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Unboxing Snapdeal IPO

by tavaga

Snapdeal an Indian pure play value e-commerce platform is all set to roll out its IPO to raise Rs 1250 crore via fresh issue as per the draft red herring prospectus (DRHP) filed on 21 December 2021 with the Securities and Exchange Board of India. DRHP also includes 30.77 million equity shares Offered for sale (OFS) by existing investors.

The company aims to expand its logistic capabilities, enhance technology infrastructure and improve its growth initiatives through these proceeds.

The company currently has 71 shareholders out of which 8 shareholders comprising SoftBank, Myriad Opportunities, Foxconn, Sequoia Capital, Madison India, Ontario Teacher’s Pension Plan Board (OTPPB), Laurent Amouyal, and Kenneth Stuart Glass decided to participate in OFS by divesting a certain portion of their existing holdings.

From the above table, the largest beneficiary of the OFS transaction is Softbank followed by Foxconn and OTPPB which will be offloading 140.7 million, 17.4 million, and 7.98 million equity shares respectively.

Industry Overview

The growth phase in the Indian retail industry will be driven by the Lifestyle retail segment which includes home, beauty, fashion, and personal care. Within the Lifestyle retail segment, a subsegment has emerged called the value lifestyle retail segment driven by value-conscious customers which are estimated to grow to USD 175 billion by 2026 from the US $ 88 Bn in 2021.

According to the World Economic Outlook, India’s GDP is around $US 2.7 trillion in 2020, making it the world’s sixth-largest economy, and is expected to reach $US 4.2 trillion by 2025. The digitization trend in India is growing owing to the rising number of smartphone users.  

The Retail Industry has shown resilience despite the Covid pandemic and will grow at 10.6% CAGR in the next five years to become US $1.4 trillion in 2026. Indian retail industry consists of various segments of which lifestyle retail comprises one of the segments. It includes such products which consumers buy to enjoy a comfortable and high standard of living such as apparel, footwear, home decor, personal care products, etc. – which may reflect consumer social status. It’s the second-largest segment within the Indian retail market.

The value lifestyle retail segment includes customers who make purchasing decisions based on product availability, pricing, and cash backs, among other factors. The Value Lifestyle retail segment is made up of Bharat shoppers. This market is expected to grow at a rate of $175 billion over the next five years.

According to a study conducted by RedSeer, Snapdeal’s shopper base is expected to reach 350 million by FY2026, with emerging shoppers driving future growth. These customers are from tier-2 cities and come from a middle-income segment.

The figure below depicts that 77% of the Lifestyle retail segment business has come from the value lifestyle retail and will continue to grow as the segment expands.

Company Overview

Snapdeal is an e-commerce platform founded by Kunal Bahl and Rohit Bansal on February 4, 2010. Its headquarters are in New Delhi, and it was founded as a daily deals platform before expanding to become an online marketplace. The value e-commerce segment is the company’s primary focus. In this case, sellers on the platform provide good-quality, low-cost products to ensure that their customers get good value for their money by meeting their needs at low costs. Snapdeal is one of the top four internet-based shopping destinations in India in terms of total app installation.

The wide variety of products offered by the company ranges from home, fashion, and general merchandise to beauty and personal care products. The company claims that it intends to attract mid-income segment buyers residing in Tier 2+ cities of India. It accounts for the majorly untapped value buyers. By 2026 the shopper base is estimated to increase by 25.6 crores cited by Redseer. The figure below shows the 6 monthly data ending September 2021 pertaining to the platform’s business.

The majority of the company’s revenue comes from the seller’s marketing, freight, and collection fees. In April 2021, the company eliminated charges for cash on delivery transactions and shipping charges to increase revenue and buyers.

Unicommerce eSolutions Pvt, Snapdeal’s subsidiary helps traditional retailers to sell online by providing software services that contribute 11.13% to Snapdeal’s revenue. Apart from that Snapdeals owns 13 Power brands which are licensed to sellers.

Covid induced lockdown had hurt its business by creating supply-side interruptions and delivery delays. The graph below depicts the data for Net Merchandise value for the last seven quarters. Net merchandise value is showing a rising trend from Rs 1929.18 million in Q1 FY21 to Rs 3740.68 million in Q2 FY22. In Q1 of FY21, the delivered units fell to 3.55 million from 4.77 million in Q4 of FY20 after which there’s an increasing trend indicating recovery from Covid effect.  

