CHENNAI:Days after India’s most successful homegrown e-commerce major Flipkart managed to raise $1.4 billion in funding, Housing Development Finance Corporation (HDFC) chairman Deepak Parekh said he was worried about the financial models of e-commerce companies, stating that the time had come for them to rein in the cash burn model.
Speaking at the Indian Institute of Technology - Madras (IIT-M) on Wednesday, Parekh said while he might be too traditional in thinking and approach, he felt that the valuation game may have run ahead of what these companies’ fundamentals warrant.
“India does need to have more unicorns (start-up firms valued at $1 billion or more)… Yet, time has come to exercise caution and rein in the cash burn model. There has to be a threshold level where the revenue stream and profitability have to become key considerations, rather than just focusing on gross merchandise value,” he pointed out.
E-commerce firms have started feeling the pressure from venture capital investors to begin concentrating on profitability, with even giants like Flipkart and Snapdeal having trouble finding new funding avenues. In fact, Flipkart’s latest funding round came at a much lower valuation. Parekh went on to question how these firms would ever be self-sustaining if they do not record profits. “Otherwise, the model is just based on going from one private equity fund to another… at some stage someone will be left holding the baby. This can have a domino effect on the entire system.”
“However, an area that should not be neglected is digital literacy,” he said. On the future of financial services, Parekh said that penetration levels are still extremely low and demand is immense. However, the priority for the sector, he said, is addressing the twin balance sheet issue — that of stressed corporate and banks’ balance sheets.
“NPAs have reached untenable levels… The key issue lies in resolving governance structures in public sector banks,” he stated.