Shopping…. After listening to this word.. what comes first to your mind?? Going to crowded malls… chasing your products… hunting in many other shops for the variety.. And last but not the least… standing in the long queue to pay off your bills????
Your answer to this must be something like… In which century are you living in? Today shopping means sitting at home and getting your desired product right there. As now, shopping is at your fingertips and just a click away.  
Today when we open newspaper, we find a full-page ad of an E-Commerce company. To facilitate these companies, an extra page is added before the first page of the newspaper. As these days, e-commerce has more importance than the headlines in our life.
While watching television, we see more of ads of such companies. Even we can find many channels selling various products. Thus, today the most popular ad is of E-Commerce.
There are many e-commerce companies operating in India like Flipkart, amazon, snapdeal, jabong and the list goes on. With the entry of e-commerce, the trading market is being hampered. Many customers have shifted and many are shifting towards the easy way of life. People are getting accustomed to making purchases online.
When we shift our focus from as a customer to as an entrepreneur, many things come to our mind. Are these companies really doing so well in their field? What does the profit and valuation figures speak about the company? To understand this, lets take an overview of one of such company.

Flipkart… An E-Commerce company established in 2007 by Sachin Bansal and Binny Bansal. It operates exclusively in India, with headquarters at Bangalore, Karnataka. Flipkart has also launched its own product range. It allows payment methods such as cash on delivery, credit or debit card transactions, net banking, e-gift voucher and card swipe on delivery.
Fund Raising So Far

Initially, the founders had spent 400,000 only for making website to set up the business. Flipkart has later raised funding from venture capital funds Accel India (US$1 million in 2009) and Tiger Global (US$10 million in 2010 and US$20 million in June 2011).
On 24 August 2012, Flipkart announced the completion of its 4th round of $150 million funding from MIH (part of Naspers Group) and ICONIQ Capital.
The company announced, on 10 July 2013, that it has raised an additional $200 million from existing investors including Tiger Global, Naspers, Accel Partners and Iconiq Capital.

In October 2013, it was reported that Flipkart had raised an additional $160 million from new investors Dragoneer Investment Group, Morgan Stanley Wealth Management, Sofina SA and Vulcan Inc. with participation from existing investor Tiger Global.
In May 2014, Flipkart received $210 million from DST Global and in July, it raised $1 billion led by existing investors Tiger Global and South Africa’s media group Naspers.

On 26 May 2014, Flipkart announced that it has raised $210 million from Yuri Milner’s DST Global and its existing investors Tiger Global, Naspers and Iconiq Capital.

In brief:  
   2009 – $ 1mn
   2010 – $ 10mn
   2011 – $ 20mn
   2012 – $ 150mn
   2013 – $ 360mn (single round in two tranches of $200mn and $ 160mn)
   2014 – $ 210mn + $ 1bn + $ 700mn (three rounds)

Look over the sales graph

 

            FY 2008–2009 – Rs. 40 million
           FY 2009–2010 – Rs. 200 million
           FY 2010–2011- Rs. 750 million
           FY 2012–2013 – Rs. 5000 million
           FY 2013–2014 – Rs. 10000 million

 

 

  Profit/ Loss

FY 2011–2012 – loss of 110 crore
  FY 2012–2013 – loss of 281 crore
  FY 2013–2014 – loss of 400 crore

Valuation – Rs 69,000 crore worth Flipkart is now bigger than several traditional public listed companies such as:
• Dabur India which is worth Rs 41,000 crore
• Godrej Consumer which is worth Rs 31,000 crore
• Grasim Industries which is worth Rs 25,000 crore
• Mind Tree which is worth Rs 10,000 crore
• Hero MotoCorp which is worth Rs 5160 crore

It has become almost half of Wipro now, which is valued at Rs 1.34 lakh crore and almost one-third of Infosys which is worth Rs 2.1 lakh crore.

In 2012, the company was valued at about $850 million when it raised about $150 million.
If a private equity firm is valuing Flipkart at $1 billion now, this must mean they see it worth $3 billion sometime soon — either to an acquirer or to the public markets when they flip it. Who would pay 13,500 crore for a loss-making e-commerce portal?
There are several methods for determining the value of the business/ shares of the company. The most appropriate in this case would be “Value based on Discounted Cash Flow (DCF) Method”. Under this technique, the projected free cash flows of the business operations are discounted at the weighted average cost of capital (WACC) to the providers of capital to the business, and the sum of the present discounted value of such free cash flows is the value of business.

Flipkart was valued at nearly $7 billion in the July 2014 round of fund raising, more than double the $2.6-3 billion valuation it received in its May 2014 round.
Flipkart’s last fundraising round in December 2014 had pegged its valuation at $12 billion.
On average, Flipkart sells nearly 10 products per minute and is aiming at generating a revenue of 50 billion (US$0.81 billion) by 2015.

