Moneycontrol Pro Panorama | Gold dust on online marketplaces, but will everyone get rich?

Market

The initial public offering (IPO) of online marketplace Meesho is fully subscribed on its first day. The IPO values Meesho at around Rs 50,000 crore making handsome returns for its promoters and early investors.

The IPO valuation is astounding, considering that Meesho is still a money-losing company. The current market capitalisation of Vishal Mega Mart, a large brick and mortar store value retailer that has been generating decent earnings, is only 23 percent higher than that of Meesho.

Market caps of other value retailers--V2 Retail and V-Mart Retail—are very small in comparison to Meesho. The current market cap of Aditya Birla Fashion and Retail, a maker and retailer of premium and value apparel, is also at a fraction of Meesho's.

Meesho’s IPO valuation underlines the opportunity in online marketplaces and the value that investors are ascribing to future growth potential.

Traditional retailers have been slow to build online marketplaces. New age companies are taking the risk and are ahead in tapping customer spends.

The trend is visible in other segments of the market also. The market cap of food delivery companies—Eternal and Swiggy—exceed the combined market cap of all quick service restaurants (QSR). “This shows a clear investor preference for asset-light platforms that scale quickly, face lower capital intensity, and benefit from the entire restaurant ecosystem, compared to QSR chains that grow by heavy investment store network,” explain analysts at ICICI Securities.

Of course, building an online marketplace is not easy and early investors reap money when their venture succeeds or lists on the stock exchanges. However, for retail investors checking into these businesses at a later stage, they should be wary of changing sector dynamics. Entry of a large investor or a large fund-raise can intensify competition and increase discounting in the sector.

Quick commerce is a case in point. The sector, which is currently the focus area for many listed companies, is seeing heightened competition. “While we remain constructive on the quick commerce space, competition is intensifying through entry of adjacent sector players, and capital raise by the existing players,” analysts at Emkay said in a note after meeting industry participants. Both Zomato and Swiggy are facing competition in quick commerce.

Amid the changing market landscape, it is important for investors to focus on earnings. In public markets, investors ascribe more value to cash flows and earnings than to future potential. “The key question for investors is whether the company can translate this (business) scale into consistent, predictable profitability -- a challenge that value-commerce players have historically struggled with,” write Varsha Bang and Bharat Gianani of our research team on Meesho IPO.

In stock markets, the NSE IT index is leading gains amongst sectoral indices in Thursday afternoon trade. One factor going in its favour is that the sharp depreciation in the Indian rupee against major currencies can benefit software companies. Read our Chart of the Day to know more.

How executive pay went galactic (republished from the FT)

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