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Are the valuations realistic?

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Microsoft has agreed to invest about $100 million in Uber Technologies as a part of a private deal valuing the company at approximately $50 billion. The San Francisco based company, led by CEO Travis Kalanick, is using the cash to expand operations to cities across the globe. Some time back Facebook (FB) wrapped up its landmark $19 billion acquisition of WhatsApp. WhatsApp had continued to run its operation completely independently since then with a measly employee base of 55, but the closing of the deal marks the start of a gradual integration as FB gives the world’s biggest mobile messaging service legal and administrative support and — eventually, we can presume — finds new ways to monetize the company in which spent more than Iceland’s GDP. This is nearly five times what employees of Instagram would have got when that company was bought out for $1 billion in 2012. There is another side to the story as well.

Off-late the valuations of many privately funded Indian start-ups have come under scrutiny after a sharp drop in market capitalization in comparison with similar new age ventures in the US and China. These overseas listed counter parts often form the benchmark for valuations of the Indian ventures. Restaurant search and review venture Yelp currently valued a about $1.7 billion, observed a significant drop from close to $6 billion a year ago. The company, which reported a revenue of about $400 million for the full year ended December 31, 2014, is now struggling to win advertising revenue in a crowded market. That’s raising questions about the valuation of Zomato, Yelp’s Indian counter part. Zomato, with barely $25 million in revenue, was valued at over $700 million, in its last round of funding. Going by Yelp’s latest valuation and the difference in revenue between the two companies, analysts say Zomato’s valuation cannot hold.

Similarly, Chinese e-commerce giant Alibaba has a market capitalization of about $172 billion currently, down from $231 billion, when it went public in September last year. Alibaba was also hurt by tepid revenue growth, which rose at its slowest in over three years in the first quarter of this year. The Jack Ma led company reported revenue of $12.3 billion last year. Such numbers suggest that Flipkart’s valuation of $15 billion, with revenue at an estimated $800 million, and Snapdeal’s valuation of $4.8 billion in their last rounds may also be excessive. Mobile payment processor Paytm is valued at about $2 billion, with an annual revenue of about $50 million, while its closest global counterpart, Paypal, has a market cap of $41 billion with revenue of $8 billion annually. In all these cases, the valuation differences are significantly narrower than the revenue differences.

This kind of valuation is happening because of the assumption that the Indian market will be similar to China in terms of size. People are assuming perfect execution for many quarters consistently, but in India, the same is distant reality. One adverse contingency can upset all calculations. On the contrary, such valuations are not always based on fundamentals for early stage investments. One should also look for the rate of growth and the headroom for growth. So the Indian ventures cannot be strictly compared with global companies that have gone public or even their Chinese counterparts. Also the valuations of Indian companies tend to be higher also because India is the last big market and with a stable democracy, the country makes for an ideal investment destination among other emerging markets.

With more and more e-commerce companies fetching astonishing valuations, two things comes into foreplay. Possibly, there is something deep in these valuations that defies traditional financial sense or hidden elements in their business model per se that are apparent to the PE players. Which leads to the conclusion that new valuation models are emerging in PE, which are still beyond the mainstay of financial academic fraternity. However, if the valuations prove to be wrong, in hindsight this could be a follow up of an another dotcom bubble.

Contributed By:
Dr. Subir Sen
Dean – Globsyn Business School

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