WHAT'S THE BIG IDEA"
Outlook, (Bharat Ahluwalia), February 21, 2000

PSST! Wanna buy a six-month-old dotcom with a few lakhs in revenue? It's going cheap, just Rs 100 crore? But step on the gas, and snap it up before someone pays Rs 150 crore and gobbles it up. No, no one's trying to pull your leg on this one. Still don't believe it? It's reality-check time. For it was only last November that Satyam Infoway bought the Rs. 1.3 crore indiaworld.com.in for Rs 499 crore. And the country's most popular website, with an estimated turnover of a couple of crore, rediff.com is expected to get valuations in the range of $300-500 million (Rs 1,300-Rs2,200 crore) when it debuts on the US bourse a few months from now. For that matter, take the blinding appreciaion in the valuation of Alok Kejriwal's Contest2Win.com. Last May, it was valued at $2 million (Rs 9 crore), last December it was $9 million (Rs 38 crore) and last week? A cool $20 million (Rs 86 crore).

Hold on. What's happened to those hard-nosed investment bankers, who played hardball with their prey till the little fellows slashed prices? Why are they playing fairy godmonther to every dotcom start-up which happens to come their way? If anything, bankers are happy that they've got their clients what they believe is a good deal, even at these crazy price-earning (P/E) multiples (a multiple of 385 for the indiaworld deal). Hear out Sanjiv Agarwal, head, valuation and allied services at Ernst & Young, and the man who valued indiaworld: "If your look at the benefits that Satyam gets out of purchasing indiaworld, they actually got it quite cheap,"

Just how's that? What happened to the age-old method of valuing a company on the basis of its assets, looking at its current and projected turnover and giving it a multiple of two or three at bet, and setting a price? That is, a profitable manufacturing company with Rs 5 crore as assets and a Rs 10-crore turnover, growing at 20 percent annually, would fetch Rs 30-40 crore.

Well, these methods don't work in the dotcom business. Says Rohit Bhasin, executive director, financial advisory services at PriceWaterhouseCoopers: "With so many inponderables on e-commerce, it's difficult to forecast future cash flows. So you can't use revenue multiples." Also, most dotcoms are in the red and have no physical assets as such. Even if e-commerce does take off, nobody knows in what industries, and with what margins. Will e-banking happen first, or e-retailing, or maybe e-travel? Then the Yahoo!s and MSNS which are developing India-specific portals. How will their entry affect the Indian dotcoms? So how do you value them?

The real key is the NASDAQ in the US, the bourse that's home to the big dotcom stocks. Just let the NASDAQ take the bet, and go with it. "If you believe the NASDAQ is correctly valued - and it's booming now-your use that as a benchmark to value your own dotcoms," says Sanjay Sakhuja, partner, Arthur Anderson. Take the Satyam-indiaworld deal. Prior to it, Satyam's two businesses - it's in Internet service provider (ISP) with revenues of Rs. 42.39 crore ($10 million) up to the third quarter of fiscal 2000, and a few portals with 4.5 lakh page views per day - were valued through market capitalisation on the NASDAQ at $1.5 billion. Typically, ISPS command a price six or seven times greater than their revenue. So, of the $1.5 billion market cap, only about $70 million can be attributed to the ISP service. But let's get conservative, and say that investors ascribed equal to both businesses. That would mean that 4.5 lakh page views that Satyam managed daily were valued at $1,500 per page view. That's among the highest in the world (obviously NASDAQ investors believe that Indian netizens are as lucrative as those in the US). Each Yahoo! page view gets a valuation of $200, an Infoseek page view manages $50, while at the top of the heap, China.com commands a valuation of $860 a page view. In this context, indiaworld's monthly 13 million page views-mostly by NRIS-got valued at a fairly reasonable $250 a page view. Satyam investors seemed to agree. From $1.5 billion before the acquisition, Satyam's market cap stands at $4.5 billion today.

And look at how Satyam is leveraging this acquisition. Within days of going public with the deal, it announced strategic alliances with ICICI and Hindustan Motors to turn those page views and eye-balls into e-commerce avenues. Another 10-odd strategic are expected shortly to make e-commerce the bread and butter of the Satyam site. Says Agrawal: "Eyeballs and page views are all-important today. Whether the site gets advertising or e-commerce revenue is secondary. Once you have the traffic coming to your site, it is your own creativity that decides how much money you can make from that site." That's borne out by the indiaworld case where of its Rs. 1.3-crore in revenue, roughly half came from web page designing/hosting and web consultancy services. The 13 million page views a month counted for zilch. But it is Satyam's creative e-commerce ideas that will extract revenue from the eyeballs now.

While everyone's bullish on the market now, there's some element of caution advised. For, don't expect all sites to command such valuations. While funding dotcoms, venture capitalists use the thumb rule that nine of the 10 ventures they fund will die out. It's that one venture-which is how indiaworld should be looked at-which more than pays for the nine failures.

Plus, buyers need to have the confidence in either their own business plan or the site owners' current business model so that they are confident of payback. Then, of course, you need a few more Indian dotcom stocks to be listed on the NASDAQ to be able to fund these acquisitions. "In this business, it is difficult to grow through internal accruals. You need to issue equity to the public. If companies are putting up their own cash to buy out dotcoms, the valuations will be much lower," says Sakhuja.

Another reason why companies like rediff, indiaworld, or for that matter Contest2Win command such high values is because they've been in the business longer than most other dotcoms today. "As your dotcom business becomes older, and your business models get proved in practice, the risks decrease and valuations increase," says Bhasin. That is why star-ups initially use some of their own capital and then gradually infuse more in little bits rather than going the whole hog upfront. As the company grows in size, it needs to part with lesser equity for more money. In December, rediff placed 15 per cent of its equity for $15 million. Today, it might command triple the price for the same amount of equity. Says Venkat Ramaswamy, director, Edelsweiss: "Even if you know you need a certain amount of funds over a certain period, companies stagger the funding to get better valuations." It is at this initial start-up stage that business models, quality of promoters, market size, competition and site features matter. For, that's when during valuation venture capitalists are looking to see the staying power of the dotcom. Soon enough, it all boils down to a page view business.

So, how long will it stay like this? Or are we seeing another extraordinary delusion of society akin to the tulipmania which swept the Dutch society in the 17th century, where one tulip bulb at times fetched a price equivalent to that of acres of land and there was speculative trade in tulips on "tulip exchanges" before it all went bust? "As long as the NASDAQ stays this way, so will valuations. There will be a correction on the NASDAQ-how much and when-who knows," says Sakhuja. Net, net: dream big alright, but watch your back.