The Valuation of the Indian E commerce Industry

Flipkart got a new valuation- $11 Billion. It raised a fresh $700 Mn from investors at this valuation. Just to put things into perspective, this is 20 times the valuation of the Future Retail which is a brick and mortar chain and sells the same things Flipkart sells online, much more merchandise actually. 

Traditional DCF valuations for the E commerce industry is hard to perform because of the unknown amount of data. Since these are unlisted companies and they are very protective of their data, predicting their margins,growth, reinvestment would be a impossible task.

This takes us to the Relative Valuation method, the method that VC investors use to come up with these valuations. Relative valuation looks at previous transactions and valuations of competitors who are in an identical phase, identical cost of capital, identical revenues, identical growth rate, identical margins, so on. In reality, it would be impossible for two different companies to have identical characteristics but in the presence of less data, this is the method that gives us an estimate of how much we the asset can be priced depending on how someone else bought it for (Relative Pricing)

For a young firm, the most common metric used is EV/Sales. For firms that have reached a maturity period the metric used is EV/EBITDA but for a young firm, margins would be tough to predict so EV/Sales are used. 

Let's have a look at the EV/Sales ratios of Ecommerce industries around the world.

	Market Cap	Revenue (USD Mn)			EV/S
Company	US$M	2013	2014	2015	2013	2014	2015
US (Mean)					2.68	2.31	1.99
Amazon	170722	74453	90581	110243	2.29	1.88	1.55
Ebay	76569	16047	18268	21059	4.77	4.19	3.64
Shutterfly	2070	784	923	1059	2.64	2.24	1.95
Blue Nile	461	450	498	549	1.02	0.93	0.84
CHINA
Dangdang	1337	1039	1243	1451	1.29	1.08	0.92
Alibaba	262290	5553	8447			26

Other than Alibaba, the US mean is around 2.31. From the data Damodaran has shown on his website here , the EV/Sales for US internet retail is 3.31.

Let's look at the EV/Sales ratios firms are trading at in India. 

Here, Sales represents the GMV or Gross Merchandise Value sold through the websites. GMV is a term used in online retailing to indicate a sales value sold through an online website in a particular timeframe. This is the value the supplier lists his merchandise on the website at and the discounts that the online websites give out on their own is their own loss and doesn't add to the GMV.

If the value of a shirt is Rs 1200 as listed by the supplier, let's say Lee and some consumer buys this shirt through Flipkart for Rs 1000 for a Rs 200, the GMV sold is Rs 1200 and the Rs 200 is Flipkart's own losses. 

Flipkart has supposedly reached a $3 Billion GMV and is looking at a $4 Billion GMV by March 2014. At a $3 Billion GMV, and a pre money valuation of $10.3 Billion (Flipkart raised $700 Mn in the fresh round), its EV/Sales ratio works out to be 3.43 which is around the average EV/Sales ratio for US internet retail.

Amazon's EV/Sales ratio is roughly around 2-2.5 and this is considered a standard in the industry as a good valuation for EV/Sales. Most likely, Flipkart commanded this premium because of the expectation that it will reach a $ 4 Billion GMV pretty soon. At a $4 Billion GMV, the EV/Sales ratio will be around 2.5.

But these valuations show a difference between Snapdeal and Flipkart. Snapdeal got a valuation of $3 Billion (rumored) when Softbank invested $670 Mn. Snapdeal crossed the $ 2 Bn GMV in November so it has an EV/Sales ratio of 1.5 which is quite less compared to the industry standard.
 This implies that the investors of Snapdeal snapped it at a tasty valuation and will yield higher returns on their investments. If you are an investor with AUM higher than $ 10 Bn, you know where to invest now !

A better metric would be to look at the Enterprise Value per user as this might give a better chance to view how many users are registered to each website and can give us a better indication of the value. This would help because Alibaba would typically have higher number of users registered onto it commanding its high valuation.

Number of users
Amazon 244 Million
Alibaba 618 Million
Snapdeal 20 Million
Flipkart 22 Million

This gives an EV/user of
Amazon- 560
Alibaba- 275
Snapdeal - 150
Flipkart- 468

Even looking at these metrics, Snapdeal comes across as a relatively undervalued company as of now and looking at the business models, Snapdeal is going to break even in a relatively quicker time because of its pure marketplace model while Flipkart is going to burn cash for a long time