Accounting

After seeing the above figures, what comes to you mind? Such a high valuation of the company when it incurs loss year by year.. how?? But I will take this aside and talk of accounting practices at some of these e-commerce firms.
To understand its accounting practices, lets take an instance: An electronic item has an internal cost price of 200. Offer it at 220. But at the same time, offer a discount of 30, so you finally realize only 190. But show the selling price as 220, count the 20 as net positive income and show the 30 coupon as “long-term amortizable marketing expenses”.
Is this what Accounting Standard lays down for these companies? What kind of accounting practice is being done by big accounting firm?
Imagine.. A price-to-sales ratio of 50 times? A PE ratio of infinity? What could the logic be to value firms at these numbers?

Impact/ status

From the very beginning, we all are following the correct path. Top thing to be noticed is how the valuation of these companies is being done. They not only have high valuation but losses too. Flipkart, still far away from earning profit but faces no problems in raising funds.
The fund-raising is a sign that there is a large amount of international confidence in Indian e-commerce. It can be seen that it has set a new benchmark for the rest of the industry.
It also indicates that Flipkart may be growing faster than what was estimated earlier and as such, the valuation has changed significantly between all rounds of fund raised.  
However, the foreign investment in these companies has been under scrutiny. Foreign investment is not permitted in e-commerce but there is no rule barring it in a marketplace model. Most e-commerce entities in India are operating the marketplace model.
When we mark the sales of the company, it is booming day by day but the net revenue is curtailing. It seems like sales revenue is being gobbled by some overlooked factors of the company. What lies behind this is mysterious fact. How these companies are surviving with such an ease?
Through the past few years, Flipkart, valued at about $12 billion, has often been in the news for raising funds. In 2014, it raised about $2 billion. Since its launch in 2007, the company has raised about $3 billion from a clutch of marquee investors. The company is yet to record profits.
One of the various article reports 100 crore monthly sales for flipkart. Even if I assume 10% margin, the revenue comes out to be 10 crore per month or 120 Crore per year. For 10x revenue multiple the valuation should be around 1200 Crore i.e. 240 Million $ … for 20x revenue (used only for extremely high growth and early stage companies) multiple its valuation should be around 480 Million $. Why is its valuation close to $ 1B or even $600 Million, provided it is not profitable till date?

Big Billion Day

On 6 October 2014, Flipkart launched Big Billion Day with intention to increase the popularity by targeting billion sales in 1 day.
Flipkart sold products worth INR 650Crore in 10 hours in a special one-day event, claiming they had created e-commerce history. However, in reality, their hard-won reputation for good customer service suffered because of technical problems.   
Many users could not place the order because the servers were not capable enough to take the load and was giving random errors to users that led to frustration among customers. Many users who placed orders got email saying that the order got cancelled. Most of the products were sold for price less than cost price and was accused of killing the competition. Major competitors filed complaints against Flipkart to commerce ministry claiming that selling products for less than cost price is against the commerce policy of the country. Ministry said that they would form new trade rules for e retail after this incident
Customers were disappointed with the pricing and availability of products. There was a widespread criticism across consumers, competitors and partners heavily damaging its reputation. There were even angry reactions on social media from buyers.

Awards

• Co-Founder of Flipkart Sachin Bansal, got Entrepreneur of the Year Award 2012-2013 from Economic Times, leading Indian Economic Daily
• Flipkart.com awarded Young Turk of the Year at CNBC TV 18’s ‘India Business Leader Awards 2012’ (IBLA).
• Flipkart.com- nominated for India MART Leaders of Tomorrow Awards 2011.

Listing of Company

Flipkart is believed to be working on an international listing, with Nasdaq in the US emerging as the preferred destination. The choice of stock exchange will be a challenge, as listing in India is impossible because of issues such as profits and the traditional definition of promoter.
Among others, Nasdaq seemed to be the best choice. Nasdaq known for listing technology companies and it is much easier to list there.
Is this was the last round of funding before Flipkart goes for an IPO?

 

By now, we must have understood that there must be difference between the actual and scenario infront of us. Thus, E-commerce is full of mysteries. After a close analyze, many startups may flip their mind for E-commerce as today E-commerce is growing at much faster rate. The journey may start from selling a product to lots of funds raising to being listed and it will go on. The point to be marked is that a company can have bright and prosperous future even if it has never seen the profit in its journey. Therefore, it should be a motivation for all those companies who are going through downward phase. We are here not to target any particular company, however, this is just to analyze the situation of an industry i.e. E- Commerce.

 

Disclaimer: All data used in this Article are based on sources and publications from the Internet. The author does not claim any authenticity or copyright for the same.

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