Oh, not again!

India’s e-commerce pioneer’s ownership change underlines Indian enterprises’ struggle to achieve scale

 The churn of big-bracket investors at India’s first digital marketplace continues. The price tag for 77% stake by the new buyer puts a valuation of over US$ 21 billion, making it more expensive than decades-old Old Economy companies such as Tata Motors and Coal India. In the absence of listing, the transaction size becomes a function of the buyers’ capacity for risk and projection of outlook for the business on one hand and the sellers’ doggedness to get the desired price or impatience to exit to cut losses on the other. After all at the turn of the century internet properties were assigned discounting based on eyeballs rather than cash flow. Foreign direct investment in multi-brand retail is not high on the current government’s agenda. At the same time, the fastest-growing economy in the world is too important to ignore by global companies in search of growth. Offline retailer D-Mart in fact is supposed to have mimicked the low-cost model of US peer Walmart, the new buyer of Flipkart, with great success. Despite keeping prices low, the net profit margins are near about 4%, highest for any discount retailer in the world, and are projected to increase 1% point and  the return on equity by nearly half in another three years. The sparkling performance is in stark contrast to the cash-guzzling and loss-making e-commerce pioneer. Interestingly, there was no panic selling in Avenue Supermarkets, indicating that competition from cyber space is not expected to affect D-Mart in the immediate term.

What the transaction instead does is trigger a tinge of regret that India is yet to produce a Jack Ma in the e-commerce space. Alibaba’s US$ 21-billion IPO four years ago is the largest capital-raising exercise so far. Hint of further capital infusion is as an acknowledgement of the Indian consumption story as much to the difficulty in cracking the market. Walmart is known to get is calls wrong. It had to wind up physical presence in Germany due to inability to understand local tastes. Its online investments in the US and China are more of counter-strategies to stave off Amazon and Alibaba. The coexistence of brick-and-mortar retailers with e-tailers highlights a strange paradox of post liberalization India: a nation ready to embrace innovations and at the same time conservative in accepting change. If the two-wheeler segment demonstrates the ability of local companies to beat foreign brands, the consumer durables space is a tale of meek surrender: regulations reduced domestic labels to assemblers of knocked-down kits. The typical reaction of an entrenched Indian enterprise that prospered on patronage to any threat to market share is to scurry into unrelated areas such as telecom, aviation and oil and gas.   

The many bright sparks in the non-digital space are mostly first-generation entrepreneurs. Their horizon is not restricted to the Indian borders. Naturally, they are from sunrise areas. Some degree of success has been achieved by generics makers exporting to the US. The old and new coexist in healthcare, but the money-spinning diagnostic centers have the stamp of start-ups. The personal-care segment is a testimony to the innovative spirit of Indian entrepreneurs so much so that even multinationals are looking at home-based remedies. Similarly, the food business is seeing a replay of David taking on Goliath, with a tilt in preference for Indian savories of regional brands over foreign labels. Though reminiscent of the crowded 2G spectrum era about a decade ago, the money-transfer business looks set to become the next big theme after private banks. More often, an unexpected success sees re-rating of the entire sector. The over 100% subscription and listing returns of Avenue Supermarts brought into fashion Shoppers Stop, V Mart and Future Retail. French giant Lafarge’s entry through ACC and Ambuja Cements prompted a relook at a mature market. The lining up of suitors for distressed steel assets is taken as a sign of recovery. Unfortunately, not all missions have had a happy ending. Many have succumbed under the weight of their ambitions as well as due to the hostile environment post the global liquidity crunch. Suzlon sold itself to Sun Pharmaceuticals, another new-age venture. The wireless business has proved to be a graveyard across generations of would-be telecom czars. Airlines remain work in progress as promoters without baggage of experience struggle with regulations and a brutal marketplace. Yet, the notable take-away from the Flipkart trade, representing 5% of the total assets of mutual funds end March 2018, is that deals in India are going to get bigger. Money is waiting. The question is if Indian promoters are ready to loosen their grip to let in big-ticket investors to achieve scale. Ma owns only 7% equity shares in Alibaba.   

-- Mohan Sule