Decoding $5 bn valuation: With star investors like Alibaba, Snapdeal is ready to take on biggies
The Indian e-commerce is hot and Snapdeal has indeed become a company to reckon with
If you are in e-commerce, you just cannot ignore the power of Indian market. That's the message investors are getting from the latest round of investment Snapdeal has obtained.
Snapdeal has raised $500 million from Chinese e-retail giant Alibaba, Taiwanese iPhone maker Foxconn and Japanese major SoftBank. Existing investors Temasek, BlackRock, Myriad and Premji Invest also participated in the funding round, Snapdeal said, without giving further details.
In October 2014, the company had raised $627 million from SoftBank, which is learnt to be holding a significant stake in the online marketplace now.
In the latest round, media reports say Alibaba and SoftBank are likely to have invested $100-125 million each.
The move holds significance for three reasons.
For one, it shows Snapdeal is fast gaining prominence in the Indian e-commerce sector. Flipkart is definitely a bigger rival. It has been valued at $15 billion, while Snapdeal is at $5 billion. As this article in YourStory.com says, Snapdeal has in recent months been able to woo major investors and big capital. This "has made it a strong contender to beat current market leader and the much better funded Flipkart," the article says. Even Amazon India, which has mostly been focussed on fighting with Flipkart, will now have "to contend with the new Snapdeal that is backed by investors with some very deep pockets", the article says. Snapdeal has started making waves in the e-commerce.
Secondly, it sends out a message to all players because Alibaba is really getting serious about its punt on India. This is the second investment by the company in Indian e-commerce. Earlier it had invested in Paytm, a mobile payment solutions provider. Why is Alibaba so gung-ho about India? One reason could be the crippling slowdown in its home market, which has affected its profitablility. Its shares have fallen more than 18 percent from its US IPO price as worried investors exited.
Meanwhile, India's e-commerce market is booming. Morgan Stanley expects online shopping market in India to be worth $100 billion in 2020 from $2.9 billion in 2013. Even when it comes to m-commerce, India is the place to be in as the country is the world's third-biggest smartphone market after China and the US. A report in The Economic Times says the deal with Snapdeal has been in the works for a long time. It was held back because of valuation differences. The report says while Snapdeal was looking at a valuation of $3.5 billion, Alibaba was not ready for it. However, interestingly, the Chinese giant seems to have settled for a higher valuation of about $5 billion. It is to be remembered that all these figures are source-based and have no confirmation from either of the companies. But if indeed this is true, it means Alibaba has come back to the drawing board with bigger plans for India. And that shows the country's potential as an e-commerce market.
Thirdly, it also shows valuations in the Indian e-commerce sector may be prohibitively high. When Snapdeal raised $627 million 10 months back the valuation was about $2 billion. Now, with a $500 million investment, the valuation has soared a whopping 150 percent. The Economic Times report says "investments have slowed into ecommerce companies this year as compared with the big deals struck in 2014". Questions have been raised as to whether the investment is really worth it. India may be the fastest growing online retail market but then there are many technical glitches that are limiting the growth of the internet in the country.
Moreover, as the ET report points out, none of the players are making profit and there are tax roadblocks. But the companies, who are giving deep discounts to customers, and investors, who are pumping billions into these companies, seem to be pinning their hopes on the government's Digital India campaign and the much-awaited economic revival.
"With global leaders like Alibaba, Foxconn, and SoftBank, in addition to our other existing partners, supporting us, our efforts towards building India’s most impactful digital commerce ecosystem will be propelled further, enabling us to contribute towards creating a Digital India," Kunal Bahl, CEO, Snapdeal, has been quoted as saying in media reports. If Digital India falters and economic recovery did not pick up as expected, the valuations may be hit.
However, for the time being, the Indian e-commerce space is hot and Snapdeal has reaffirmed it remains a company to reckon with.
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Flipkart is also hosting an Apple Days sale right now that will also end on 14 May.