It is widely acknowledged that e-commerce is a booming industry in India today. Many Indian e-commerce firms have attracted huge amounts of money from venture capitalists and private equity funds. These investors have bet on these firms despite most of them being loss making. The growth potential of these firms is huge. However, as these are unlisted firms, should you as an Aam investor feel left out? We don't believe so.
We are of the firm belief that the bottomline always trumps the topline. No matter how fast a company's sales may grow; investors should avoid unprofitable firms. For the retail investor, Indian e-commerce firms are just too risky. While some of their business models have a moat, most of them are currently burning a lot of cash for growth. Profitability and healthy shareholder returns are not the companies' targets in the medium term.
So is there no way for investors to participate in the e-commerce boom? The answer may surprise you. Consider this: In a few years, the online retail sales of global FMCG giant Unilever will equal HUL's total revenues! This statement comes from none other than the CEO of Unilever, Paul Polman. This means that the e-commerce boom will benefit brick and mortar firms too. These firms have the advantage of strong brands and a wide distribution network. If these strengths can be leveraged with a robust and flexible backend IT system, these firms could boost sales with better margins. The resulting improvement in profitability will directly benefit investors via higher dividends and stock prices.
Thus we see that Indian investors do not need to invest in the next Amazon to benefit from the boom in ecommerce space. The existing brick and mortar entities (which did not have a big online presence till now) could do very well in the years to come. Investors, who keep a hawk-eye on positive cash flows and margins in this space, will spot such opportunities. It is all well and good to grow fast by burning cash raised from investors. However, without profits the e-commerce business model cannot be a success in the long term.