When a credit card issuer conducted a survey of online spending in India in 2009, it found to its surprise that the biggest e-commerce site in the country was the Indian Railway Catering and Tourism Corporation (IRCTC). Surely, lunches ordered on the Internet could not be totting up to some US$70 million a month? IRCTC had actually gone beyond its basic menu; its major business had become selling railway tickets online.
Travel is big business in India. The federal ministry of tourism estimates the number of domestic tourists at 850 million annually. Joining IRCTC in the limelight now is redBus — India’s largest bus ticketing company, which has just been acquired by the Ibibo Group, a joint venture between Naspers of South Africa and Tencent of China, for an estimated US$125 million. Says Kanwaljit Singh, senior managing director of Helion Venture Partners, an early-stage investor in redBus: “The acquisition is indeed a significant event in the Indian startup ecosystem for several reasons. It is the first Internet company from India which has been acquired by a global strategic investor. It is a validation of India’s domestic market opportunity for Internet-based businesses. It is a successful exit for several venture capitalists (VCs). We are sure this will inspire more wannabe entrepreneurs to take the plunge and boost the startup ecosystem and encourage more global strategic players to look at India as part of their future growth strategy, both organically and inorganically.”
The problem in India is that exits have not been too easy. “redBus’s acquisition is a great sign for India’s Internet industry,” says Kartik Hosanagar, professor of operations and information management at Wharton. “This will encourage more investments on the part of VCs and angels who have lately been starved of exits. Further, it will likely encourage more bold acquisitions by other companies down the road as well.”
Boost for Entrepreneurs
“I hope [the deal] spurs many more entrepreneurs to start companies with unique and differentiated models that solve real problems of real India,” says Bharati Jacob, managing partner at VC firm Seedfund, the first VC to invest in redBus. “More entrepreneurs will think of models that work in India and aren’t necessarily copy-paste of a Western model. This also proves that if an entrepreneur creates a company that is a category leader, it results in a great outcome for all stakeholders.”
“This is a good thing for the ecosystem,” adds Phanindra Sama, cofounder and CEO of redBus. “We have to make this acquisition a huge success for our parent company for many such acquisitions to follow. Other tech-enabled consumer companies like Justdial [India’s No. 1 local search engine] have gone public. These companies will, in turn, acquire small startups, which will set the whole ball rolling.”
Sama and his two cofounders set the ball rolling in August 2006 with just two bus operators and a daily inventory of 10 seats. India has around 500 inter-city bus operators with five to 500 buses each. Until redBus came on the scene, it was a very haphazard integration operation, conducted mainly through telephone links with the thousands of centers and start-off points. Buses went with seats empty while frantic passengers, desperate to get tickets, were left behind. Today, technology makes it all simple. redBus handles about a million passengers a month. (See redBus: Moving India’s Transportation Industry in a New Direction.)
Sama is unwilling to talk detailed numbers. But the audited accounts for 2012-2013 are likely to show a turnover of around US$100 million, twice that chalked up last year. The company had moved into the black in 2012-2013 with a net profit of around US$80,000. It is likely to remain on the right side of the ledger this year, too. The valuation is reasonable, according to one merchant banker who spoke off the record: redBus is the leader in its field and has huge potential.
Reasonable Valuation
“We can think of valuation of a company in terms of revenue (turnover) multiple or net profit multiple,” says Hosanagar. “Revenue multiples for companies like redBus are lower than that for tech companies like Google or Apple. That’s because redBus’s margins are much lower, and a significant portion of the revenues goes directly to the bus operator. redBus has gross margins of 10% and turnover of around US$100 million. For businesses like that, revenue multiples of 0.75X or 1X are not uncommon. redBus got a better multiple than that to reflect the fact that it’s growing at a fast rate (projected turnover for 2013 is around US$170 million). Profit multiples are not commonly used for early-stage tech companies because they are unprofitable; they are used for later-stage companies. I don’t know the actual profit details for redBus, but they may not have been appropriate for calculation given its growth (and likely improving profitability).”
Overall, the valuation is “reasonable,” Hosanagar concludes. “It reflects the nature of the business and, in particular, lower gross margins of a ticketing operation. One could argue that if India’s Internet sector was growing the way it is in China, the valuation for redBus would have been at least 50% to 100% higher. But the reality is that growth is slower in India, so such high valuations cannot be justified.”
