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Deal or Snapdeal: Should You Invest in the Snapdeal IPO?

Editor, TRANSFIN.
Dec 30, 2021 5:53 AM 6 min read
Editorial

Last week, New Delhi-based ecommerce company Snapdeal filed its DRHP for an IPO.

The ₹1,250cr ($165m) offer includes the sale of new shares and the sale of as many as 30.77 million secondary shares by existing stockholders, including SoftBank and Sequoia.

Snapdeal's IPO would come on the heels of an array of listings of consumer-focused startups - the performance of which has been a mixed bag. Some, like Zomato and Nykaa, made stellar debuts while others, like Paytm and Policybazaar, have burnt many a hole in many a pocket.

Should you invest in Snapdeal when it finally hits the bourses? Read on for details!

About the Company

Snapdeal was founded in 2010 and expanded into one of the largest online marketplaces in India. It bagged investments from the likes of eBay, BlackRock, Alibaba, Foxconn, Temasek and SoftBank (which remains one of the firm’s biggest backers, owing 35.41% of the company). By 2015, it was valued at $6.5bn.

However, it quickly lost out to deep-pocketed rivals like Amazon and Walmart-owned Flipkart, the latter of which also flirted with an on-off-on-off deal to acquire Snapdeal in a widely-rumoured $900-950m deal.

Amid these critical circumstances, the company decided to revamp its business and streamline its priorities. Since 2017, “Snapdeal 2.0” has been in the works. Under it, the startup has positioned itself as an e-commerce platform for tier-2 and tier-3 cities and towns (“Bharat”, as CEO Kunal Bahl describes it) even as Amazon and Flipkart expanded in urban areas.

This shift has been considerable, enabling the startup to become a major player among “value-seeking, middle-income, price-conscious buyers coming from non-metros”. This was propelled in part by the ballooning digital literacy in the hinterland and the skyrocketing smartphone usage that have made India the second-largest digital economy in the world. Today, over 75% of Snapdeal’s business “comes from repeat customers….more than 70% of sales are from beyond tier-2 towns and cities, 99% of orders come via mobile phones…and users browse and connect in seven languages, beyond Hindi and English”. Furthermore, about 95% of the 60 million items listed on the platform are priced under ₹1,000 ($13.34) (page 148, DRHP).

 

Fast Facts

  1. The offer includes fresh equity worth ₹1,250cr ($165m) and an offer-for-sale (OFS) of 30.77 million shares.
  2. The date of the listing has not been announced yet, but it is expected to be sometime early next year.
  3. The net proceeds would be used for funding organic growth initiatives, enhancing the company's tech infrastructure, and for general corporate purposes.
  4. The startup currently has 71 shareholders, including SoftBank’s 35.41% stake and the 20.28% combined equity of founders Kunal Bahl and Rohit Bansal.
  5. Snapdeal has reportedly raised more than $1.7bn to-date (as per Crunchbase and Tracxn).
  6. Link to DRHP

 

Macro and Money Matters

In FY21, Snapdeal recorded revenues from operations at ₹471.756cr ($62.96m). Its restated loss for the same period was ₹125.44cr ($16.74m).

Meanwhile, the company’s delivered units have grown 86.3% over the last two quarters from 4.61 million in Q4FY21 to 8.59 million in Q2FY22. During the most recent festival season, Snapdeal’s sales volumes grew 254% in the fashion category, 101% in the kitchen category, and 93% in the beauty category. And over 50 million unique customers have shopped at least once on the platform since April 2018. Interestingly, these customers are more or less equally distributed across the country, with only 13.07% coming from metro cities (page 148, DRHP).

 

Reading the IPO Room: Opportunities and Risks

Snapdeal is firmly hitching its wagon to shoppers in "Bharat". In its prospectus, the company argues that while the urban elite drove ecommerce in the 2010s, growth in the sector "in the near future will be driven by the mid-income demographic, which tend to be made up of value shoppers". It reasons that the pandemic, increasing household incomes, and stable savings will continue to drive more value shoppers towards online shopping.

And these non-metro shoppers tend to "be highly budget-oriented and prefer functional products over premium options...and are avid discount hunters". As such, they are less swayed by brand loyalty and more attentive to offers and price-tags. “Our consumers aren't looking for brands. They are looking for the combination of the right product + right price,” to quote Mr. Bahl.

The core business of Snapdeal centres around "emerging households", which have a combined household income between $2,800-7,100. They are c. 55% of the population today and are estimated to grow to more than 60% of the population by 2025 (page 123, DRHP).

Moreover, "an estimated 61% of India’s private consumption will be driven by emerging households going forward" + "the ecommerce shopper base in India is projected to reach 350 million by FY26 vis-a-vis 140-160 million in FY21" + "15% of all private consumption in India will be digital by FY26" + "the retail industry will continue to account for C. 56% of private consumption in the Indian economy". All these factors are expected to favour the growth of a player like Snapdeal.

Coming to risk factors, there are more than a handful. The biggest concern is probably Snapdeal's declining topline: its FY21 revenue was 44.26% lower YoY. And even though its losses in the same period dropped by 54% YoY, the firm has not posted a profit yet. While there is a COVID-19 lockdown impact there, given that the pandemic is nowhere near done - what with Omicron cases rising steadily - the near-term revenue outlook looks uncertain.

This situation is further aggravated by Snapdeal's negative cash flow and declining net merchandise value (although the latter has been steadily rising over recent quarters). Competition remains a major worry - even if it solidifies its place in "Bharat" against Amazon and Flipkart, it has to confront RIL, whose Jio Mart is looking to upend everything from online grocery to the retail distribution supply chain.

Then there are the proposed new rules for ecommerce platforms, which have the entire sector sweating profusely (here’s why). The new regulations could "increase costs" and "require significant changes in technology solutions" from Snapdeal's side.

However, it may be pertinent to note that negative cash flow is a staple feature of most young tech and ecommerce companies. Moreover, Snapdeal's underlying fundamentals are broadly improving, given its uptick in GMV and ability to maintain positive unit economics. But there's still a long way to go to ensure consistent growth.

 

The Bottom Line

Going forward, Snapdeal intends to expand into omnichannel distributions through partner-driven offline stores. It also aims to double down on unit economics, further develop UniMove (its logistics platform), and expand its Power Brands initiative (which includes brands that have been developed by Snapdeal and licensed to sellers and manufacturers).

While the company may have less-than-ideal numbers, it operates in a sector that enjoys - and will most likely continue to enjoy - robust growth. According to a report by Bain & Company in collaboration with the World Economic Forum, India's consumer market will present a $6trn opportunity by 2030. While this is a pre-COVID estimate, it nonetheless shows that there’s no turning back on India’s tryst with digitisation and the Indian consumer’s embrace of ecommerce.

That said, it’ll take more than sectoral confidence and a vast untapped market to attract a retail investor-heavy and IPO-weary market. Tech debuts in 2021, as we have seen, have been hit-or-miss. For precedent, one may be loath to look to Nykaa, which hit the exchanges as a profitable unicon, unlike Snapdeal, which continues to bleed capital. And pure-play ecommerce precedents are lacking - Flipkart is yet to approach SEBI with its own prospectus.

Snapdeal’s USP of being the go-to online marketplace for non-urban India can only help it so far. The IPO market’s retail reach, unlike Snapdeal’s business, is yet to significantly penetrate into “Bharat”.

FIN.
 

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