​Diwali is coming: Indian ecommerce giants sun-dry funding crackers

With just a few more months to go, the countdown for the festive days of Diwali has begun. If not for you, at least definitely for the e commerce players diwali is almost here. Flipkart and Snapdeal are gearing up to get the deal fireworks started!

Both the companies are in talks with a number of investors since 6 months now. While competition is getting tough, especially in this segment, increasing valuation mismatches and performance pressures have made the struggle to get funds a mark tougher.

Bengaluru-based Flipkart is said to be raising $1 billion (Rs 6,300 crore) from its existing investors at a post-money valuation of $15 billion, according to a news report by The Economic Times.

The new round of funding will come from existing investors like Tiger Global and DST Global, sources have informed the financial daily.

Even rival Snapdeal is engaged in negotiations with Taiwanese corporate giant Foxconn Technologies along with Chinese etailer Alibaba and existing investor SoftBank to raise as much as $1 billion, according to three sources. Two of them said that the investment from Foxconn has been finalised, and one indicated that that the Apple iPhone-maker has committed up to $600 million to Snapdeal.

But talks with Alibaba have been stuck on valuation, as Snapdeal is targeting a post-money valuation of around $5 billion while Alibaba does not want to pay over $3.5 billion, prolonging closure of the deal.

"This is a speculation and as a policy, we do not comment on speculations," said a Snapdeal representative. "As a listed company, we typically do not comment on markspeculations. If any material events happen, we will put out formal announcements," said Vincent Tong, head of Foxconn's investment arm, in an emailed response to ET queries. Alibaba did not reply to ET's queries. A Flipkart representative declined to comment.

The large financing rounds come after a fundraising lull at the two leading etailing giants this year, who between themselves raised nearly $3 billion in 2014 besides Amazon's commitment of $2 billion to India operations. But other players entering the space have also been able to attract funding, like Paytm's $575-million raise from Alibaba affiliate Ant Financial.

And competition is only bound to increase as the online retailing industry grows in size to an estimated $50 billion by 2020 from $3 billion in 2014.

"Within the next 12 months we will also see conglomerates like Tatas, Reliance and Aditya Birla Group throwing their hats in the ring in a much more forceful manner," said Arvind Singhal, founder of retail consultancy Technopak. "This doesn't give much of a headroom to current players to slow down their spend on marketing, infrastructure and discounting. Therefore the need to raise more funds will increase rather than decrease."

Indian online retailers suffer gross losses of 35%, with much of it attributed to discounts, according to a recent Goldman Sachs report. The re port stated that etailers will need additional $20 billion in incremental cash infusion till 2020.

Flipkart said that it is targeting annual gross merchandise value (GMV) run rate of $10 billion by early 2016, more than doubling the $4-billion mark that it crossed in April 2015. In March 2014 it had crossed the $1-billion mark, indicating a four-fold increase in GMV. Similarly, Snapdeal recently stated that it has reached GMV of $3.5 billion, indicating similar growth, as per the news report.

But as etailers start operating with a larger revenue base and the initial euphoria around etailing starts ebbing, similar growth will be hard to achieve. A venture capital investor said that growth in 2014 was being fueled by new buyers coming on board, which has tapered this year.

"The whole ecommerce wave last year erupted after hundreds of crores was spent on marketing and these firms brought in a new class of consumers on board who wanted to try ecommerce. But they haven't transformed into repeat buyers immediately, which for them will happen organically," he said on the condition of anonymity, underlining that with a larger base the rate of growth of etailer has been slowing. This is likely to have an impact on valuation multiples.

For instance, Flipkart was eyeing a valuation of $18 billion for the new round of funding but is now closing the round at $15 billion, according to a person source privy to the details of the negotiations.

"This is exactly how Future Group also built the business, which was borrowing money and their valuation was going up. In this case instead of borrowing Flipkart has been raising equity," Harminder Sahni, founder and managing director of Wazir Advisors, a management consulting firm told the ET.

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