Shopclues could raise a pre-IPO round by January: Sanjay Sethi
The company joined the Unicorn club with a claimed valuation of USD 1.1 billion last January following a fund infusion from GIC Pte Ltd, Tiger Global Management and Nexus Venture Partners
Tiger Global-backed Shopclues has gradually inched towards being the third largest player following Amazon and Flipkart after rival Snapdeal succumbed to exist in its current avatar. The company claims to have grown 2.7 times in terms of monthly revenue in July as compared to November 2016, with a daily average order number of 80,000.
Its revenue for the year ended March 31, 2016, stood at Rs 179 crore with over double the loss at Rs 383 crore. The company joined the Unicorn club with a claimed valuation of USD 1.1 billion last January following a fund infusion from Singapore’s sovereign wealth fund GIC Pte Ltd, and existing investors Tiger Global Management and Nexus Venture Partners.
The company’s plan is to go public in the coming financial year. In a detailed interaction, Sanjay Sethi, chief executive officer (CEO) tells Moneycontrol's Priyanka Sahay on why investors would be interested in Shopclues’ shares and how the recent industry dynamics including the Snapdeal saga would be a crucial thing to watch out for in the e-commerce industry. Edited excerpts:
Q: Having raised less than USD 200 million so far, Shopclues is expected to proceed with an initial public offering (IPO). By when do you plan to file the red herring prospectus?
A: We have just hired the chief financial officer and the red herring prospectus should happen most likely in the first quarter of the next year. We had Tiger come on board in 2014 and only at that time the IPO was pretty much decided. Tiger was on the board of Flipkart and Nexus Venture Partners (Shopclues early investor) was on the board of Snapdeal and we had made it very clear that we had no intention of getting aligned with either Flipkart or Snapdeal.
We had decided that we will be responsible for our own destiny and that will be by going public.
Q. What is the amount that you plan to raise?
A: This the market will only tell. There can be a range … anywhere from USD 50 million to USD 500 million.Q. So it will be in the US market?
A: Six months ago, I would have said yes. But today I am not so sure. Today I think India market is also ready.
Q: But is there much scope for a loss making company in India?
A: We have done a lot of work. The law says that a loss making company cannot make more than 10 percent offering on retail. Which means you and I cannot buy more than 10 percent. That's it.Q: But what made you consider India?
A: I will tell you why not India. The reason people were giving is that Indian public market is not very deep, secondly, e-commerce is a sector which not many analysts track and not many people understand. But the positive side of the India market is that because we are an electronic exchange, people can invest in India from anywhere.
Q: Is there a plan to do a pre-IPO fund raise?
A: We might actually do a pre-IPO fund raise, mostly around December-January. We are almost hitting profitability, we don’t need a lot of cash. If we will raise, it will be mostly for some kind of acquisition. Given the environment that we live in, there are many companies that can add to our growth, there are brands that are cheaper ... talking about either vertical or horizontal player -- parallel companies. But our own need is very less. That money, if we will raise, we will raise internally, perhaps a single digit million.All I am saying is that if we will need to raise fund, that will be in the context of acquiring a company only. The cheque size would depend on the acquisition cost of the company.
Q: What are the immediate concerns of the company and how do you plan to grow from here?
A:We will all be very pleasantly surprised by how the e-commerce industry develops in the next 2-3 years. There are 1.3 billion people in the country. Only 150 million people stay in Tier one and metro cities. Currently, we are just catering to them. Who are the rest of the people? What do they buy? What do they wear? We are blind for them.Q: But a company also needs to take into account their disposable income. Also considering that you plan to target them with low ticket size items, how will Shopclues ever make money?
A:It is a myth that you cannot make money while selling low ticket items. This is also a myth that if you are selling an item worth Rs 10,000 you make huge money. For example, for an iPhone, there are a handful of customers. On the other hand, take a Rs 300 item. The merchant's margin is 60 percent and it can be shipped for as low as even Rs. 30. We are not saying that it will get delivered the same day. We are saying that you tell me your budget, in that budget, we will tell you what you can get ...
We offer low price point are a fully managed marketplace, not inventory led. We work more on higher gross margin and a very fat long tail. We promise selection and price points. Such marketplaces naturally cater to low-income people. While there is a delivery fee below specific ticket sizes, we have a very different thought process. If you are our regular buyer then we will eliminate the delivery charge for you. We will ask you money only if we think you are not our frequent buyer.Q: But you will have to create that market, which doesn't currently exist. Will this exercise not require good branding exercise and a huge amount of cash burn?
A:That’s actually not true. You cannot grow faster than the market. No amount of money can bring 400 million people up there. It is stupid to say that I will inject say like USD 500 million so this market will become ours. Softbank is also dealing with this grandeur. This is a deep well, it will absorb whatever money you pour into it. These things run on macro forces. We cannot go beyond that. If I had USD 1 billion, I will spend it, but then I will realise that as soon as the money is gone, there is no marginal utility left. All I am saying is that you have to be very patient.Q: So the market that you are targeting will shape up broadly post IPO?
A:Yes 100 percent. This market will reach there in the next 5 to 15 years. I am not talking about next year.Q: What will be the incentive for people to buy Shopclues’ share when the company is still developing its target market?
A:It is very simple. Just imagine, if Flipkart goes for an IPO what will be its valuation? Flipkart cannot do an IPO for less than its current valuation. Last fund raise happened at around USD 11 billion. If Softbank puts in some more money, the valuation might increase. In that case, if you don’t do it for more than USD 12-15 billion, I don’t think you are setting an example for the street. Company’s inherent value is based on the cash put in. So the watermark is set. When you go public you have to stand to that watermark. Now, what will be the outlook? The investor will buy the stocks and will wait till it becomes USD 30 billion.
Now on the other side, you have another company, in this case, Shopclues, whose valuation is USD 1 billion. If it goes public and then grows to USD 2 billion then you will have equivalent benefit as you would have had when the USD 15 billion company became USD 30 billion. In public market, this is how it happens. People will invest not because they see a USD 15 billion or USD 1 billion firm. Their target is to ensure that if they invest a specific amount then by when will they get the return.Q: What sort of month on month growth in revenues are you reporting?
A:Our net revenue from Nov 2016 has growth 170 percent, while the number of orders are 70-75 percent higher. In the last 12 months, our transacting customers have doubled and out of the new additional customers, 90 percent are from Tier 4 cities.Q: What do you think of the Snapdeal issue? It is now expected to become a much leaner company and run on a pure marketplace model, possibly similar to eBay or TaoBao. You have been a part of eBay which could not eventually succeed in India. Considering the money they are raising with the Freecharge sale (Rs 375 crore) and the rest in the bank, do you think the company can grow from here?
A: If somebody was starting from scratch with no baggage from the past, I would have said yes. In many ways, companies like Shopclues and what Snapdeal 2.0 is touted to be ... are very capital efficient. They don't need a large amount of money. There isn’t a huge capital expenditure. You don't put warehouses or machinery. The broad spend is on brand building, salaries and technology.
But in this particular scenario, it is much harder because of the legacy that it has. It has gone down from 10,000 to around thousand odd employees. Expected to reduce strength further. It leaves a scar that needs a huge amount of healing. You have to nurse it bring it back to health. It can easily take two, three years to retrace the path and for that, you need to have a long runway to spend money.
Q: Do you see a competition coming Snapdeal 2.0?A: We will always be looking for it. We closely follow that.