Sachin and Binny Bansal's Flipkart Worth 10 Times Kishore Biyani's Future Retail_ - The Economic...

8/7/2014 Sachin and Binny Bansal's Flipkart worth 10 times Kishore Biyani's Future Retail? - The Economic Times

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By ET Bureau | 15 Jul, 2014, 07.15AM IST Post a Comment

If Flipkart manages that valuation, by itself, that would be a

stunning double. It would be even more stunning when

compared to all that surrounds it.

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In the last round of funding it raised, this May, India's largest online retailer was valued at $2.5

billion (about Rs 15,000 crore). And, as ET reported last week, Flipkart is now lining up its

biggest round of fund-raising as a precursor to a possible American listing, and this time the

valuation figure doing the rounds is $5 billion (Rs 30,000 crore).

If Flipkart manages that valuation, by itself, that would be a stunning double. It would be even

more stunning when compared to all that surrounds it. There is no comparison, especially in the

brickand-mortal world.

Here, Future Retail was India's first organised retailer, set up in 1994. This Kishore Biyani

company, whose flagship is Big Bazaar, has a product span that matches, if not betters,

Flipkart's. As of March 2014, Future had 319 stores in 98 cities and towns, whereas Flipkart

had six warehouses and zero stores. Future's revenues were about two times and its assets 23

times that of Flipkart. Future is profitable, whereas Flipkart is yet to post a profit.

Yet, at $5 billion, the company set up by Binny Bansal and Sachin Bansal (no relation) in 2007 would be 10.6 times more valuable than the

operation that Biyani has assembled. "Investors look at the future," explains Rachna Nath, leader, retail & consumer,

PricewaterhouseCoopers. "Is there scalability in the business? Does it disrupt existing systems and processes? Here, online sellers score

over offline retailers, and are valued more."

HOW MUCH PREMIUM?

Still, 10.6 times? In the US, Amazon earns a premium over Walmart -- market value of $2.1 for every dollar of revenues versus $0.5 -- but

Flipkart is angling for a revenue multiple of 5. While the acknowledgement of e-commerce hitting a tipping point in India is universal, some

advise restraint on how to value it and, by extension, what it says about offline retailers.

Sameer Sain, managing partner of Everstone Capital, a private equity fund, feels very few online retailers will succeed, as has been the case

in the US. At present, in India, the emphasis is on scaling up quickly and raising capital to fuel cash burn.

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Sain calls it a "dangerous game" for investors. "People are paying rich valuations for a very

aggressive future promise," says Sain. "Unfortunately, investor psychology always creates a

belief that it will be them who succeeds and that's why so much money keeps flowing into this

space."

Today, that money is principally looking at revenue growth. In financial year 2012-13, Flipkart

saw its revenues surge 478 per cent, against 65 per cent for Future Retail. In 2013-14, it

reportedly matched that to cross $1 billion in revenues. Flipkart is hitting a sweet spot, where

it has customer stickiness and it is able to monetise that connect by making available more

and more categories of goods.

It's not just Flipkart. Snapdeal was valued at $1 billion in May. The same month, Flipkart

bought online fashion retailer Myntra for reportedly $300 million (about Rs 1,800 crore), about

twice that of Pantaloons Fashion & Retail. "The two models (online and offline retail) are

strictly not comparable," says Abneesh Roy, vice-president of Edelweiss Securities, without

referring to Myntra or Pantaloons. "They are very dissimilar models and have different

valuation basis."

If online retail pivots around growth, offline has more to it, like assets. This gives it less

upside than online, but also lower downside. By comparison, online retailers that come

through will receive top valuations. Equally, in the absence of assets, those that don't make it

will be spectacular flameouts.

According to Sanjeev Aggarwal, senior managing director of venture capital fund Helion

Venture Partners, the retail landscape is being remapped, because of which brick-and-

mortar retailers will never receive the valuations of online retailers. He draws parallels with

what the mobile phone did to landlines -- it is still around, but is not growing. "The obituary of

physical retail is being written," he predicts. "They are fighting a losing battle."

