Striking it rich? Why more ecommerce companies are developing an appetite for IPOs

A few Indian ecommerce companies are looking at a stock market listing, and this could actually spur others to take the same route.

Ecommerce companies in India backed by venture capitalists and high net-worth individuals have started to make a beeline to the stock market for a public listing, and this could be an encouraging sign for the sector struggling to visualise an exit route.

The first Indian pure-play ecommerce company to be listed on the stock exchanges was Infibeam in 2016 and today, there are two more — Indiamart and SaleBhai—that have filed their prospectus for an initial public offering (IPO).

The move to list on the bourses could augur well for ecommerce companies in India, which are struggling to find an exit route, and this is more true for companies that are smaller in size and receive a lesser amount of funding.

On ecommerce firms looking at listing on the exchanges, Vidhya Shankar, Executive Director, Grant Thornton India, says, “It is an excellent opportunity for the smaller startups looking at exits. Profit-making companies that may or may not have exponential growth do have a decent opportunity of accessing investors.”

Ushering in change

Ecommerce has transformed business in India. The Indian ecommerce market is expected to grow to $200 billion by 2026 from $38.5 billion as of 2017, according to IBEF. The value of the ecommerce market is expected to cross $50 billion by 2018. Much of the growth in the industry has been triggered by increasing internet and smartphone penetration.

Many ecommerce firms have seen how internet companies like Info Edge and MakeMyTrip have benefitted from listing on the stock market. With retail investors maturing and getting adjusted to the ups and downs of first generation internet companies, many feel the time is ripe for second-wave internet companies to jump on the bandwagon.

The ongoing digital transformation in the country is also expected to increase India’s total internet user base to 829 million by 2021, according to a Cisco India report. That is positively correlated to the performance of ecommerce firms. It is a great opportunity for founders and investors to attract retail investors and share the growth story with a larger populace.

It’s raining IPOs

Besides these ecommerce companies, there are other internet-based businesses like Info Edge, Justdial, MakeMyTrip and Koovs that have gone in for listing. A few of them are listed in India, while MakeMyTrip is traded on Nasdaq and Koovs is on London AIM.

Indiamart filed its draft red herring prospectus (DRHP) with the Securities Exchange Board of India (Sebi) and is looking to raise Rs 600 crore. This B2B classifieds platform was established in 1999 and has investors such as Intel Capital, WestBridge, Amadeus and Bennett Coleman and Company.

Similarly, SaleBhai, a speciality foods B2C company founded in 2015, has filed its prospectus on the SME exchange of BSE to raise Rs 23.73 crore. This firm has a few high net-worth individuals as investors besides Brand Capital. The issue opened on July 27 on the BSE SME platform.

New issues

The move on the part of ecommerce firms to list on the stock market could actually spur others in the sector to look at this option as well.

Talking about potential candidates to go public, Satish Meena, Senior Forecast Analyst, Forrester, says, “I don’t see any B2C company going directly to the stock market. But, of course, companies that are in support functions of ecommerce, like logistics (delivery) and payment companies, may go public."

He added, "We might see Delhivery going for an IPO. We might see a few companies from payment, like PayU, taking the same route as well. But it’s not certain whether they will look for India listing or on stock markets outside India. Zomato is also one of the companies that we need to watch out for in coming years.”

All eyes on logistics firms

As per recent media reports, logistics firm Delhivery plans to hit the capital market with a $350-million (Rs 2,500 crore) IPO in the next few months. This is set to be the first e-logistics listing in the country.

And that would just be the beginning, experts predict. Arvind Singhal, Chairman, Technopak, says, “Whether ecommerce companies make money or not, these logistics companies make revenue which is guaranteed for them by ecommerce transactions. Apart from Delhivery, we might see Rivigo take the IPO route in two to three years. For companies that are more mature like logistics, it will be the right thing for them to go to the stock market. In India, logistics companies are maturing faster than ecommerce companies.”

The B2B flavour

An investor, however, opines that the strong point of India’s ecommerce market has always been the B2B segment. “Beneath the glamour of the Flipkarts and Amazons, there is a vibrant B2B market that has a strong customer connect.”

The listing of Infibeam and the planned one by Indiamart help bring into focus the B2B segment of ecommerce industry in India, which is estimated to cross over $200 billion by 2020, as against that of B2C, which is projected to be around $70 million-$100 billion by 2020.

Satish of Forrester says, “The B2B market will grow as ecommerce market matures. But the Indian market is at a very early stage. Normally, when the online market matures, B2B will become bigger than B2C.”

On Indiamart, he adds, “Indiamart is an old company. This is not a company that belongs in the league of Flipkart, but is in the league of Naukri, Yatra and others that started their operations around the year 2000. While Naukri and Yatra went public, Indiamart was late to the party.”

The competition for Indiamart is likely to come from the B2B arms of global biggies like Alibaba, Amazon and Walmart.

Arvind of Technopak says, “Indiamart has been in the business for a number of years and their model is entirely B2B. They have achieved a certain degree of scale and size before they decided to go to the stock market. So, it’s a good time for them to debut.”

Financial parameters

However, the financials of these companies that are going for listing show contrasting performance. SaleBhai reported a revenue of Rs 45.42 lakh for FY 2016-17, but the loss was Rs 2.88 crore according to ROC filings. For the period ended January 2018, it reported a revenue of Rs 89.14 lakh with a loss of Rs 1.59 crore.

On the other hand, Indiamart reported a revenue of Rs 429.5 crore for FY 2017-18 with a profit of Rs 53.84 crore.

Despite some companies not being profitable, there is a provision in the listing regulations that states that firms that have a positive networth at a certain level can access the public markets. Similarly, the BSE’s SME platform has relaxed the criteria on the issue of profitability.

Vidhya of Grant Thornton notes that there is an appetite in the market for technology-led companies, which opens them to a new class of investors. “The investors in the stock market are focused on fundamentals like EBITDA positive, cash flow generation, unlike the private investments, which are more focused on hyper growth. The approaches are completely different,” he says.

Even the stock markets have come forward to support these firms that operate in segments that cannot take the normal listing route. National Stock Exchange’s Emerge platform and BSE’s SME platform are encouraging companies to list on these alternative trading platforms where companies do not have to adhere to the requirements of a typical IPO.

A venture capital investor who wished to remain anonymous says, “Stock markets are generally aware of companies that require growth capital when compared to the mature companies.”

As companies in India’s ecommerce industry looks at various options to raise capital, the bottom-line will always be the business model of these companies. And, as an investor says, “The question will always be whether the business is profitable or sustainable.”