Friday, 25 September 2015

Rich Businessmen and their Loss Making Ventures --- The Intriguing Paradox!!!

Most of the newspapers and news channels yesterday carried the story that Mukesh Ambani has been named India's richest for ninth year in a row with a net worth of $18.9 billion while the Flipkart founders Sachin Bansal and Binny Bansal made their debut on the country's top 100 rich list with a net worth of $1.3 billion each. The other billionaires from India who made it in the list of top 100 richest entrepreneurs are Sun Pharma's Dilip Shanghvi ($18 billion), Azim Premji ($15.9 billion), Hinduja brothers ($15.9 billion), Shapoorji Pallonji Mistry ($14.7 billion), Shiv Nadar ($12.9 billion), Godrej family ($11.4 billion), Lakshmi Mittal ($11.2 billion), Cyrus Poonawala ($7.9 billion),  Kumar Mangalam Birla ($7.8 billion) and Rakesh Gangwal of Indigo Airlines ($1.6 billion).

Now look at the intriguing paradox. Mukesh Ambani’s Reliance industries Limited (RIL) made a consolidated profit of ₹23,566 Crores in the Financial Year 2014-15, the highest made by any company till now. Dilip Shanghvi’s Sun Pharma, which acquired Ranbaxy for $4 billion, made a net profit of ₹4,541 crore. While Lakshmi Mittal’s Arcelor Mittal reported a net loss of $1.1 billion in 2014-15, his personal fortune also declined by $4.6 billion, pushing him down to the 5th spot among India’s riches tycoons. Raakesh Gangwal has been a new entrant to the billionaire club, all thanks to his Indigo Airlines recording profits for the ninth consecutive year, with net profits standing at 1,304 crore for the year ended 31 March, 2015.

All these facts follow a logical sequence and pattern. What defies logic is the entry of the Bansals of Flipkart in the billionaire club. Flipkart reported a loss of  344.6 crore in Financial Year 2012-13 and loss of  719.5 crore for the year ended March 2014. The figures for 2014-15 are yet to be published. 

Flipkart makes a loss of approximately ₹5 per order. This loss is due to the cost incurred in making customer acquisitions, funding mark downs, making free delivery and product return charges. What keeps their business running is the huge money poured in by the investors who believe that there is a pot of gold at the end of rainbow. The company raised $2 billion in 2014 which leapfrogged their valuation to $12 billion by the end of 2014. So although the company is yet to record a single rupee as profit, their owners have already been crowned as the paper billionaires. Many experts are already predicting a dotcom like shakeout that happened in 2001 throwing out a lot of companies that were running on illogical business models and gravity-defying valuations.

And it’s not only Flipkart which is making the experts beguiled about the E-commerce business model. Amazon and Snapdeal numbers also reveal intriguing facts. As per figures released by Morgan Stanley, Flipkart is the market leader in the $6.3 billion Indian E-Commerce market with a 44 per cent market share by Gross Merchandise Value (GMV).  Snapdeal follows next with 32% share of GMV. Amazon, which achieved $1 billion sales in 2014, is ranked third with 15% share of GMV. 

That was the sunny side. Now look at the financial figures. In 2014-15, Flipkart ran losses of ₹719.5 crore whereas Snapdeal lost ₹265 crore, and Amazon ₹321 crore. A recent report in Times of India (20th August, 2015) says that the losses made by Snapdeal might have skyrocketed to an astronomical ₹1,350 Crore, as per data given by Hong Kong Stock Exchange. The more fascinating fact is that, Amazon, the global entity, actually made profit this year after twenty years of consecutive losses. The Amazon shares jumped up by 14% based on this news.

These huge losses mainly occur because of the deep discounts on products given by the E-Commerce companies. They make up the difference between actual price and selling price by paying sellers and charging the cost to promotional expenses. An article published in Business Today (17th August, 2014) say that Flipkart, Snapdeal and Amazon burn more than $100 million of cash every month. Flipkart has the highest cash burn rate.

Although these companies have tried to sugarcoat this bleeding of money by calling it ‘gap funding’ to the sellers, the fact remains that they are getting dragged into a financial trap from which they might never recover. The investors have also now started asking questions about how and when these companies are likely to break-even and deliver profits.

Now look at the personal fortunes of the maestros of E-Commerce.  As stated earlier, the personal net worth of the Bansals stand at $1.6 billion. Jeff Bezos of Amazon is the fifth richest person in the world with personal fortune of $50.3 billion. In comparison, neither NR Narayanamurthy, Nandan Nilekani or any of the Infosys founders are yet to make it to the top richest list although Infosys has made a net profit of ₹12,249 Crores in the Financial Year 2014-15. Ratan Tata is not even a billionaire although Tata Sons have made a profit of  ₹9,060 Crores in 2014-15.

Although it is too premature to pronounce a judgement whether the rich promoter-loss making venture business model will sustain in the long run, all eyes will actually be on the financial liquidity situation in the global market place. And if the China Crisis, Arabian Turmoil and the European Slowdown casts a long shadow on the global economy, the tap providing easy funding from investors might just run dry forcing these loss making ventures to cut down on their lofty ambitions.

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