The Story Behind Not Recommending Infibeam and Avoiding a 70% Loss

Oct 3, 2018

Sarvajeet Bodas, Research analyst, The 5 Minute Wrapup

On Friday, 28 September, the stock price of Infibeam fell 70%.

This was the second biggest single-day fall after Satyam which plummeted 83% in 2009.

With this great fall, around Rs 92 billion worth of wealth was destroyed in a single day. The market capitalisation of the company fell to Rs 39 billion from more than Rs 131 billion on Thursday.

If you're a shareholder, I can't imagine what you must have felt. It is shocking to realise that an investment, worth Rs 100,000 just a day before, is now worth Rs 30,000.

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Allow me to share with you my first experience with this company.

It was the month of March in 2016.

The market had corrected about 20% over the previous twelve months.

Nevertheless, the market was recovering from the lows.

As they say, if winter comes, can spring be far behind?

Things were about to change for better. The markets started to pick up momentum.

A big party was about to begin: The IPO party.

In the middle of March, Infibeam Avenue came up with its IPO.

There was excitement in the air.

After all, Infibeam was India's first e-commerce company to get listed.

I too was eager to cover this IPO. After all, which analyst doesn't want to understand the business model of an e-commerce company?

I attended the company's IPO meet arranged at a nearby 5-star hotel. This is what we learnt from the company's management.

Infibeam has an e-commerce website - infibeam.com which is similar to Flipkart, Amazon, or Snapdeal.

Through this website, Infibeam sells several products such as mobile phones, books, electronic gadgets, and clothing.

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Apart from this, Infibeam owns and operates Buildabazaar, an e-commerce marketplace. This is basically a platform that enables merchants to set up an online storefront.

The management spoke impressively in their presentation. They said, they provide a cloud-based, modular, customisable and scalable technology platform as well as e-commerce infrastructure and logistics support.

Big words indeed!

I found it quite interesting.

Another thing that caught my attention was how the company funded its growth. There was no venture capital or private equity fund backing it. Instead, the company took money from the promoter's family and friends.

Not to mention, the company came up with 'fresh issue' at the time of the IPO. That meant the entire proceeds were to be used for business-related activities.

This wasn't like most IPOs wherein early-stage investors sell their shares in an Offer for Sale (OFS) to gullible retail investors.

So far so good, I thought.

But ultimately, it all boiled down to the company's financials and the valuations of the IPO.

That's when the red flags showed up.

The company incurred losses for each for the previous five years before turning profitable just before the IPO.

Recurring Losses Before the IPO

Rs (million)FY11FY12FY13FY14FY15
Operating Profit24(98)(220)(204)(28)
Profit After Tax(183)(108)(249)(269)(101)
Data Source: ACE Equity

Not to mention, the business was vulnerable to intense competition from established e-commerce companies, like Amazon and Flipkart, which rely on deep discounts, cashback offers, etc.

But people weren't interested in any of this!

These are some of the things I heard...

  • 'It's a long-term story. Mobile penetration is increasing. Smartphone devices and high-speed broadband are helping to increase online users.

    'Hey, don't forget India is one of the youngest online demographics globally with approximately 35% population between the age of 15-35'.

    'Young Indians will drive the growth of e-tailing in the country'.

Okay. Sure.

Now, let's talk about valuations.

First, ICICI Securities and Kotak Mahindra Capital pulled out as lead managers of the IPO due to high valuations of the issue.

Second, the valuations itself. The IPO valued the stock at a mind-boggling PE of 174.4 times.

Clearly, not for the faint-hearted! To access my IPO note, click here.

Lastly, there was another red flag.

This is what I said in my concluding remarks:

  • Infibeam has around Rs 700 million of cash on its balance sheet. It is also important to look at the amount spent as a capital expenditure in the last 5 years. Infibeam has spent around Rs 882 million in the last 5 years. And suddenly, with this IPO proceeds, Infibeam plans to spend Rs 4500 million. This sudden increase in capex of more than 5 times compared to past 5 year's combined capex raises a concern.

Due to all these concerns, we published an Avoid view on the IPO.

As of date, out of Rs 4,500 million, Rs 902.5 million still remains unused.

Despite this, the company recently sought shareholder approval to raise funds of Rs 20 billion!. They want to start a Payment Bank and a Prepaid Wallet.

This is an untested business segment the merits of which are yet to be proven.

Is it biting off more than it can chew? Maybe.

Is it any wonder that we never recommended the stock, even after the IPO?

In Smart Money Secrets, we stay away from businesses which are yet to prove themselves with a track record of profitability and self-sustaining business model.

Then there was the question of valuations. just before the crash on Friday, the PE of Infibeam was 152. It's still about 50 even now after the fall.

This is what super investor Rajeev Thakkar had to say when we asked him a question about high valuations. He gave the example of D-Mart but the same logic applies to Infibeam as well.

  • Just for the sake of argument, D-Mart at 100 times earnings then the earnings today on your purchase price is one percent.

    Now if your target return from equity is 20%, and we are saying that the market will shut down, then essentially you are saying that the earnings are going to grow substantially because I am buying this at 100 and if its earnings are Re. 1 today, someday it may earn Rs. 20 for it to make 20% return on my purchase price.

    Then you are betting on a 20-fold increase in profit, whether it is said or unsaid.

Too optimistic an assumption about profit growth?

Such an experiment in inverse thinking can help avoid buying stocks at sky-high valuations.

  • No matter how wonderful a business is, it's not worth an infinite price. We have to have a price that makes sense and gives a margin of safety considering the normal vicissitudes of life. - Charlie Munger

Happy and Safe Investing!

Chart of the day

Now this is not the first time that the stock of Infibeam saw such a steep intraday fall. The chart shows the previous instances...

Biggest Corrections in the Stock of Infibeam Avenues

As per the business newspapers, the sharp correction of on Friday was due to corporate governance issues in the company.

Earlier this year, stocks such as Gitanjali Gems, Vakrangee, and PC Jeweller saw a sharp fall due to corporate governance issues and lack of management integrity.

Despite this, the retail investors increased their stake in such stocks that have plunged over the past few months.

If a stock is in a falling spree, there's probably a good reason behind it.

It's better to stay away from such falling knives.

You could consider fundamentally strong stocks backed by India's best investors.

Regards,
Sarvajeet Bodas
Sarvajeet Bodas
Research Analyst, Smart Money Secrets

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