Are E-Commerce IPOs For You?

Tue, 22 Mar Pre-Open

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The e-commerce revolution has made quick inroads into the Indian economy. We're sure you are familiar with all these big names - Flipkart, Snapdeal, Makemytrip, Uber, Myntra, etc.

But guess what, these entrepreneurial ventures are less than a decade old. With Indians taking to the e-commerce revolution like fish in water, it has become easy for the e-commerce companies to attract large sums of money from venture capitalists (VC) and private equity (PE) funds. And the growth potential of these firms seems huge in India. As reported, Forrester expects e-commerce in India to grow from US$ 12 billion in 2015 to US$ 75 billion in 2020.

The only weak spot for these e-commerce companies is their profitability. It is a fact that most of them are mired in losses. If these losses continue for a long time, there will be a point when VC and PE will reassess their investments. And it may even prompt them to exit their positions.

If this happen, e-commerce companies will be forced to come up with initial public offerings (IPOs) for their survival. We have told our readers in the past too, that investors in e-commerce companies will try to exit their positions and force these companies to get publicly listed in the coming future.

We believe that the IPO of Infibeam Incorporation Ltd (subscription required) has just started this trend. Infibeam will be the first e-commerce company to list in India. The response this IPO gets will help assess investors' appetite for future listings of online retail companies. And it is now that we would like to ask this- Should investors be readying their funds to apply to every startup IPO that seeks listing on the exchanges?

While there be no universal answer to that, there are reasons for investors to be more cautious than optimistic for IPOs of e-commerce companies.

The most obvious, yet the most ignored reason that we mentioned above, is that hardly any of these companies are making profits. Secondly, this sector is intensely competitive. Despite this segment being relatively new, the rules of normal business hardly apply here...be it the first mover advantage or consumer loyalty. It's a price-driven business, a lucrative opportunity for online buyers, not investors or owners in the long term. Last but not the least, most of these firms are likely to get listed when market sentiments will be strong and valuations expensive.

The IPOs of most e-commerce firms are likely to be the first exit routed for the PE firms that have so far supplied them billions in funding. Therefore, notwithstanding their high growth prospects, the e-commerce IPOs are likely to be priced at significant premium to sweeten the deal for PE investors. So, as retail investors, our suggestion for you is to 'beware'.

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