  Financials

The company is losing money, as shown in the graph above, with a loss of Rs1260.02 million in FY21. Revenue has decreased from Rs 9253.19 million in FY19 to Rs 5102.68 million in FY21, as can be seen. Expenses, on the other hand, have decreased from Rs11137.82 million to Rs 6363.5 million in FY19 and FY21, respectively.

Valuation

The Indian e-commerce market was estimated to grow at an exponential rate of $ 22 bn in 2018 to reach $200 bn by 2027. The e-commerce platform was valued at $ 9.09 trillion in 2019 and during the period 2020-2027, it is expected to grow at 14.7% CAGR.

Shareholding Pattern of Snapdeal

The largest stakeholder of Snapdeal is Masayoshi Sons’ SoftBank holding a 35.41% stake in the company followed by B2 Professional Services LLP having a 12.78% stake of the pie. Yashna Bahl (wife of CEO of Snapdeal Kunal Bahl) and Parul Bansal (wife of COO Rohit Bansal) are the directors of the company. 

The stakes held by the CEO, Kunal Bahl equals 4.56% whereas a 2.94% stake was held by COO and co-founder Rohit Kumar Bansal. US-based Nexus Ventures Partners has a 10.55% share through Nexus Opportunity Fund Limited (1.08%) and Nexus India Direct Investment II (9.47%). 

Other major shareholders of e-commerce based Snapdeal are eBay and Foxconn. eBay holds a 5.68% stake whereas Foxconn subsidiary Wonderful Stars Pte Ltd owns a 4.38% stake in Snapdeal. Temasek, a Singapore government-owned company holds a 2.88% stake through Dunearn Investments (Mauritius) Pte Ltd, its wholly-owned subsidiary. 

Competitors

Amazon, Flipkart, and Snapdeal were the top three e-commerce companies in India in 2017. However, Amazon outperformed Flipkart in 2018, bringing in the most revenue. During the festive season in 2020, Flipkart’s sales increased by twice as much as Amazon’s.

Snapdeal’s market share has steadily declined over the years as a result of a series of missteps, including offering deep discounts of up to $40 million a month in 2015, dealing with controversy, and so on. Its competitors were quicker to identify the problems and, kudos to their deep pockets were able to effectively manage the situation.

Risks

Before investing in the public issue it is important to take a look at the risk profile of a company. In the draft paper company has provided for its risk assessment which includes the following issues:

  • Falling Revenue: Due to the covid scenario, the revenue of the company has toppled down from Rs. 846.36 crore to Rs. 471.76 crore having a downfall of 44.26%.
  • There have been persistent losses faced by the company for many years making a loss of Rs125.44 crore in FY21 and Rs 273.54 crore in FY20. In the draft paper, the company admitted it’s being unsure about the profitability in the future which could adversely affect the value of its equity shares.
  • The Company has been incurring negative cash flows for many years. In FY 20 and FY21, the operating cash flow was at Rs.3718 crore and Rs 914 million respectively.
  • Net Merchandise Value of the company has been declining which declined to Rs 912.37 crores in FY21 from Rs 1760.99 crores in FY20.
  • Snapdeal is going to face stiff competition from companies like Amazon, Flipkart, Jio Mart which has created a brand value and a brand name for themselves in the market.

Opportunities

Snapdeal is focusing on developing logistics capabilities and driving growth through technology by targeting consumers in the mid-income bracket in tier 2 cities.

As per the Redseer data this segment is largely untapped and holds potential for growth for e-commerce business. Keeping its intentions right, the company will raise Rs 1250 crore through fresh issues sometime in FY 22. 

Ending Note

The company must compete against well-known players such as Amazon and Flipkart to maintain and grow its share of the e-commerce retail industry. The situation appears difficult based on the company’s current financial situation, which shows that it is incurring losses and has negative cash flows. In the background, the threat of Omicron lurks, ready to strike at any moment. Hence, one should thoroughly look at all scenarios before investing in the IPO. 

The company has only filed the DRHP with SEBI and is yet to communicate the IPO date. Thanks to Paytm, investors have finally realized the importance of earnings and valuations. High valuations cannot be demanded only on the basis of future sales growth. The sales growth should be converted into profits and there should be a clear vision attached to it. 

Not only Snapdeal, but many new-age tech companies have postponed their IPO dates due to the aggressive selling by retail and institutional investors in recent IPOs. All these new-age tech companies have made things easier for people at large and have been great innovators, but buying their business at exorbitant valuations cannot be justified.

Becomes more difficult to explain this simple concept in a Bull Market!!

Disclaimer: This write up is solely for educational purposes. This in no way should be construed as a buy/sell recommendation. Please consult your investment advisor before investing.

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