Tuesday 2 July 2019

Unlisted market: Why e-commerce stocks like Ola, Oyo, Paytm trade at eye-popping prices

The grass is always greener on the other side.

Some analysts prefer to say the same thing about the e-commerce businesses, the biggest buzz in the industry lately. 

Some unlisted e-commerce names such as ANI Technologies (Ola), Oravel Stays (Oyo Rooms) and One97 Communications (Paytm) have been creating quite a splash in the unlisted market, mainly on the strength of their titular value, drawing in small and retail investors.

Many such investors flocking to these counters are not even aware of the challenges of the unlisted space, especially with regard value fluctuation and limited liquidity.

Many are drawn to such propositions on the lure of attractive valuations and herd mentality.

Stock prices & financial performance
According to Abhishek Securities, a firm dealing in unlisted shares, Ola, Oyo Rooms and Paytm are currently trading at Rs 27,500, Rs 75,000 and Rs 17,000, respectively, in the unlisted space.

That, even when these companies continue to incur losses. One 97 Communications, which houses the main payments business of Paytm, reported an over four-fold rise in consolidated revenue in FY18 at Rs 3,314.8 crore but losses swelled to Rs 1,606.05 crore from Rs 903.09 crore in FY17, as per data sourced from Tofler.

Meanwhile, Paytm Mall reported a loss of Rs 1,787.55 crore on a total revenue of Rs 774.86 crore in FY18, as it looks to compete with Walmart-backed Flipkart and Amazon India, which together hold 80 per cent market share.

Combined losses of One 97 and Paytm Mall swelled 270 per cent to Rs 3,393 crore in FY18 from Rs 917 crore in FY17 while combined revenues went up by 417 per cent during the same period to Rs 4,089 crore.

For the year ended March 2018, OYO India reported a marginal widening of net loss to Rs 360 crore for India operations against Rs 355 crore loss reported for the previous financial year.

OYO India’s revenue growth has jumped over three-fold. The firm reported an operating revenue of Rs 416 crore for financial year 2018 compared with Rs 120 crore reported for financial year 2016-17. 

Flipkart India led the way with an unmatched margin. Net loss of the e-commerce giant grew over 700 per cent in FY18, though revenue growth during the period was 39 per cent. In FY18, Flipkart India reported a Rs Rs 2,060 crore loss against Rs 245 crore in the previous year.

What then justifies the sky-high valuations that these stocks are commanding in the unlisted space?

“Business models in e-commerce industry, in general, differ from traditional businesses. They do not owe or possess any tangible assets like land, plant, or warehouse. Also, they incur huge losses and do not have any other reserve as well. Despite this, their valuations keep going up to billions. Remember, Flipkart sold its controlling stake to Walmart at Rs 1.11 lakh crore,” says Sandip Ginodia of Abhishek Securities.

Dinesh Gupta, Partner at Unlisted Securities, explains the arithmetic of valuing an e-commerce entity. “E-commerce outfits are virtual shops and they are valued by their sales, at 10 to 15 times of annual sales. The multiple may be even higher in certain cases depending on growth stage of the segment,” he said.

What is the theory?
Fair value of any stock is very subjective till it gets listed. “Different sets of people can value the same thing using different methods to arrive at different numbers. Here, one sees value in something and the other does not,” says Ginodia.

Arun Mukherjee, a Kolkata-based value investor and co-founder of Sebi-registered SA Investment Advisors, says there is a ‘great fool theory’ at work behind the humungous valuations that these companies command.

“That theory says it is possible to make money by buying securities, whether or not they are overvalued, and by selling them for a profit at a later date. This is because there will always be someone (a bigger or greater fool) willing to pay a higher price,” he said.

Even the largest e-commerce company of the world, Amazon, does not make any money, Ginodia points out. e-commerce is a global trend, which is why such a company will be valued higher even when they do not have any asset or profits. Since there is no structural mechanism, they are inflating valuations at will.

A trend or a business?E-commerce is the new trend currently. But once sentiment weakens, investors may rush to offload them. 

“These companies are valued only on the basis of top line and the growth they show. It is very hard to arrive at fair value,” said Ginodia.

Gupta says when a company is not listed, it does not need to focus on investors. “It does not opt for any mechanism like rights issue or bonus issue, which may downgrade their stock value. This is why any valuation is considered okay.”

Again, price alone cannot be a determinant of attractiveness of a stock. MRF currently trades around Rs 55,000, at 20 times the EPS of Rs 2,600. 

“This is does mean that the stock is not investor-friendly. Similarly, if Wipro had not given any bonus or split its share, the stock value would have been Rs 5 lakh today. They split it to ensure liquidity for investors,” Gupta said.

Key concernsE-commerce stocks do not see much volume in the unlisted space, mostly because of high valuations. “If they are to be listed in the stock market, the valuation will not be even 1/100th of what they are demanding. They are priced so high, but you would still buy it thinking that some another buyer will come later on,” says Mukherjee. 

He said investors should be very cautious while investing in the unlisted space. 

“Flipkart is making billions of losses every year. You are making sales in penny, but are valued in millions. This is crazy. There is no logic in it. At some point, these bubbles will burst for sure,” Mukherjee said.

According to him, Indian customers fall for discounts and offers and this is what the e-commerce companies are tapping to do business. But this is unlikely to continue forever. They will not make any profit anytime soon, perhaps next three to five years. 

The contrarian viewSome analysts say some promoters, like those of the e-commerce giants, want their stocks to trade at a premium among select investors. This is why companies like MRF, Page Industries or Shree Cements do not opt for a stock split or bonus issues.

Ola has slashed all discounts and will be in profit in a year or two. People will be using Ola as they have got used to it now. At a later stage, Paytm may start charging a fee for its services. It is active in many services, which will, in turn, enhance revenue. This is be the business model and most e-commerce companies follow the same, said Gupta.

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