Snapdeal IPO: Key risk factors listed on draft papers filed for Rs 1,250-crore issue

Snapdeal IPO

Online marketplace Snapdeal has filed a draft red herring prospectus with the Securities Exchange Board of India to raise Rs 1,250 crore through an initial public issue.

The company also has an offer-for-sale of up to 30.77 million shares by its existing shareholders and promoters.

Softbank, along with seven stakeholders such as Foxconn, Sequoia Capital and Ontario Teacher’s Pension Plan Board, will participate in the OFS for partial exits. Collectively, this amounts to around 8 percent of the company’s pre-offer equity share capital.

The OFS kitty comprises 24 million shares by Starfish I Pte Ltd, 2.97 million by Wonderful Stars Pte Ltd, 4.12 lakh by Sequoia Capital India III Ltd, 7.48 million by Kenneth Stuart Glass, 6.5 million by Myriad Opportunities Master Fund Ltd, 1.36 million by Ontario Teachers Pension Plan Board, 1.28 million shares by Laurent Amouyal and 5.04 lakh shares by Milestone Trusteeship Services Pvt Ltd.

Snapdeal has 71 shareholders. While Softbank has 35.41 percent of the pie, founders Kunal Bahl and Rohit Bansal together own 20.28 percent in the company. None of the two founders is diluting any stake in this IPO.

The proceeds of the public issue will be used towards growth initiatives, expanding logistics capabilities and enhancing the company’s technology infrastructure.

Axis Capital Ltd, BofA Securities India Ltd, CLSA India Pvt Ltd and JM Financial Ltd are the book running lead managers to the issue.

A look at the draft papers filed with the market regulator shares the risk assessment done by the company. Let’s take a look at the key risk factors before investing in the public issue.

1. Falling Topline: Snapdeal’s revenue declined substantially due to the COVID-19 pandemic. It reported a revenue of Rs 471.76 crore in fiscal year 2020-21, down 44.26 percent from Rs 846.39 crore a year ago. For nine months ended September 2021, its revenue was at Rs 238.59 crore. With the Omicron fears looming on the horizon, it could be difficult for the company to turn around its topline.

2. Persistent Losses: The company never reported profit. Its losses for FY21 stood at Rs 125.44 crore as against Rs 273.54 crore a year ago. For nine months ended September 2021, its losses were at Rs 177.08 crore. Although the Indian economy is on a rebound, a massive swing into profit looks difficult.

3. Uncertain Future: Snapdeal admitted in the draft papers that it was unsure about a turnaround. “We may incur losses further in future. If we fail to increase our number of delivered units or NMV, acquire new users in a cost-effective manner or keep our expenses in check, we may not be able to increase our revenue or be profitable. If we continue to incur losses, our business and the value of our equity shares could be adversely affected,” it said.

4. Negative Cash Flow: The firm has had negative cash flow for many years. In FY21, its net cash used in operating activities was at negative-Rs 914 million from negative-Rs 3718 crore a year ago. “Any negative cash flows in the future could adversely affect our results of operations and financial condition, and we cannot assure you that our net cash flows will be positive in the future,” Snapdeal said.

5. Declining Merchandise Value: Snapdeal’s net merchandise value (NMV) for FY21 declined to Rs 912.37 crore from Rs 1,760.99 crore a year ago. Delivered units fell 18.56 million from 34.58 million last year.

6. Stiff Competition: Snapdeal faces stiff competition from e-cmmoerce giants like Amazon and Flipkart, besides Reliance Industries and Jio Mart, which are expanding their businesses rapidly.

7. Macroeconomic Factors: The firm said macroeconomic conditions may also adversely affect its business. “If general economic conditions deteriorate globally or in specific markets where we operate, consumer discretionary spending may decline and demand for products available on our platform may be reduced. A decrease in consumer discretionary spending would cause sales in our platform to decline and adversely impact our business,” it said.

8. Policy Changes: The government has proposed certain amendments to consumer protection (E-Commerce) rules in relation to registration requirements for online retailers, restrictions on conducting flash sales, rein in a push to promote private label brands push and raise scrutiny of relationships between online marketplace operators and their vendors. Snapdeal fears that the new laws or regulations and policies, if implemented, may affect its manufacturing, retail and e-commerce industries in general, which could lead to new compliance requirements.

“Such and other new compliance requirements could substantially increase our costs or otherwise adversely affect our business, financial condition, results of operations and cash flows. Further, the manner in which new requirements will be enforced or interpreted can lead to uncertainty in our operations, require significant changes in technology solutions and could also adversely affect our operations,” said the DRHP.

9. Higher Wage Costs: The recent wage code, if implemented, will drastically alter the way industrial houses treat their employees and also impact the working hours, take-home salaries, and other rights of employees. “Implementation of such laws has the ability to increase our employee and labour costs, thereby adversely impacting our results of operations, cash flows, business and financial performance,” the company said.