COST EQUATIONS

The fight for physical retailers is on the cost side. Growth for physical retailers is linear in

nature. In order to sell to a buyer in, say, Jhansi, they need to set up a store there, and hire

staff and incur overheads. By comparison, an online retailer like Flipkart is servicing virtually

every pin code in the country from its six warehouses.

Hence, for online retailers, growth is less linear. It can even be close to non-linear for those who follow a marketplace model, where they don't

stock goods but only act as an online platform for other sellers. "As online retailers scale up, their profitability improves. But for brick-and-

mortar players, every expansion is a hit on profitability," says Bijou Kurien former chief executive of the lifestyle division of Reliance Retail.

Future Group has about 35,000 people on its rolls and Shoppers Stop 16,000. By comparison, Flipkart has 13,000 and Snapdeal 1,600 (of

which, 1,000 are engineers). "In the last one year, my headcount has grown by 10 per cent, while sales have increased 600 per cent," says

Kunal Bahl, co-founder of Snapdeal, a large online marketplace.

More than people, it is real estate that is killing physical retail. According to Technopak Retail Report 2014, brick-and-mortar rentals in India

average 15 per cent of turnover, against 8 per cent in international markets. "The physical retail model is weighed down by inventory and high

rental costs," says Roy of Edelweiss. "There is no inventory or rental costs in an online model, and it therefore tends to fetch higher valuations.

PE valuations are based on profitability growth three to four years down the line."



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With the advent of smartphones and mobile Internet, Indians are logging in on some scale --and shopping. In the last two years, India's Internet

user base has jumped from 120 million to 200 million. PwC estimates it at 400 million by end-2015. "Online has a penetration of 0.2 per cent in

the country's retail pie," says Saurabh Srivastava, director, PwC. "It has lot more headroom for growth."

OFFLINE COMES ONLINE

Even physical retailers are eyeing the online space. It is also fast becoming a compulsion for them. Growth in the physical space is about 20

per cent a year, but there are barriers. And if online keeps chipping away, they might as well pocket that growth themselves.

In the US, Walmart's online business posted revenues of $10 billion in 2013 and it's growing at 30 per cent,

against the company's overall growth of about 2 per cent. Most physical retailers in India -- including Future

Group, Tata Croma, Reliance Retail and Aditya Birla Group -- either have something in online or are

shaping plans. "When brick-and-mortars combine their e-commerce strategy, the opportunities will be far

more than pure-play online retailers," says Kishore Biyani, CEO of Future Group.

Future Group has opened one online flank in Big Bazaar Direct, which reaches 40 cities, many of which do

not have a Big Bazaar outlet.

The group plans to unveil, what Biyani calls, its "omni-channel strategy" later this year. "It will be a force

multiplier," he says. Roy of Edelweiss does not share that reading for physical retailers in general. "They

tend to see it (online) as an add-on, as something that drives traffic," he says. "They are not too serious

about it."

According to Pragya Singh of Technopak, a consultancy, an omni-channel strategy can help physical

retailers expand reach, but they also run the risk of cannibalising their own sales. "Offering discounts for

online purchases will be a challenge," says Singh, leader, retail & consumer. "That will get the clicks but take

away the footfalls."

Electronics retailer Croma added an online platform to its 100-odd stores a year back. But the prices there

are not lower. Ajit Joshi, CEO & MD of Infiniti Retail, which owns the Croma brand, feels there is room for

both online and physical players to grow. He cites the example of Dixons and Best Buy, which continue to be

large offline electronic retailers in the US. "In developed markets, penetration of online is not more than 10

per cent." He adds.

Biyani sees consumer habits marking territories for online and offline retail. "Any product that can be identified by a model number (like

smartphones and electronics) will be sold online," he says. "For others (clothes and groceries), people are more likely to go to shops."

Online, however, has the momentum. Srivastava of PwC, who was the head of supply chain at Flipkart till a month ago, believes risks for

brickand-mortar retailers are higher. For example, physical retail has four to five layers between the manufacturer and the buyer. Each has to

be serviced and each receives a cut. For an online retailer, there's only the manufacturer and the buyer. Adds Aggarwal of Helion: "A 24-year-

old today is more likely to shop and pay bills online than go to malls or stand in queues."

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