Written by: Anjali Tripathi
Have you heard of Snapdeal in news lately? Snapdeal, for those who don’t know, is an e-commerce website that sells goods just like any other e-commerce giant, like Flipkart or Amazon. Snapdeal was one of the popular sellers when it started, thanks to its low-cost commodities. However, it soon lost its charm when the goods delivered were found of inferior quality.
Now, Snapdeal has once again sprung up in news, thanks to the financial venture it is undertaking. Snapdeal has requested the Securities and Exchange Board of India (SEBI) to approve its initial public offer of Rs 125 crore. In the offer, the company plans to raise the said amount by offering 30.77 million shares for sale.
However, two big questions that stand before the e-commerce company before going ahead with the IPO are:
- Who even buys from Snapdeal?
- Will the IPO be a success?
Who Buys From Snapdeal?
Snapdeal was founded a decade ago and was successful in rivalling giants such as Amazon.com Inc and Walmart Inc’s Flipkart. However, as fast as it rose to success, it fell deep in losses as the revenue dipped by 44% at Rs 4.7 billion by the end of the financial year of 2021.
Because of this reason, the recent news of Snapdeal’s IPO has taken everyone by surprise. The company isn’t selling highly and has a poor reputation regarding the quality of the products, then how is it keeping afloat?
Co-founder Kunal Bahl answered this by saying that he is asked the same question a lot of times. He went on to say that the brand largely caters to the middle-income group population hailing from tier-2 cities and beyond. As per them, their idea is to serve the best available at the lowest price and not to the people coming from those cities where Amazon and Flipkart are not able to deliver promptly. Their customers are mostly people who drive two-wheelers and look for value for money rather than premium quality.
Well, it does make sense because the inhabitants of galis and mohallas of tier-2 and tier-3 cities of India want to get the product at the best value. They want affordable commodities and quality doesn’t pose a great issue here. Thus, they serve as an apt market for a brand like Snapdeal that has tarnished its reputation in most of the urban cities.
And mind you, I am not making empty claims. I once myself ordered a saree from the website but it wasn’t up to the mark. And later, my friends who ordered from the same website had their share of issues too with the quality of the product they got.
In toto, it can be said that Snapdeal’s customers live in the interior parts of India and that’s what has been able to keep the company afloat, apart from its investors like Softbank.
Will The IPO Be Successful?
IPOs have always been a tough bet when it comes to startups. Rather, it would be fit to say that any company coming forward with an IPO takes a huge risk and so do the investors.
Snapdeal is attempting a Rs-125-crore IPO, which is big enough to create huge speculation in the market. The brand has potentially lost trust from urban consumers, who happen to be the largest investors in the share market. This might work against the company’s interests when launching an IPO.
Snapdeal currently has 71 shareholders, including 35.41% equity of Softbank and 20.28% combined equity of founders Kunal Bahl and Rohit Bansal. The founders are not diluting their share in the IPO, thus the investors are. The question arises why would the investors dilute their equity in a profitable venture.
It’s most unlikely for a profitable venture to raise funds from the market until and unless they want to have a global presence or want a huge sum of money that no investor can provide. The second case can be found to be true here, since Rs 125 crore is a huge sum for any investor to shell out.
Speaking of the company’s financials, Snapdeal’s revenue declined during the Covid-19 pandemic, during which it could have raised revenue of Rs 471.76 crore that was less than 44.26% as against the revenue in the previous financial year that stood at Rs 846.39 crore.
The company’s losses reduced in the financial year 2021 from Rs 273.54 crores to Rs 125.44 crores. However, it doesn’t change the fact that the company has been facing persistent losses, thus further reducing hopes for future profit.
The company is also seeing negative cash flow; this isn’t a great sign as cash flow is one of the major indicators in a company’s valuation. In the financial year 2021, the new cash used by Snapdeal in operating activities stood at a negative of Rs 914 million, changing from a negative value of Rs 3,718 crore that was in the financial year 2020. This negative cash flow will affect the operational and financial conditions of the company negatively.
Though the company has made its name in tier-2 and tier-3 cities of the country, the chances of it rising and shining on the national stock market are still low. This is for the fact that the amount intended to raise is way too much and the profitability is very less. I hope for good results and wish Snapdeal luck, but it would have been better for the company to bring an IPO when they had a stable and positive financial position.
Note: The article was originally published here.