With liquidity in the market, valuations for ecommerce firms are justified.

“The valuations are in a different league, compared to what we have seen in India so far, no question about it. Also, we have not seen Indian companies grow so fast. From a global perspective, the valuations of these companies are not off the mark. They are very much in line.
In the next 2-3 years, there would be continued growth because there are a lot of opportunities. There is space for multiple players in each segment, says Kalaari Cap's Vani Kola.
But the question is, does India have the exit environment that US or China have? If that happens, then these valuations are in line. The exit environment is untested and not proven yet. That is the main point of concern. I think the exits in India will be very supportive. As long as there is liquidity in the market, these valuations are justified. That is not to say every company deserves the valuation it has got. There are some companies that you want to write off. I don’t see a systemic failure happening, which is different from some companies not doing well.

In the near term, as in the next 2-3 years, there would be continued growth because there are a lot of opportunities. There is space for multiple players in each segment. On an average, valuations are two to three times the revenue of a company and that is a norm globally too. Indian companies are also getting valued at the same global average.

There is a way in which a services company will be valued. Likewise, Indian e-commerce companies are valued at 2-3 times their Gross Merchandise Value (GMV). So, why are we shocked? Retail companies, globally, are valued at 1x their sales, not their gross margins. When e-commerce companies are growing at 200 per cent, why can’t they be valued at 2x? We are applying the same global principles in India as well. There are certain assumptions when it comes to startups, as we expect them to grow. If you assumption is that at this stage the company cannot grow beyond a point, then you would think that these valuations are crazy. Another assumption is that the policies which lead to liquidity will continue to be there.”

Source : Economic Times
Published on 5th June, 2015

One thought on “With liquidity in the market, valuations for ecommerce firms are justified.

  1. Valuation at 2 to 3 times GMV is not justified, When the sales growth is achieved riding on frequent & abnormal heavy discounts, backed by easy fund flow. More so when more players are entering the market.

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