For many of us, the obvious answer for the question, “Which out of two companies – Tata Motors and Flipkart, is bigger in the market?” would be Tata Motors. Well, if you’re also one of those who thinks that Tata Motors is the correct answer, then think again. According to the current stats, Flipkart’s valuation is now over $15 billion (Rs 100,000 crore). While, in comparison, the stock market values the Tata Motors at a mere Rs 95,000 crore. Shocked? Well, here are some more similar cases.
67-year-old manufacturing company – Hindalco, which is India’s largest aluminium company, has a market valuation of Rs 16,000 crore. On the other hand, Snapdeal, which began trading just five years ago, is valued at Rs 35,000 crore. Snapdeal’s figure is more than double of what Hindalco is valued at.
So, the big question that arises here from the above two examples is how and why? And, the answer for this how and why is simple, Mobile phones and Internet.
The coming up of Internet and smartphones has completely revolutionised the world we live. Everything has become easier, quicker and faster than ever because of this amazing innovation of the human mind.
Ola, Snapdeal, Flipkart, Grofers, Foodpanda and all the other App-based firms essentially act as brokers and courier services. They are basically responsible for connecting Consumers with service providers. The world wide web allows them to cut through the infrastructure clutter and reach even the remotest.
The valuation of companies like Tata Motors, Hindalco or Jet Airways are calculated in terms of their annual revenues while e-commerce firms like Flipkart and Snapdeal focus on gross merchandise value (GMV) to pitch their stories.
Now GMV is misleading for two reasons. First, it reflects the total value of goods and services transacted through the website or app, not the actual revenue earned by it. Second, the huge discounts offered are not excluded from GMV.
However, this doesn’t mean that every e-commerce start-ups are overvalued.
Factually and statistically, Flipkart, has “real” annual revenue of just over Rs 3,000 crore on a GMV of Rs 40,000 crore. That’s a ratio of around 7.5 per cent. Its audited annual loss on account of discounts in 2013-14 was a staggering Rs 719.50 crore.
One more example of valuation myth is Uber, the taxi cab aggregator app, founded in 2009, is valued at $50 billion (Rs 3.30 lakh crore), higher than auto giant General Motors ($44 billion), which was founded in 1908.
The gist of startup (over)valuation hype is that start-ups are surviving on VC/PE/angel money and not on its own earned profits. When that source eventually dries up, some will go belly-up. Only those with business models that generate real cash profits will survive