PE activity for e-comm companies muted in future

PE activity for e-commerce companies is expected to remain muted in the foreseeable future as fragile global recovery and recent amendment to the India-Mauritius tax treaty may keep global investors away from India, India Ratings and Research (Ind-Ra) said.
According to a PTI report: E-tailers, which were flushed with private equity funds till 2015 have had lesser fortune this year, with muted deals during January-April 2016.
“The funding concerns have arisen at a time when e-tailers are undergoing a structural transition in their business model, involving considerable capital expenditure,” it added.
Ind-Ra further said funding through conventional bank lending route is highly unlikely and consequently e-commerce firms will need to look for specialised institutional investors that have a high risk appetite to avail bridge finance.
“Such funding will only be available at a higher cost. These funds are generally extended on a short-term basis, until the next round of PE funding occurs,” it added.
However, funding from such investors will depend upon the ability of the e-tailers to maintain a level of PE confidence by sustaining its prominence and valuation, which seems to be heading southward.
E-tailers are attempting to move out of the deep discounting model to a more sustainable business model by offering lower discounts, improving efficiencies and focusing on improving loyalty among customers that require a considerable investment commitment.
“As a result, the existing players have large planned investments in the value chain namely logistics, payment banking, fulfillment centres and omni-channels with a primary focus on improving the active customer base, enhancing customer loyalty and value add services,” Ind-Ra said.
The e-commerce companies are also undergoing structural changes in terms of their business model, especially after government’s guidelines on marketplace model.
Ind-Ra further said established players will enjoy the first mover advantages and have limited operating expenses compared to the large capital expenditure that new entrants in the e-commerce space will need.
“However, the Indian industry is exposed to competition from global players with deep pocket and strong parentage and they will continue to be a challenge,” it added.