Is ShopClues torn between an IPO and a merger?

Twenty months after it last raised equity funding of around $100 million, ShopClues, the non-metro focused marketplace that primarily sells unbranded items, appears to be standing at a crossroads.

The e-tailer, which has deferred its initial public offering (IPO) plans, maintains that a Nasdaq listing remains on its agenda. It recently even hired a new chief financial officer to steer the company's listing plans. “IPO continues to be our goal. There is a few quarters’ delay because we want to be sure the timing is right. We should be ready to file for an IPO by 2018...” co-founder Radhika Aggarwal said.

However, VCCircle has learnt from several persons privy to the developments that ShopClues' merger with a bigger rival is the more likely scenario at this point.

Given the state of affairs at the company—low cash reserves, scale-back in categories like large home appliances, and a missed gross merchandise volume target—a merger would indeed seem like the preferred course of action. The contours of the e-commerce market, too, have changed significantly over the last few quarters, making the landscape ripe for consolidation.

Early talks of merger?

Sanjay Sethi, co-founder and CEO of ShopClues, told Business Standard last week that the company was open to merger proposals even as it pursued the IPO. Sethi’s remark only corroborate such talks in the industry.

“There are some interests and they (ShopClues management) are not unreasonable people,” said a person directly familiar with the developments at the company. “ShopClues is complementary to some of the major players in the market now, whether it is in terms of increasing their market share or revenue because of its low burn rate,” the person added.

“While it may not be an immediate move, joining forces with a larger e-commerce firm looks the most likely scenario in the medium term,” another person said.

The battle lines in India's e-commerce market have been redrawn following SoftBank's mega fund infusion into Flipkart, massive downsizing at Snapdeal, Amazon’s steady rise and Paytm’s acceleration of its e-commerce business. It remains to be seen how ShopClues navigates and establishes itself as a formidable player amid these well-funded names.

Potential suitors

Although it couldn't not be ascertained if there are any active discussions currently, Alibaba and ShopClues had reportedly held talks a year ago, with the former looking to bump up the e-commerce business of investee firm Paytm. Such discussions could revive and steer ShopClues away from its IPO goal, said the people cited above.

The Alibaba-Paytm combine seems to be the most likely suitor, as a merger with ShopClues will lay the ground for its aggressive expansion in e-commerce. In fact, Alibaba-Paytm’s over $200-million investment in online grocery firm BigBasket is almost a certainty. VCCircle had reported last week that Paytm was nearing acquisition of investee firm Little Internet Pvt. Ltd, which runs deal discovery app Little. It is also in talks to buy out online deals startup Nearbuy to strengthen its hyperlocal play.

While Paytm Mall is modelled on Alibaba’s Tmall, ShopClues could complement its offerings with a large selection of unbranded items, two consumer internet entrepreneurs closely familiar with its business model said. “Given the way ShopClues is built, it is very easy to position itself as a customer-to-customer platform. While Alibaba can position Paytm Mall as its Tmall-equivalent in India, ShopClues can be its Taobao,” said a third person familiar with ShopClues’s business.

Flush with funds, Flipkart may also look at ShopClues given its history of expanding inorganically via large acquisitions. It bought Myntra and, recently, eBay’s India business. It was close to acquiring Snapdeal, although the deal came a cropper after months of negotiations. That means a great deal of cash remains unutilised in its coffers, which Flipkart can use for other potential targets.

“While Flipkart focuses on the mid-to-premium range of e-commerce and Myntra caters to the fashion segment, ShopClues could be a good fit for tapping the lower segments and non-metro markets,” said the third person cited above.

Last but not least, Flipkart’s lead investor Tiger Global, which plays a key role in its strategic decisions, holds a board seat and significant minority stake at ShopClues. Singapore’s sovereign wealth fund GIC is another common investor.

Tap running dry

ShopClues will have to take some decisive steps on the funding front as it last raised equity funding about 20 months ago, when GIC led a $100-million round valuing the company at $1.1 billion. In May, it raised $7.7 million in venture debt from InnoVen Capital, saying it did not raise equity since it would have meant dilution.

The company has raised around $200 million in total. In an interview with VCCircle a year ago, CEO Sethi had said half of that money was still in the bank. An estimated monthly cash burn of $3-4 million would mean the company's cash reserves could last a little over a year from now.

The company had hinted at a pre-IPO fundraise of $75-100 million six months ago, but has not closed the round yet.

Meanwhile, it has made some key changes on the business front. “We took some tough calls. We have taken a step back from the structured categories whether they are large appliances, branded TVs or mobile phones,” Aggarwal told VCCircle. This also meant that ShopClues missed its milestone of $1.2 billion in GMV by March.

Though ShopClues has stopped disclosing GMV numbers, industry estimates peg it at $700-800 million. Two categories that are going strong for it are refurbished phones and unbranded fashion. “We believe we own about 40% of the refurbished phone market. In lifestyle we are the fourth-largest player in India. We grew 60% year on year,” said Aggarwal.

The company’s revenues have risen at a fast clip, but losses have outpaced revenue growth. Revenue rose 150% in 2015 to Rs 79.23 crore, and 125% in 2016 to Rs 178.61 crore. Losses, meanwhile, tripled from Rs 38 crore to Rs 101 crore in 2015, and to Rs 383 crore in 2016, according to VCCEdge, the data research arm of News Corp VCCircle.

Aggarwal claimed the number of orders on the company's platform has doubled. However, on the question of a merger with larger platforms, she said: “We are building the business only for IPO.”