Is Flipkart worth its $7bn price tag?

Moneycontrol Bureau

Flipkart, India's largest online retailer, made big headlines last month with its mammoth fund raising exercise, which according to analysts, pegged its valuation at USD 7 billion. It was more than double the USD 2.6-3 billion valuation it received in its last round of fund raising in May.

"We believe India can produce a USD 100 billion company in the next five years, and we want to be that. Whether it takes 5 or 10 years, we are here for the longer-term," co-founder and CEO Sachin Bansal told CNBC-TV18 after the fund raising. The largest-ever fund raising by an Indian startup, gave Flipkart's the necessary wherewithal to take on Amazon India and widen its lead over other rivals.

But does it deserve such high valuations? According to an Economic Times report , Flipkart is worth over 10 times than Kishore Biyani's Future Retail, which had 319 stores in 98 cities and towns, as of March 2014. On the flip side, the Bansals-led Flipkart had six warehouses and zero stores. Future's revenues were about two times and its assets 23 times that of Flipkart. Future is profitable, whereas Flipkart is yet to post a profit.

According to a Business Standard report , Flipkart India (FIPL) posted a net loss of Rs 192 crore for the year ended March 2013, taking the total accumulated losses to Rs 281.73 crore. Its total revenues for FY13 stood at Rs 1,180 crore.

It is not just analysts who believe Flipkart is overvalued right now. Kunal Bahl, the founder of India's second-largest e-tailer Snapdeal, also seems to believe the same. "There is a company whose valuation is ridiculously high and there are a bunch of investors there already who have put in a lot of money," he told Economic Times in an obvious reference to Flipkart.

Flipkart, its rivals Snapdeal and Jabong among others are under pressure to raise capital in order to keep their head above water, especially after the advent of world's largest online retailer Amazon in India last year. Just a day after Flipkart's fund raising, Amazon pledged to infuse USD 2 billion in its India arm.

(Also Read: e-retail India growth: 4 startups already in USD 1 bn club )

And competition is just going heat up more. It is not just online players who are eyeing the Indian e-commerce boom. Physical retailers are also making a beeline to the online space, with most of them either already having a set shop or making plans to do so.

After the fund-raising, Flipkart put its IPO plans on hold, which means it does not have to deal with regulatory norms (read: disclosing financials, promoter stakes) just as yet. Flipkart said it will use the funds to expand its logistics network, build more warehouses, spend on marketing and discounts and acquire companies. The company said the gross value of merchandise sold on the website has already reached USD 1 billion.

With the smart phone-backed Internet revolution taking shape in India, online retail sales are expected to cross the USD 30 billion-mark within the next five years. It is this potential of the market that is keeping investors interested, despite the fact that no Indian online player has been able to successfully crack the code on 'how to make profits' so far.