Private equity funding gets tighter for Indian e-tailers, says report

Access to private equity funds is getting tighter for India’s e-commerce players. A fragile global recovery and recent amendment to the India-Mauritius tax treaty may keep international investors away from India, according to India Ratings and Research (Ind-Ra).

Until 2015, e-tailers were flush with private equity funds. But they have not been as fortunate this year, with muted deals during January-April 2016, Ind-Ra said in a report.

"The funding concerns have arisen at a time when e-tailers are undergoing a structural transition in their business model, involving considerable capital expenditure," it added.

Ind-Ra further said funding through conventional bank lending route is highly unlikely and consequently e-commerce firms will need to look for specialised institutional investors that have a high risk appetite to avail bridge finance.

"Such funding will only be available at a higher cost. These funds are generally extended on a short-term basis, until the next round of PE funding occurs," it added.

The report said funding from such investors will depend upon the ability of the e-tailers to maintain a level of PE confidence by sustaining its prominence and valuation, which seems to be heading southward.

E-tailers are attempting to move out of the deep discounting model to a more sustainable business model by offering lower discounts, improving efficiencies and focusing on improving loyalty among customers that require a considerable investment commitment.

"As a result, the existing players have large planned investments in the value chain namely logistics, payment banking, fulfillment centres and omni-channels with a primary focus on improving the active customer base, enhancing customer loyalty and value add services," Ind-Ra said.

The e-commerce companies are also undergoing structural changes in terms of their business model, especially after government's guidelines on marketplace model.

Ind-Ra further said established players will enjoy the first mover advantages and have limited operating expenses compared to the large capital expenditure that new entrants in the e-commerce space will need.

"However, the Indian industry is exposed to competition from global players with deep pocket and strong parentage and they will continue to be a challenge," the rating company said.