Alibaba Group Holding Ltd (BABA)’s backing Off Raises Valuations Concerns In India’s E-commerce

Alibaba Group Holding Ltd (NYSE:BABA) backing off from a potential investment in Snapdeal has gone to confirm earlier concerns that India’s startup valuations are way off the mark. Alibaba’s investment in Snapdeal would have been its first direct investment in India but seems to have been scared off by the high valuation.

$6 Billion Valuation

The deal is reported to have hit the rocks after Snapdeal demanded a valuation of $6 billion while Alibaba Group Holding Ltd (NYSE:BABA) valued it at $5 billion. Questions are already being asked whether the high valuations that the startups are seeking are justifiable and sustainable or only meant to suck money from hungry investors looking to tap into India’s e-commerce space.

The wave of spending in India’s startup sector has been on the rise, having received $5 billion in funding in 2014 up from $1.6 billion in 2013 and $760 million in 2012. Valuations have been off the roof as Flipkart continues to be valued at $11 billion and Snapdeal at $5 billion. Snapdeal and Flipkart are now valued more than the total market capitalization of the India’s brick and mortar industry. Acquiring some stakes In Snapdeal would have been a good deal for Alibaba Group Holding Ltd (NYSE:BABA) but it seems it won’t happen any time soon.

E-commerce Potential

The phenomenal valuations have come in parcel because of the perception that Asia’s third-largest economy has a vast opportunity for online retailers, taking into consideration the huge population at hand. Economic growth has been on the right track as the middle class continues to expand powered by the smartphone revolution.

Infrastructure and high real estate costs means brick and mortar stores will never be able to scale at the same rate as e-commerce. Amazon.com, Inc. (NASDAQ:AMZN) has already invested in the market place and given the clearest of indication that India remains its key next stop having faltered in China amidst stiff competition from Alibaba Group Holding Ltd (NYSE:BABA).

E-commerce prospects are massive in India, but valuations should also be in line with the market and companies fundamentals if investors are to budge and invest.

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