What is also important for the valuation is that the management team is staying in place. “I continue in my role as CEO,” says Sama. “Nothing’s changing here.” Adds Jacob of Seedfund: “redbus will remain an independent company. The South African group is known globally for acquiring majority stakes in companies and letting them be independently operated by the entrepreneur. I believe the deal and valuation is good for all of us at the table, and that’s why it went through. For redBus, the tie-up provides access to other markets, capital and leverage of the knowledge resident with Internet entrepreneurs within the South African company’s fold.”
redBus was actually looking for another round of financing when it met with an offer it couldn’t refuse. But if it hand’t been redBus, there were other potential brides, though none with the same attractive statistics. Among the competitors redBus faces are Makemytrip, AbhiBus and travelyaari. They all have their claims to fame. Abhibus, for one, bills itself as the “fastest-growing online aggregator of bus tickets inventory across India.” There could be many leaders on different parameters. Unlike air travel, where 28% of all tickets are sold online, for bus tickets, the figure is only 5.7%.
The Ibibo Group that has taken over redBus – or to be more exact, redBus’s parent company, Pilani Soft Labs – is younger than the ticketing outfit, having been set up in 2007. It is a joint venture between Naspers of South Africa, a traditional mass media company listed in Johannesburg, which has metamorphosed into an Internet powerhouse, and Tencent, China’s largest Internet services portal. In 1993, Naspers demerged into M.Net and MultiChoice Ltd (later renamed MIH Holdings). MIH has other interests in India including a stake in Flipkart, the country’s largest e-commerce platform. Tencent is a Chinese giant with more than 500 million registered users. Napsers acquired its stake in Tencent in 2001 when it was a startup. According to a BrandZ study, Tencent Holdings is more valuable than Facebook. It is responsible for Napsers global success, which it is trying to replicate in India.
The Ibibo Menu of Offerings
“We are one of the top e-commerce groups in India in terms of volume and value of transactions,” says Ibibo Group founder and CEO Ashish Kashyap. The group has in its stable travel company Goibibo.com, B2B travel aggregator Travel Boutique Online, commerce payment aggregator PayU India, online marketplace Tradus.com and auto transaction site Gaadi.com.
“The redBus acquisition expands and diversifies the group’s existing travel assets,” says Kashyap. “redBus is deeply entrenched in both the supply and demand side in this market. The combined volumes of redBus and the Ibibo Group make us one of the biggest online travel players in India.” Like redBus, Gaadi.com and Travel Boutique Online are acquired properties. Kashyap was earlier country head of Google India.
There are two other broader aspects to the redBus deal that have a significance beyond the transaction itself. The first is the emergence of Birla Institute of Technology and Science (BITS) as a cradle for entrepreneurship. So far, the Indian Institutes of Technology (IITs) have enjoyed this reputation. But in some ways BITS, which was set up by the Birla Group in their hometown Pilani, is ahead of them. (See Connected Universities: Much Greater Than the Sum of Their Parts.)
The Pilani influence is even present in the name of the company that owns redBus – Pilani Soft Labs. This was started by Sama and two other alumni of BITS. Before redBus, which was started for the simple reason that they could not get bus tickets to travel back home in an emergency, the trio won their spurs in MNC subsidiaries in Bangalore – Sama at Texas Instruments, Charan Padmaraju at Honeywell and Sudhakar Pasupunuri at IBM. “I think the ownership and the freedom given in BITS to students is what is making them take ownership in the outside world and start companies,” says Sama. There are many other prominent entrepreneurs from BITS — Raju Reddy, the founder of Sierra Atlantic; Rajesh Hukku of iflex; Sabeer Bhatia of Hotmail…. The forerunner of BITS was set up in 1901 with just one teacher to educate the grandsons of Birla group founder Seth Shiv Narayan Birla. It has come a long way since. (Incidentally, one of the Birla Group’s key holding companies is Pilani Investments.)
The Chinese Entry
The second take-home from the Naspers entry is the increasing China presence in India. In the Internet space, the two countries are very big markets. According to Internet Trends, a report authored by Kleiner Perkins Caufield & Byers, a VC firm based in Menlo Park, Calif., in 2012, China had 564 million Internet users, the U.S. 244 million and India 127 million. The Indian market grew by 26% last year, while China was relatively slower at 10% and the U.S. the laggard at only 3%. Internet companies are looking at ways to develop synergistic offerings for India and China.
Alibaba.com of China, one of the world’s leading e-commerce companies targeted at small businesses, has held a successful offline sourcing event in Mumbai. More than 250 suppliers of Alibaba participated.
In the brick-and-mortar space, too, Chinese consumer goods companies have made major inroads into the Indian market. In the infrastructure sector alone, Chinese firms are involved in projects valued at about US$65 billion. The newly formed Chindia Chamber of Commerce has more than 100 Chinese companies as members. Meanwhile, more than 200 Indian companies have set up shop in China. And a dozen plus restaurants, offering ethnic Indian food cooked Chinese style, are doing roaring business in Shanghai. Chinese chow mein has, of course, captured urban India the way it has much of the Western world.
