More Layoffs Likely in E-Commerce as Countdown Begins For US Rate Hike

The recent layoffs in well-known startups such as Zomato, TinyOwl and Housing.com signal rising fund crunch in India's fast-growing e-commerce industry, which has attracted billions of dollars in investments over the last few years. (Read)

For now, these layoffs have been limited to the hyperlocal, food ordering and classifieds segments of e-commerce industry, but analysts say more start-ups may find it tougher to raise funds if interest rates in the US go up for the first time in a decade in December.

"You will see a lot of these start-ups falling by the wayside once the US Federal Reserve starts raising rates and funding dries up," said Paras Adenwala, investment consultant at Capital Portfolio Advisors.

Interest rates in the US have remained near zero since 2008 in a bid to drive investments and create jobs in the world's largest economy. Though the easy money policy was designed to drive US economy, it also helped emerging markets like India attract foreign money.

The talk of an impending rise in US rates, however, has led foreign investors to seek the safety of US bonds. Domestic stock markets, which have been a big beneficiary of low rates in the US, are under pressure following sustained selloff by foreign investors. (Read)

The layoffs have also put the spotlight back on the astronomical valuations that some of India's start-ups command despite reporting losses. Most e-commerce firms are not profitable because they give big discounts to push up sales and drive valuations.

"People are turning Diwali into a reckless celebration of throwing away $100 to earn $70; they are chasing vanity sales numbers to maximise the next fundraise," Paytm founder Vijay Shekhar Sharma was quoted by Ambit Capital as saying.

In the past, high valuations of e-commerce firms have led analysts to equate the current sharp growth in these firms with the dotcom bubble of late nineties (1997-2000), which resulted in the collapse of many internet companies worldwide.

Meanwhile, analysts have warned that some media stocks may suffer a collateral damage if the e-commerce industry continues to suffer from a fund crunch.

"Business continuity challenges of several e-commerce categories lead us to believe that the growth rates of media spending by e-commerce players are likely to moderate. Such an event could negatively impact revenue growth, and hence the profitability of ENIL, HT Media, Jagran and Zee Entertainment," said Ambit Capital.

E-commerce ad spending grew by 70-300 per cent for many listed players in the September quarter, the brokerage said, so a slowdown in ad spending could lead to earnings disappointment for media firms.

(With agency inputs)