OPEN APP
Home >Industry >Banking >Indian e-commerce companies may take till 2020 to turn profit: report

Indian e-commerce companies may take till 2020 to turn profit: report

While e-commerce sites such as Flipkart, Amazon and Snapdeal are reporting sales growth of more than 100%, the boom has been driven by persistent advertising and deep discounts, leading to huge losses and prompting analysts to question whether online retail can ever be a profitable business. Photo: Ramesh Pathania/MintPremium
While e-commerce sites such as Flipkart, Amazon and Snapdeal are reporting sales growth of more than 100%, the boom has been driven by persistent advertising and deep discounts, leading to huge losses and prompting analysts to question whether online retail can ever be a profitable business. Photo: Ramesh Pathania/Mint

Online retail sales could touch anywhere between $48 billion and $60 billion by 2020 from $4.47 billion last year, says report

Bengaluru: E-commerce is a viable business in India, although online retailers may take as long as five years or more to become profitable and could be overvalued currently, according to a new report by the Indian financial services unit of UBS Group AG.

Online retail sales could touch anywhere between $48 billion and $60 billion by 2020 from $4.47 billion last year, helped by explosive growth in smartphone penetration and the resultant increase in mobile commerce, UBS analysts Gautam Chhaochharia and Shaleen Kumar wrote in the report.

Sales in this case refers to gross merchandise value (GMV), which means value of goods sold on a site before accounting for discounts and product returns.

India is widely considered as the last big e-commerce market, as explosive sales of smartphones give Internet access to hundreds of millions of its untapped shoppers. Investors ploughed in more than $4 billion in Internet businesses last year, and that amount is expected to be significantly higher in 2015.

“Profitability has to happen much before 2020, otherwise investors will be in trouble, as it’ll be tough to justify valuations. However, I do think it’ll actually happen before 2020 as discounts reduce over time," said Abhishek Goyal, a former investor with Accel Partners who now runs a start-up called Tracxn which sells data on private companies to investors.

While e-commerce sites such as Flipkart, Amazon and Snapdeal are reporting sales growth of more than 100%, the boom has been driven by persistent advertising and deep discounts, leading to huge losses and prompting analysts to question whether online retail can ever be a profitable business.

“E-tail is basically replicating the role of the distributor/wholesaler and the retailer in the traditional brick-and-mortar supply chain, in our view. We argue that if the margin available to these two components of the supply chain currently in offline is adequate to cover the operating costs of e-tail (including logistics) then it is definitely a viable business," the UBS analysts wrote.

The report, however, makes a few key assumptions. Discounts, which have primarily fuelled the growth of online retail, are estimated to drop 7 percentage points as a percentage of GMV. Then, operating costs are estimated to fall 4 percentage points as a percentage of GMV as companies benefit from economies of scale.

If e-commerce companies can cut discounts and operating costs, their average gross margins will jump to about 15% in 2020 from 8% currently, UBS estimates.

“(The estimated drop in discounts) remains the key for surprise to our estimates of breakeven (by 2020) and ultimately profitability," the analysts said.

Over the past year, valuations of privately held e-commerce companies including those that run Flipkart, Snapdeal and Zomato have jumped 4-5 times or more. For instance, investors may push up Flipkart’s valuation to nearly $15 billion in its next round of fund raising from less than $3 billion at the beginning of 2014, even though the company is nowhere close to profitability.

“Look at the overall potential of e-commerce and the size of business already, especially the Flipkart-Myntra combination—we believe that if we execute well we will be a very sizeable player with a significant market share," Mukesh Bansal, head of Flipkart’s e-commerce platform, said in an interview on 6 April. “In that context, whatever the current valuation is, we can see a clear future where we will be much larger in size with a much higher valuation."

However, many analysts and investors, who are themselves pushing up valuations, have questioned the rosy valuations attached to e-commerce companies in general.

UBS analysts estimate that e-commerce companies in India should be valued at $17-19 billion, much lower than the current implied valuation of $25 billion.

“Thus, the valuations implied by funding are rich compared with our estimates. It also implies that investors are expecting positive operating leverage, lower discounting and strong growth, probably more than we estimate. While this may look simple on an excel sheet or in this report, we think execution will be difficult," the two UBS analysts said.

Subscribe to Mint Newsletters
* Enter a valid email
* Thank you for subscribing to our newsletter.

Never miss a story! Stay connected and informed with Mint. Download our App Now!!

Close
×
Edit Profile
My ReadsRedeem a Gift CardLogout