Moment of reckoning for Indian ecommerce as valuations plummet

The period of irrational exuberance seems to have come to a temporary halt as VCs and investment firms begin to reappraise what they paid for in the first place.
Written by Rajiv Rao, Contributing Writer

It's almost as if the world woke up and realised that the kings of Indian ecommerce were wearing no clothes.

Yesterday, Indian restaurant search site Zomato, which is in a major battle with Yelp for world dominance, was given a major haircut by HSBC Securities and Capital Markets when the investment firm valued it at around $500 million -- or just half of the valuation at which it raised its last round of funding in September last year. The firm pointed to an over-dependence on online advertisements and haemorrhaging international operations for the markedly lower figure. (The company has raised $225 million since it was funded in 2008.)

This isn't good news for Zomato -- and it won't take much solace in the fact that it is following in the footsteps of Indian ecommerce giant Flipkart who has also experienced the ignominy of a markdown in its net worth recently.

First it was Morgan Stanley and T. Rowe Price, both of whom own hundreds of millions of dollars out of what was once a $15 billion market cap, who respectively decided that Flipkart was worth only $11 billion and $12.75 billion in their investor declarations in late February.

Then two other funds, Valic Co 1 and Fidelity Rutland Square Trust II, who both own a sliver of the company (around $6 million shares) also went the same route and recalibrated the value of their holdings. Valic did it by close to 30 percent while Fidelity went further by chopping the worth of its holdings by close to 40 percent.

Flipkart's co-founder Sachin Bansal reacted to this by stating that all this is fine and dandy but doesn't change a thing since it's only a shareholder opinion and nothing more. Flipkart is not raising any money -- which is when a markdown would matter. For now, this is basically an irrelevant exercise, he insinuated

"In the long term, things will take care of themselves. Good times do not last forever and bad times don't either. Things will keep changing and the learning we should take from this is, when the good times come again -- and they will -- we should not fool ourselves thinking that it will remain constant, and remember a downturn will come again," Business Standard newspaper quoted Bansal as saying.

As a few publications have already observed, this is the most down-to-earth prognostication they have heard from this founding team who have been more known for their know-it-all attitude and overweening self-confidence.

Zomato's Deepinder Goyal similarly brushed aside HSBC's devaluation of his firm saying in a blog post that "nobody who knows our business has marked down our valuations. In fact, our existing investors are bullish about us, and are willing to back us further, if needed. But external perceptions of valuations are determined by the state of the market, and the availability of facts to the person who is analysing these numbers."

The fact remains that either everyone has egg on their faces, or no one does. It all depends on who does the finger-pointing in an industry that has always thrived on irrational exuberance. The same investors that are now the de-facto barbers performing haircuts are part of an industry where following the herd and plonking down money chasing either asinine valuations or ideas with paper-thin business models (food delivery companies anyone?) have been de rigueur.

When a company is finally able to go public and then consistently satisfy shareholders every quarter with its performance -- which will depend heavily on profitability, something these ecommerce companies are not altogether familiar with as yet -- only then will talk of valuations become truly worth debating.

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