Valuationofdotcomcompanies

BeneaththeglossofscorchinggrowthandvaluationsofIndianecommercecompanies,there
arenaggingquestionsabouttheiraccountingpracticesandownershippatternsthatrecallthe
Internetbubbleof2000.Thesetwoquestionsarecentraltotheoperationsoftheposterboyof
ecommerceinIndia:flipkart.com,the70croreonlineretailerofbooksandelectronicsthatis
reportedlyclosetobaggingaprivateequityinvestmentatavaluationof$1billion(about4,500
crore).Theyalsohaveabearingonaclutchofothercompanies,includingFlipkart,Myntraand
Snapdeal.AccordingtoGrantThornton,inthefirstsixmonthsofcalendar2011,privateequity
firmsinvested$108millioninnineecommercecompanies.
Valuations,though,areaconcern."Ithinkit(valuationsingeneral)isabubble,thoughIhopeit
isnot,"saysKVaitheeswaran,founderofIndiaplaza.com,whohaslivedthroughtwocrashesin
his12yearsinthisbusiness.AddsMaheshMurthy,aventurecapitalist:"Inthesecasesofhigh
Indianvaluation,thenumberseemstobedrivenbythe'findagreaterfooltheory'whereyou
believeitisokaytovaluesomeoneat$1billionbecauseyouthinkyoucanfindafoolwhowill
buyitfromyouat$3billioninafewyears."
InflatingProfitsinCurrentYear
Thefirstissuerelatestothecredibilityofthenetprofitnumberthatsomeecommerceplayers
are putting out. This question arises from how they account for the discounts they offer
substantialinmanycases.Severalcompaniesarereportedlyindulgingincreativeaccountingof
marketingexpenses,includingdiscounts.
The net effect of this creative accounting is to postpone expenses to later years and inflate
profitsinthecurrentone.TheissuewasfirstflaggedintheIndianmediabyMurthy,who,ina
columninTehelkamagazine,datedAugust2,termedit"nonsenseaccountingpracticesatsome
oftheseecommercefirms".Itworkslikethis.Say,thecostpriceofabookforanecommerce
firmis100.Itoffersitforsalefor120,butalsooffersa30discount,beitintheformofcashor
agiftcertificate.Acustomerbuysthebookataneffectivepriceof90.ButXYZdoesnotrecord
90asrevenueand10asloss.Itbreaksitdownintotwoentries.Thefirstentryrecords120as
revenueand20(120100)asprofit.Thesecondentryrecordsthe30discountasanexpense.
But this is not expensed the same year. Instead, it is capitalised and written off over many
years,thusinflatingprofitsinthecurrentyear.
TheannualreportsofFlipkartandgroupentityWSRetailfor200910thelatestavailablewith
thecorporateaffairsministry(MCA)andtheyearbeforeitsgrowthtookoffdonotshowsuch
writeoffs."IamnotawareofsuchapracticeinFlipkart,"saysSachinBansal,thecompany'sco
founder.Whenaskedspecificallyifanycurrentexpensewasbeingcapitalised,hereplied:"Iwill
notcomment."Mostecommerceplayershavetakenoffinthepast18months,gainingtraction
withtheonlineconsumer.AidedbycashfromPEandVCfirms,ecommercecompanieshave
rolledoutaggressivepricinganddealstodriverevenues.Profits,though,areanothermatter.In
200910,Flipkartreportedalossof90lakhonsalesof11.6crore.Flipkartclockedrevenuesof
Rs500croreinFY201112,atentimeincreasefromRs50croreinFY201011.