PE Activity For E-Tailers Muted In Foreseeable Future: India Ratings

New Delhi: PE activity for e-commerce companies is expected to remain muted in the foreseeable future as fragile global recovery and recent amendment to the India-Mauritius tax treaty may keep global investors away from India, a report said on Thursday.

E-tailers, which were flushed with private equity funds till 2015, have had lesser fortune this year, with muted deals during January-April 2016.

"The funding concerns have arisen at a time when e-tailers are undergoing a structural transition in their business model, involving considerable capital expenditure," the report by India Ratings and Research added. 

India Ratings further said funding through the 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. 

However, 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 efficiency 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," India Ratings said. 

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

India Ratings 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," it added.