Private equity funds to tighten their purse strings

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Mumbai | Updated: February 22, 2016 1:40:58 AM

If 2015 was a good year for India’s e-commerce sector with more than a 110 deals and close to $5.7 billion in inflows — up 40% over 2014 — this year could turn out to be somewhat more subdued.

Indian rupee vs US dollar: The Indian rupee again broke below the 68-mark by depreciating 26 paise to 68.20 against the dollar in early trade on Tuesday at the Interbank Foreign Exchange due to increased demand for the American unit from importers and banks amid a lower opening in the domestic equity market.Kotak Institutional Equities expects the lower PE/VC funds availability to play out in three ways: Companies with high cash-burn shutting shop as fresh funding drops, weaker firms being snapped up by stronger peers and valuations trending down. (Photo: AP)

If 2015 was a good year for India’s e-commerce sector with more than a 110 deals and close to $5.7 billion in inflows — up 40% over 2014 — this year could turn out to be somewhat more subdued.

As data for the December quarter showed, smaller ventures continue to attract funds. However, investors are becoming a little less tolerant and companies burning too much cash aren’t likely to see too much money come their way.

Kotak Institutional Equities expects the lower PE/VC funds availability to play out in three ways: Companies with high cash-burn shutting shop as fresh funding drops, weaker firms being snapped up by stronger peers and valuations trending down.

Indeed, while investors continue to be confident about businesses, they’re less sure about valuations: As analysts point out, Commonfloor was acquired by Quikr for $120 million in January 2016 lower than the implied valuation of R9.7 billion during the last round of funding in January 2015.

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Less than a billion dollars was raised in the three months to December, according to data from Jefferies. The number of deals worth $5 million and more, however, doubled from 12 to 24. That would suggest investors aren’t turning off the tap just yet but they’re not exactly turned on by cash burn either. So while early-stage players are getting a buy in, bigger businesses that aren’t able to get a grip on costs seem to be losing out.

Alok Goel, managing director, SAIF Partners, believes the sector is in for some consolidation. “We will continue to look for new opportunities but some investors may choose not to participate,” Goel says. SAIF Partners has incubated and funded tech start-ups such as Paytm and Bookmyshow.com.

E-tailing companies — who received the lion’s share of the money in 2014 — over 70% — were less lucky last year. The $4.1 billion that flowed in during 2014 was spread across fewer than 50 deals. Services were a hit with investors in 2015 — from Ola to Quikr to Oyo, Zomato and Practo picked up more than $100 million each.

Swetabh Pareek, Senior Manager, Valuation & Advisory Services, Aranca, however, feels the e-commerce space is becoming commoditised. Pareek cautions there are warning signs from the food delivery and mobile payment segments segments. “There more than 85 companies in food tech and 38 companies in the virtual wallet space,”he points out. Aranca is a Mumbai headquartered research and analytics firm.

Going by the trend so far in 2016, it has been a dull start with Shopclues, Swiggy and smaller start-ups such as Freshmenu attracting either B Series or C Series funding. Individual investors such as Ratan Tata, of course, continue to support start-ups. In 2015 — there were some big ticket deals — Snapdeal raised $500 million, Ola picked up $245 million in September and Zomato picked up $60 million.

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