslargestinvestorwhichvaluedtheventureat$2billion.TheinvestmentarmofthegovernmentofSingapore,thelegendaryRatanTata&AzimPremjiandtheworld'slargestassetmanagerBlackRockaresomeoftherecentinvestorsthatSnapdealattractedthisyear.AndrecentlyJackMametwithSnapdeal'sfounderduringhisIndiavisitandspeculationgrewthatSnapdealhadaddedanotherfeatherinitscap,buttherewasnoofficialannouncementfromeitherparty.

1/8/2015 ETailingInIndia:TheBestWayToPlayItIsMissIt|SeekingAlpha

http://seekingalpha.com/article/2754325etailinginindiathebestwaytoplayitismissit?page=2 3/8

Update:Flipkartrecentlyraised$700millionatavaluationofaround$11$12billion.Toprovidesomeperspective,atcurrentvaluationFlipkartislargerthanDaburIndia($6.5b)andGodrejConsumers($5b)combinedtogetherandalmostequivalenttoBajajAuto,AsianPaintsandUltraTechCement.WhileBajajAutoreportedtotalsalesof20,800crandanetprofitof3,240cr,Flipkartreportedalossof644crwithtotalturnoverof1,163crin20122013accordingtodocumentsfiledwiththeSingaporeGovernment,whereitsholdingentityisregistered.

Thefadofburningcashcalled'discounts'

Indiadoesn'tpermitForeignDirectInvestmentsinecommercecompaniesthatsellproductsdirectlytoconsumers,butitallowsthemtoestablishmarketplacestoconnectcustomerswithsellers.Neitherofthethreeplayersholdinventoriesontheirbooksandhence,theycannotexerciseproductpricingstrategiesonbehalfoftheirsellers,atleastnotlegally.Buttheycircumventtheregulationsandindirectlyfundthediscounts.Anewsreportexplainedhowexactlythisworks.Foraproductpriced100whensoldforadiscountof40%byasellerononeoftheseportals,theonlineretailerwillcollect60fromthecustomerandpassitontotheselleraftertakingitsownmargin.Then,theonlineretailerwillalsogivetheselleranadditionalamounttoaccountforthediscountofferedbytheseller,whichcouldbe40orless.Attheendofacertainperiod,sellerswillsendadebitnotetotheonlineretailertitled"promotionalfunding".Thisnotecontainstheamountofdiscountthatthesellergaveonallproductssoldontheirsite.

Thesocalled"promotionalfunding"mightbeagreatmarketingactivitytoattractnewcustomers,buthowoftencanonepracticeit?Thediscountgivendirectlyimpactsthebottomline.Theneverendingroundsoffinancingandexponentiallygrowingvaluationsoftheirventureshavecompelledthefounderstobelievethatthisisindeedthebestwaytoburncashrapidly.Amazonseemstohavemasteredthisartofburningcash.Ifonelooksatthechartbelow,ithighlightsthepointsuccinctly.Exponentiallygrowingrevenuesandanalmostflatbottomlinenotforquartersbutfordecades.Flipkart,whosefoundersareexAmazonemployees,seemstohavegeneticallyinheritedthistraitofburningcash.

InarecentinterviewinIndia,oneoftheearliestinvestorsinAlibaba,MasayoshiSon,saidhebelievedthatSnapdealcanbecomeIndia'sAlibaba.Butaspermediareports,Snapdealtoogaveintopeerpressure.Duringtheirbuyone,getonepromotionaloffer,itpaidthesellersforthesecondproductwhilechargingitscommissiononlyononeitem.AlibabaapparentlyseemstohavechartedadifferentcoursethanAmazonandhasgrownbothrevenuesandprofitsexponentially.ItmightbetooearlytocompareSnapdealwithAlibaba,butthebillionaireMasayoshiSon'smoveofplacingindustryveteranandtheformerhighestpaidGoogleexecutive(NikeshArora)onSnapdeal'sboardmightbeasmartmove.

