June 14, 2017
Max A. Cherney is a San Francisco-based journalist who covers tech.
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News about the fast-growing $12 billion India retail e-commerce market doesn’t often make it through the barrage of reports of turmoil in Washington D.C., but that doesn’t mean it isn’t critically important for the global technology industry.

But, the drama has been Tony-worthy at India e-commerce startup Flipkart, amid high-profile executive departures — the COO last week for example — and a ew CEO installed in January. The company has closed a massive fundraising round in April with eBay, Microsoft, and Chinese tech-giant Tencent, all kicking in for the fresh round of financing.

The three companies agreed to invest $1.4 billion in India e-tail startup Flipkart, at an $11.6 billion valuation. As a part of the deal, eBay siphoned off its nascent India unit to Flipkart and arranged a partnership deal. But not everyone agrees on the $11 billion valuation. More on that later.

India E-commerce Set to Surge

Though data on market share is difficult to come by, Alibaba-backed Paytm, Amazon.com, Flipkart, and Snapdeal — also an eBay investment — are vying for market share. Thus far, recent reports suggest Amazon and Flipkart are neck-and-neck as leaders, with Snapdeal, which eBay has also invested in, a distant third.

The reasons why e-commerce giants are eyeing the Indian market, to begin with, are clear enough. After the US, China is the largest potential market, but it’s difficult to conquer. India is a close third.

With a population of 1.3 billion, and only 2.5 percent of all retail shopping occurring online, there is the potential for significant growth, Morgan Stanley expects online sales to hit $100 billion by 2020.

By contrast, in 2016, US e-commerce retail sales were more than $389 billion, according to a May Commerce Department estimate. Year-over-year growth hovers around 15 percent, about 8.5 percent of retail sales in the US occurs online, which inches upward each quarter.

But sales growth isn’t the whole story. Unlike the US, where about 75 percent of the population has internet access, in India that number is much lower — 19 percent, according to a KPMG report. Of those people with internet access, a mere 14 percent have shopped online.

Because of the proliferation of mobile devices in India, which are set to double in two years, and the ease of purchasing items on them, which was not true even three or four years ago, it’s possible that number could as much as double to match its peer countries, according to the KPMG report.

RIP eBay India

It’s worth noting that the eBay-Flipkart deal didn’t occur in a vacuum. In the fall, it emerged that Walmart was in talks to invest $1 billion in the Indian startup but the talks have since broken down or not yet been finalized.

At the time, analysts said a Walmart-Flipkart deal would have given the American retail giant greater access to the Indian market, which the company continues to struggle with. The Bentonville, Arkansas-based retailer currently operates 21 wholesales stores in India, which are not allowed to sell without a middleman, and has shelved 2013 plans to build supermarkets, citing regulatory challenges.

So Flipkart was looking for investors and may have not found the right fit. Enter eBay.

As anyone who has been following eBay closely, or not-so-closely, knows the company has been underperforming e-commerce peers such as Amazon for years.

“We expect the company to maintain its current revenue growth rate in the mid-single digits with share buybacks driving double-digit EPS growth,” wrote Wedbush analyst Aaron Turner in a recent note to investors. “While share buybacks provide a measure of downside protection, we believe upside potential for shares will be limited until [the] company can exhibit sustainable volume growth acceleration.”

Translation: share buybacks are great for the bottom line, but the company has to figure out how to grow the top line too.

EBay has been taking several steps to do so as the PayPal spin-off completed. It has invested in developing a technical solution to its $200 million SEO problem — with the arcane title “structured data” — and, as we now know, looking into e-commerce in India.

As CEO Devin Wenig described in a recent interview, the e-commerce company has been evaluating options in the Indian market for almost a year. Executives decided that spinning-off its India unit, investing $500 million in Flipkart, and making an exclusive partnership deal was, for the moment, a better idea than continuing to go it alone.

“Flipkart had a very strong close to last year and they are starting to pull away,” Wenig said. “So if we are serious about the market, I want to invest in — and be partners with — those that are going to win. The conclusion was there weren’t going to be 10 winners, but maybe only one or two. And Flipkart — given all of that — was the natural party to align with.”

Despite Wenig’s assessment of eBay’s opportunities in India, what’s less clear is whether the move was due to a belief that the company needed to reposition itself against the deep-pocked, Amazon, which been has been active in India since at least 2013.

It’s possible eBay’s move was a strategic pull-back, like Uber’s decision to get out of China, which was due to the company’s mounting losses, for little gain in market share. It also took a stake in its China-based rival.

According to a report published in April, the underlying reason may be the latter — that eBay has failed to understand the Indian market since it entered the country 13 years ago. An anonymous senior executive told The Hindu Business Line that up until 2016, eBay had invested about $250 million in India.

EBay, the sources said, also endured management changes, as well as an inability to innovate for the Indian market.

“It was trying to do things in India that it did globally, but the playbook was not working at all,” an anonymous India official told Business Line.

Flipkart’s Valuation

What’s less clear is whether Flipkart’s business is stable in the long run. As stable executive teams often beget stable growth, Flipkart has been unable to go several months without a high profile departure, or some other form of shakeup.

Lastly, as promised, it’s worth thinking about how the smart money values the Indian startup. At this point, its shares — which are privately held — aren’t stable either. Investors, some of who include mutual funds such as the Morgan Stanley Institutional Fund, and the Vanguard Variable Insurance Fund can’t agree on what the company’ is worth. In January, for example, Fidelity Investments marked down its shares, and valued the company at $5.58 billion, and three months later eBay shelled out at an $11.6 billion valuation.

Even if that $11.6 billion value is accurate, and some market event more than doubled its share price, it’s off from its $15 billion June, 2015 value assigned by Morgan Stanley. That’s still a two-bagger for the big bank, a feather in its cap if it can get out at the right time. Yet, Morgan Stanley has been marking down its valuation, slashing Flipkarts value for five consecutive quarters.

But, one thing investors that must disclose valuations to the public agreed on: The company wasn’t worth what many of them bought-in at, and it is now faring worse than NASDAQ.