All eyes on Infibeam IPO as Indian e-commerce wonders which road to take

Tense trading.
Tense trading.
Image: Reuters/Arko Datta
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The initial public offering (IPO) of Infibeam, to be launched later today (March 21), is keenly awaited despite its small size.

The Ahmedabad-based e-commerce company, which competes with Flipkart, Snapdeal,, and Paytm, among others, plans to raise Rs450 crore ($66.8 million) at a valuation of $334 million through the IPO that closes on March 23. The company has fixed a price range of Rs360 to Rs432 per share for the offer.

Infibeam will be the first e-commerce company to list in India and the response it gets will help assess investors’ appetite for future listings of online retail companies.

In India, companies that plan to list on stock exchanges file a draft red herring prospectus (DRHP) with the Securities and Exchange Board of India. The document, which often runs into hundreds of pages, contains information pertaining to the company’s operations, prospects, competitors, industry, threats, and other aspects.

Infibeam’s 458-page DRHP (pdf) talks about the challenges facing a sector that is expected to be worth $15 billion by the end of 2016 with nearly 100 million shoppers:

Huge losses

Indian online retail companies have so far focused only on attracting more customers and increasing the gross merchandise value (total value of goods sold through a portal). In an attempt to attract more eyeballs, these companies have been on a discount spree, burning deep holes into their pockets. Even after close to a decade of being in the business, the two leading players—Flipkart and Snapdeal—are far from breaking even.

Infibeam’s IPO document admits this ugly truth:

We have incurred significant losses in the past and may continue to incur significant losses in the future.

The DRHP also says:

Further, revenues from our e-retail business may fluctuate from period to period resulting typically from variations in internet usage as well as traditional retail spending patterns.

Infibeam booked a loss of Rs9.8 crore in fiscal 2015—lower than the four previous years. Between April to September 2015, the company booked profits of Rs6.6 crore. 

Fierce competition

Indian e-commerce companies have received the lion’s share of the venture capital investment that has flowed into India in the last few years. To attract more customers, these companies often offer deep discounts, besides investing in human resource, technology and logistics in a big way.

Cut-throat competition would ensure that discounts don’t end anytime soon; online retailers will have to continue digging deep into their pockets. In its DRHP, Infibeam says:

We face intense competition and this presents a continuous challenge to our success… Pricing is a significant driver in consumer decisions in our industry, and our competitors may engage in price competition. We may respond by increasing advertising and promotions, which may increase our costs and may not reflect past trends.

It also says:

There can be no assurance that we will have sufficient resources to respond to competitors’ investments in pricing and other promotional programs or technological developments. We may be required to reduce our operating margins in order to compete effectively and maintain or gain market share.

Counterfeit threat

Proliferation of fake products has become a serious problem for Indian e-commerce companies. In fact, often consumers who placed orders online have received not just counterfeit items, but sometimes even bricks and soap bars.

Given the competition, the companies cannot stop adding more vendors on their platforms and that might just aggravate the issue, as the Infibeam’s prospectus points:

We may incur liability for selling counterfeit products, products sold on our websites or content provided on our websites that infringes third-party intellectual property rights.

We could incur significant costs and efforts in either defending against or settling such claims. If there is a successful claim against us, we might be required to pay substantial damages or refrain from further sale of the relevant products.

Moreover, regardless of whether we successfully defend against such claims, our reputation could be severely damaged. In addition, implementing stricter measures to reduce exposure to such liability and/or to limit the information collated and provided by our services may result in us being less attractive to our users. Any of these events could have a material adverse effect on our business, results of operations or financial condition.

App anxiety

Many consumers in India access the internet only through their smartphones. This is the reason why e-commerce companies have been trying hard to push consumers to use their own apps. As they are installed on a user’s phone, the apps also let the firms interact better with customers.

Infibeam explains how the need to get more users on apps is stoking anxiety in the industry:

Increasing number of customers use mobile devices to access e-retail sites. If our mobile solutions are not widely adopted or are unsuccessful, our results of operations and business could be adversely affected.

If we experience difficulties in the future in integrating mobile applications into mobile devices, or if issues arise in our relationships with providers of mobile operating systems or mobile application download stores, or if our applications receive unfavourable treatment compared to the promotion and placement of competing applications, our future growth and our results of operations could suffer.

Archaic taxes

Indian tax laws predate the advent of e-commerce. This has led to confusion and chaos in recent years, landing online retailers in trouble vis a vis several state governments. While the Indian government is working to simplify taxes for these new-age companies, there is no clarity yet.

New tax treatment of companies engaged in e-commerce may adversely affect the commercial use of our services and our financial results.

Due to the global nature of the internet, it is possible that various governments might attempt to levy sales, income or other taxes relating to our activities… New taxes could also create significant increases in internal costs necessary to capture data, and collect and remit taxes.

State governments may adopt new policies in relation to taxation of e-commerce transactions in the future. Any of these events could have an adverse effect on our business and results of operations.