1/8/2015 ETailingInIndia:TheBestWayToPlayItIsMissIt|SeekingAlpha

http://seekingalpha.com/article/2754325etailinginindiathebestwaytoplayitismissit?page=2 4/8

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1/8/2015 ETailingInIndia:TheBestWayToPlayItIsMissIt|SeekingAlpha

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ThecuriouscaseofAmazon'svaluation

Amazon'sstockhasperformedwell.Infiveyearsfrom2008to2013,thestockhasoctupledandhandsomelyoutperformedthemarkets.Muchoftheoutperformancehadbeenattributedtothestupendousrevenuegrowththatthecompanywitnessedinthoseyears,ashighlightedinthegraphabove.FounderJeffBezos'svisionaryideasandhisabilitytoputhismoneywherehismouthishaswooedinvestors.However,substantialprofitmarginswerealwayselusiveforinvestorsandtheyhavetobecontentonlywithrevenuegrowthrates.

AmazonreportedalossforthelastquarteranditsforwardP/Eisexpectedtoberoughly370asperYahooFinance.Withannualsalesof$85billion,Amazoncommandsamarketcapitalizationofaround$150billion,whileAlibaba,withrevenuesof$9billion,hadamarketcapitalizationofaround$300billionataforwardP/Eof35.Prof.DamodaranarguedthatthemarketshavebeenextraordinarilyforgivingofAmazon'slonglossmakinghistoryandhadgivenJeffBezosenoughbreaksthatveryfewcompanieshavereceivedthroughtime.However,withmoderatingrevenuegrowthandalackofprofitabilityindicators,investorsseemstobefleeingAmazonthisyearatlast,ifthegraphbelowinanyindicator.Thestockhasunderperformedthebroadmarketsbyover35%YTD.

1/8/2015 ETailingInIndia:TheBestWayToPlayItIsMissIt|SeekingAlpha

http://seekingalpha.com/article/2754325etailinginindiathebestwaytoplayitismissit?page=2 6/8

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ConcludingRemarks

Indiaisstillnascentintheetailingspaceanditsgrowthprospectsareverypromising.ButIndiahasitsownsetofchallengesitmustfaceinorderforitsetailingspacetofoster.ArecentPwCreporthighlightsthatlogisticsandinfrastructurearethebackboneforetailingyouneedbricksbehindthoseclicksandinIndiathesearetheweakestlinks.LogisticsmanagementhasalwaysbeenchallenginginIndiagivenitsgeographicaldiversity,subparinfrastructureanddifferingtaxationregimesacrossstates.Mostofthethirdpartylogistics(3PL)providersareeitherregionalplayersorhavelimitedpresenceintier3cities.Indiahasover35,000pin(postalindexnumber)codesandmostofthe3PLsareunabletocovereven10,000pincodesofthecountry.

Unfortunately,India'sinfrastructurewillnotgrowasexponentiallyasthevaluationofFlipkart.Rather,aninterestingcandidatetolookoutforisIndiaPost,whichistrulypanIndiaandisalsodeemedtobecomeafullfledgedbankinthefuture,anidealstrategicpartnerforalletailers.

ATechnopakanalysishighlightsthesharesplitof100ofrevenueearnedbyanetailerinsteadystate(asbelow).Similarstudiesindevelopedmarketshavehighlightedasingledigitrevenueshareforetailers.

Thecaseforinvestinginetailersshallbeputtorestafterseeingthevaluechainforasteadystateetailingmarket.Indeed,Indiaisfarfrombeingasteadystatemarketandhence,thecaseisevenmorestraightforward.Eventoextract3%of100revenues,theetailerswouldhavetosplurgetogetnoticedandgeteyeballstrainedontheirwebsites.Whywouldsomeoneinvestinsuchcompaniesatloftyvaluationswheninvestingclearlymeanssponsoringtheirsplurgetoextractaminisculemargin?

1/8/2015 ETailingInIndia:TheBestWayToPlayItIsMissIt|SeekingAlpha

http://seekingalpha.com/article/2754325etailinginindiathebestwaytoplayitismissit?page=2 7/8

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