Key facts to know before Meesho’s IPO hits the market
- Investors looking to participate in India’s ecommerce story will need to keep in mind that the valuation will continue to be premium even for those startups that are turning in a small profit.
- For better monetisation,
Meeshois also entering categories where brands tend to do well. It currently offers brands like Decathlon, Marico and Nivea on its platform.
- It is also exploring a low-cost grocery model in some smaller cities, which it plans to scale if unit economics justify the investments.
Meesho, a horizontal ecommerce player that caters to unorganised sellers, has its task cut out before its public listing 12-18 months down the line. The marketplace will not repeat the mistakes some of its new age peers made while tapping public markets. The marketplace may be the first horizontal ecommerce platform to turn profitable, but it is just the beginning of an arduous journey, given that many investors have burnt their fingers by investing in IPOs of new age companies. Share prices have not kept up with the hype that surrounded these companies, which suggests that investors will not chase such pricey companies no matter how fast they are growing. So how different will Meesho be from the other new age tech platforms that tapped public markets?
In conversation with Business Insider, Meesho’s chief financial officer Dhiresh Bansal said they have reflected on the experiences of investors who participated in IPOs in 2021 and 2022. The key takeaway is that valuations were high because there was a lot of free money floating around. He says: “But public market investors are focused on profitable growth. Our point of view is that we want to make sure we run a decent track record of profitable growth if we aspire to get listed. We are targeting to grow revenues by 40% and accelerate it a little more by putting investments back, but we will continue to be profitable.”
Clearly, the new mantra for startups today is to be profitable but the size and scale of the profit pool will not impress if compared to the larger companies. Investors looking to participate in India’s ecommerce story will need to keep in mind that the valuation will continue to be premium even for those startups that are turning in a small profit. Call it a scarcity premium, if you will. Explains Bansal: “The investment phase of the company in the new age world is slightly longer but they generate very large pools of cash over a period of time. This is true for unprofitable or small profit companies.”
Bansal cites examples of some companies in the US that had a small profit pool to report when they got listed a decade ago. But now these companies churn out large amounts in profits. Therefore, these new age companies cannot be compared to traditional companies. Bansal says that even as fixed costs remain the same over a period of time, on a higher base these companies tend to generate a lot more in profits. Currently, Meesho has 140 mn users who visit the app every month and 40 mn, who open the app everyday. With a revenue growth target of 40% year-on-year, Meesho believes it can earn more without fixed costs going up.
In addition to controlling costs and boosting operational efficiency, Meesho is also tweaking its categories and model to earn more in some categories. Even though it continues to largely be a platform for unorganised/small sellers from across India, you can find some brands too as the platform provides a differentiated experience to branded players too. Says Bansal, “Our business is largely unbranded, but we have introduced brands in some categories. We have brands like Decathlon, Marico, Nivea and other D2C brands in the marketplace other than brands in the beauty and personal care category.” Monetisation in these categories is much better than the unbranded segments.
The cashburn may have slowed and Meesho’s business may be cashflow positive, but a public listing will not just look at raising fresh capital. The issue will be a mix of fresh issue of shares and offer for sale by existing shareholders. Explains Bansal: “We don’t need fresh capital for growth as we have almost $400 mn in the bank. People will decide whether they want to exit or remain on for a longer period— but It will be a mix of primary and secondary offering at the IPO but it will be largely towards secondary.” This suggests that existing investors will look at a partial exit whenever Meesho hits the public market.
The platform is also experimenting with other categories as it looks to diversify from its existing mainstay – apparel, beauty and kitchenware. Meesho wants to sell consumers everything but smartphones, electronics and groceries. Adds Bansal: “We have been experimenting with groceries and beyond the convenience model that works in metro and Tier 1 cities but there is a low priced model of groceries that can work in Tier1 and Tier 2 cities. We are running pilots and once we are sure about the unit economics we will scale the business.”
Popular on BI
- Micron begins construction on $2.7 bn India semiconductor plant in 'epic' beginning
- India, Japan agree to strengthen economic cooperation including achieving progress on high-speed railway project
- India rises to No 1 in ODIs, becomes top ranked team in all formats
- Discover what's new in iOS 17: Your ultimate guide to the latest features
- Hyderabad-based ethnic retailer Sai Silks Kalamandir IPO subscribed 4.4x