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Monday, September 28, 2020

Temasek Tracking - Snapdeal, the Indian online marketplace sees heavy valuation write down


2010   Founded
2014   Temasek joins US$105m funding round
2015   Temasek joins US$500m funding round

Snapdeal started as a daily deals platform in 2010. A few months on, it expanded into an online market place. At the time, online shopping was undeveloped. With its huge population of 1.3b, and rapid expansion of internet services and mobile phone sales, there was high expectation of explosive growth in online sales in India.

eBay came in 2004, Flipkart started 2008, then Snapdeal 2010. Amazon entered India in 2013. In between, there were several smaller startups. Online marketplace is huge, but no one's making any profits. In 2017 eBay sold its Indian unit to Flipkart. Indian online marketplace startups were just Amazon copycats. They don't bring any differentiation features to the market. It's simply competing on structures. The models are all the same. Build inventories, expand by acquisitions up the vertical lines in logistics and payment systems, fight for market shares with huge discounts. 

Founders Kunal Bahl (Snapdeal) and Binny Bansal (Flipkart) became posterboys of India eCommerce tech world. With abundance of private equity headed for India as the next frontier for cheap money, it became a funding race. When Snapdeal got its US$600m from Softbank, Flipkart boasted of its US$1b+ from several funders, Jeff Bezos literally waved his US$2b cheque for Amazon, India. Both Snapdeal and Flipkart were unicorns which have not earned a single rupee in profits. By 2015, Snapdeal had a valuation of US$6b!

It was in this backdrop that Temasek entered the fray. It participated in 2 late funding rounds in 2014 and 2015. Temasek does not mention how much they put into Snapdeal, but it won't be small change for sure. Incidentally, GIC put US$500m into Flipkart. Strangely, the 2 sovereign wealth funds are having a proxy war in India, them being in opposing camps. 

Amazon has the major share of the market, followed by Flipkart and a distant third is Snapdeal. Amazon is a matured player with far greater capacity to go for market share and no profits for many years. Flipkart and Snapdeal burnt easy private equity funds to expand by giving crazy discounts and acquisitions, often at wild valuations.

After obtaining funding from Softbank in 2015, Kunal Bahl boasted Snapdeal will overtake Flipkart within a year. In 2016, things began unravelling at Snapdeal. What went wrong? Their mobile apps were not getting downloaded as much as Amazon and Flipkart. Opinions differ but there was much talk that Snapdeal focused too much on gross merchandize value (GMV). That means too much effort and resources into the one-day delivery capabilities, the logistics and inventory side of things. Its something that technology and AI can easily take care of. Sellers complained management was not sympathetic to their problems. For an online marketplace operation, sellers are key. No sellers, no customers. Snapdeal's headcount had exploded. It did'nt help that tribal employment practices resulted in manpower quality issues. The company had a burn rate of US$20m a month.

Softbank, the second biggest shareholder, wanted Snapdeal to be sold to Flipkart. Founders and investor Nexus objected and negotiations with Flipkart failed. The deal valued Snapdeal at US$800-US$900m. 

With the sale aborted in 2017/2018, Snapdeal was in survival mode as cash was running out. It cut manpower drastically, disposed of many subsidiaries, including Freecharge the payment systems which it purchased for US$450m, now disposed at fire sale price of US$80m. The company has managed to drastically reduced the cash burn rate. Founders and Nexus propped up the company with further injection of funds. Kunal Bahl now talks of Snapdeal 2.0 and IPO possibly in 2019, which has'nt happened. Interestingly, the pandemic has been good to online sales. Snapdeal picked up millions of new customers. Data indicates Amazon is still number one in tier 1 cities, Flipkart is strong in tier 2 and 3 cities, and Snapdeal is picking up growth in the smaller towns.     

What are the prospects of Snapdeal? Not very bright. Snapdeal is still a very distant 3rd in the e-Commerce war. With the sale of 77% of  Flipkart to Walmart for US$16b in 2018, eBay divested their interest in the company and decided to return to India.  New competition coming. Even as Snapdeal watch their expenditure, it is still spending heavily on advertising. This is unavoidable for online marketplace because unlike a physical store, their customers have no location loyalty. If they don't advertise heavily, they die. There is also still much infrastructure needed. Unlike Amazon and Flipkart, Snapdeal has not yet employed AI technology to monetise the vast amount of customer data, spending habits, etc. Amazon uses its Amazon AWS cloud whilst Flipkart uses Microsoft Azure. Given all this, Snapdeal's future is not assured and it is likely to face another cash crunch round the corner.

What is the impairment to Temasek's investment? We do not know how much Temasek put up. But a little guess work is possible. Snapdeal has received a total of  about US$2b funding and Temasek's share has been mentioned at 2.65%. Thus most likely Temasek put up US$53m. Using Flipkart's offer of about US$850m as a basis of valuation, the investment has lost at least 60% in value. On top of that, Rupee has depreciated against SGD by 10% since 2013. An unrealised loss of about US$34m for Temasek's books is a fair assessment.


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1 comment:

  1. Hefty holdings of Cisco systems at USD50+ way back when it was USD50+... never recovered

    ReplyDelete

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