Infibeam Incorporation is India’s first e-commerce company to launch an Initial Public Offer (IPO) of equity. The company’s business model, however, is different from a typical e-commerce company. While opportunities are immense, risks are also high. Although Infibeam is among the few domestic e-commerce companies to report profits, the IPO pricing is expensive. In this backdrop, the IPO is not for the faint-hearted.
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The revenue mix is diversified. In addition to its own e-commerce business via the infibeam.com website, the company offers cloud-based, customisable online solutions via its BuildaBazaar platform, wherein merchants can create their own website. BuildaBazaar also provides services such as mobile applications, digital product catalogue, content management, promotions handling and access to payment getaways, among others.
Infibeam’s strength is the integrated business model which allows merchants to sell their products both via the retail website and the BuildaBazaar platform. Infibeam.com provides the company access to customers and market analytics which can be used by merchants. E-commerce’s low penetration in India offers immense growth potential for such companies.
However, even as the company’s retail-facing website. infibeam.com, contributed about 72 per cent of consolidated revenue for the six months ending September 2015 (the rest from BuildaBazaar), margins were only one per cent in this period. This business has very limited brand visibility among retail customers, as well as intense competition from a host of e-commerce players such as FlipKart, Amazon, and Jabong. Low brand visibility will make it difficult for the company to reduce discounts and improve profitability, a strategy adopted by most leading peers in this space.
The BuildaBazaar business is the main contributor to profits and generated an Ebitda margin of 58 per cent in the first half of FY16. The business caters to clients such as Panasonic India, Crossword Bookstores, Adlabs Entertainment, Gulf Oil Lubricants India, Hidesign India and Axiom Telecom. BuildaBazaar currently charges its merchants in two ways. One, as a per cent of transaction value and as a fixed cost of Rs 1,000 a month, which merchants can use once they achieve scale in the number of transactions done via the platform.
Thanks to the conservative and different model vis-à-vis peers, Infibeam has managed to break even. It reported a net profit of Rs 7 crore in the first half of FY16.
In this backdrop, the focus on growing its BuildaBazaar platform seems in the right direction. Strategies to improve merchant acquisitions (48,724 now), ensure customer loyalty, increase average revenue per merchant through multiple value-added services, upgrade technology and strengthen its logistics capabilities will aid growth of this business.
Half of the issue proceeds of Rs 450 crore, or Rs 235 crore, will be for setting up cloud data centres and purchasing property for shifting its registered and corporate offices. About Rs 38 crore will be used in setting up 75 logistics centres and Rs 67 crore to purchase software.
While BuildaBazaar has grown at a healthy clip and enjoys good margin, stiff competition from peers such as Just Dial (Omni app) and Shopify is a key monitorable. Though the management insists Just Dial’s Omni is a different product, merchants still have many options to choose from.
As Infibeam will be the only listed play on the booming e-commerce business, the market might assign some scarcity premium to its stock. While it offers high growth potential, particularly in the BuildaBazaar space, the risks are higher, too.
At the price band of Rs 360 to Rs 432, the issue is priced at 5.7-6.6 times the FY16 annualised revenue, which is not cheap. The concern also stems from the recent cut in valuations of India-based unlisted e-commerce entities, as well as the fall in those of globally listed players. The decision of two investment bankers (Kotak Mahindra Capital and ICICI Securities) to withdraw from marketing the IPO as lead managers is also not a good sign. While sectoral sources say it is due to valuation differences, the company has denied it. In any case, the valuations are high.
“At the upper band of the issue, the stock is priced at 6.5x (annualised) H1 (first half) FY16 enterprise value/sales. Return on equity and capital employed are three per cent and 10 per cent, respectively, as of H1’FY16. We envisage better profitability on the back of the upcoming cloud data centre and improvement in technology infrastructure and overseas growth. However, the Infibeam issue seems highly expensive at current valuations,” said Saptarshi Mukherjee and Amod Joshi of IIFL, in a note.
Another analyst with a reputed domestic brokerage, not willing to be named, said: “We believe the IPO is fairly expensive and prices the profitability of the next two years.”