'E-retailers face funding risks due to tighter private equity'

Mumbai: Online retailers are exposed to funding risks as their access to easily available private equity (PE) funds gets tighter, according to a report.

As per the report by India Ratings and Research (Ind-Ra), the funding through the conventional bank lending is highly unlikely and consequently the e-retailers will need to look for specialised institutional investors which have a high risk appetite to avail of bridge finance.

There has been a considerable slowdown in the flow of private equity into online retail companies, with muted deals seen during January-April 2016, the rating agency said.

The funding concerns have arisen at a time when e-retailers are undergoing a structural transition in their business model, involving capital expenditure especially after the government?s guidelines on FDI in e-commerce, which restricts them from using FDI funds in the inventory based model, the report said.

Ind-Ra believes that due to slowdown in PE funding, competitive pressure from new players in the e-retail business may reduce, resulting in higher entry barriers.

This indicates that 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 would need.

The agency also points out that the funding challenges have come at a stage when the e-retailers are attempting to move out of the deep discounting model to a more sustainable business model, with lower discounts, improving efficiencies and focusing on improving loyalty among customers, it said.

As a result the existing players have large planned investments in the value chain like logistics, payment banking, fulfilment centers and omni-channel with a primary focus on improving the active customer base, enhancing customer loyalty and value added services.

The transition to a more sustainable business model with lower discounts will result in lower cash burn rate, however the fund requirements to execute investments in the value chain are still sizeable, the agency said.

In the event of unsuccessful rounds of PE funding in the future, e-retailers with high cash balances may have to use their cash surplus cautiously to fund growth in the short to medium term.

This may jeopardise their organic growth and may result in losing market share to global giants, all of which may further impact the e-retailers valuations, which have recently taken a beating.

Ind-Ra thus believes that higher investments are imperative to maintain the growth momentum and e-retailers will need to find alternate funding sources.