Conversation About The IPO Journey Of Kapruka.Com

Interviewee : Mr. Dulith Herath; Interviewer : Mr. Majeed;
Date of Interview : 19/12/2021

List of Acronyms : DH = Mr. Dulith Herath, NM = Mr. Majeed

NM:

Since Kapruka.com’s inception in 2002, I am sure it’s been a long and hard journey to get to where you are now. For any company, going public is something drastic and I’m sure this must have been a very emotional journey for you. Let’s talk about why you decided to go public and some of the key objectives of this IPO.

DH:

It’s certainly been a difficult yet fun journey for me. I’ll give you three reasons for the IPO. Firstly, we started seeing hockey stick growth organically, so when that happens you have to respond fast. I had 2 choices; bring a VC in at a much higher valuation or just be bold and go public. I didn’t like option 1 as VC’s tend to only think about an exit and I don’t want that mentality. If I go public it’s going to set its path on its own. Secondly, CSE’s tax benefits that they offered were very attractive, and because we are on a hockey stick, I was thinking yes, definitely! Number 3 is, I want to do this for the future of the company, whoever comes next will not have the freedom to do whatever they want with the company. Technically, they can’t screw it up and all business-related activities will be well monitored.

NM:

Talking about the 30,000 square feet fulfillment sector in Mirihana, could you please share your thoughts behind this capital expenditure?

DH:

Yes, this expenditure is not on the IPO because we built it with our own funds. Infact, we are thinking of opening it in 3 weeks so it’s ready. Reason for this is the drastic increase of our portfolio of products, we are bringing in clothing etc., that needs automation, warehouse and logistic level efficiency. That is not possible with the current, existing infrastructure, so building infrastructure is key to an E commerce organization. We do experiment with a lot of automation. We are looking into semi automation and there is also a bit of robotics and technology that we use. This will give us a model to replicate, helping us to build more of these in other provinces. Our fulfillment center is a vertical fulfillment center; therefore, it is usable and experimental for the future growth of Kapruka.

NM:

Dwelling a bit into the financials, for the 7-month period ending October this year, Kapruka has already achieved revenues of approximately 1 billion. You have already met and outdone the full year requirement! You’ve done the full year top line performance of last year and you are running at a rate of about Rs.170 million per month. A few questions here; Where did you see the significant growth come about this year?

DH:

I think there are few factors that can attribute to this. I think the first one being a price factor; there’s obviously the fact that we are operating in an environment of inflation there can be a price element here. Are you seeing a growth in the number of orders or basket values and also is the FX aspect also helping your top planning? In this case, there are three factors I would count. One is, Kapruka has been increasing its product rate; for example, the clothing category has been really calm about it and we keep adding more variety, so scaling up our portfolio and the types of products that we are selling is number one. Second is the organic demand for online products has been skyrocketing, so the things that people normally wouldn’t buy online, are now things people look for. Even furniture, ceramics and any product that Sri Lankan people were not looking for before, are now top searches online and we are getting flooded with those orders, so we can see that pattern going up. You may think that after the pandemic this is going to slow down and yes, it will slow down a little bit but it’s not going to come to an end. It has created a habit in people. The third reason is our exports; So, there is a project in the IPO as well, about increasing our Amazon exports and that has been a trail-blazer approach to the situation. So those are the three main factors that have really helped us to make the most of our financials.

NM:

So, there you spoke about the export segment, and we know that more than 50% of Kapruka’s top line is USD based revenue. Now we operate in an environment where the FX shortages and issues are aggravating day by day. So, I would like to know how having this export segment and it contributing for 50% of your top line, has helped you to run your operations in a very smooth manner.

DH:

So Kapruka having a 50% top line in USD has been a tremendous blessing for us; We are not depending on banks for importation help, because we have this research. Also, when I’m trying to grow our export business, like our Amazon tea exports and other categories of cross border Ecommerce, we utilize this heavily. I think it’s a blessing that we don’t need to depend on a Forex. Also, if you leave the dollars aside and just look at our expert customer base, we have 1.1 million Sri Lankans who live outside of Sri Lanka that use Kapruka. That is something that we want to keep growing because in any developing country there’s about 10% of people living outside the country and those people are heavy spenders and they want to give back to the country as they have family in the country. So, it’s a different sector of E-commerce that Kapruka has been focusing on from day one, which can really grow up in the IPO because some of the proceedings will actually go towards improving such services.

NM:

So Dulith, just talking about the valuations for this IPO; As investors we look at the future potential of a company. Now, Kapruka is coming in at less than ten times in terms of its FY22 forward p. Also, you need to keep in mind that there’s no comparable company within the CSE for Kapruka, and in a global context, generally E commerce companies tend to trade at a premium to most of the other sectors. So, if you can just talk to us about these valuations and how you came about to this and also what sort of value is there for investors in this.

DH:

So let me brief you, my thinking behind it. So, I was advised much higher PEs at the beginning when we were looking at it, but what I said was, discount it as much as possible, leave something at the table, because it’s not about raising 500 million. This is about what’s going to happen to the stock, after the listing. So, it was very crucial for me to price it right as low as possible so it will take off on its own, because there’s 80% of the company at stake. So, it’s very important to me that it was priced competitively and that was always the thinking behind it. Whenever I was suggested to ask for much more, my guideline to the listing company was discount it! So that was the organic thinking behind this, so it’s less technical but I think it will add value to your question.

NM:

Just a follow up question on that. So, we’re talking about the price to earnings ratio and I want to just stress a bit on the earnings aspect for the forward multiple of Kapruka to fall below 10 times. You’re looking at significant growth in your bottom line this coming year, so if you could maybe touch on how we are seeing this significant growth in profitability, from which categories or aspects are you seeing this growth in profitability coming about?

DH:

So, in E-commerce, profitability really kicks in when economics of scale starts to work. For instance, in a brick and motor shop, if I’m going to double my sales, I have to open multiple outlets. So, if an outlet can handle 100 orders, I have to open a second outlet to handle 200 orders, but in Ecommerce that’s not the case. You still have one outlet and suddenly you have 200 orders coming in, so there are a lot of fixed costs in e-commerce that don’t change but the top line keeps growing. It starts to become a well-oiled machine. I will give an example; let’s say we have a delivery vehicle going from Colombo 05 to Moratuwa. Now, we used to have a delivery every three kilometers this was in 2019, now we have a delivery every half a kilometer. So suddenly from three to half a kilometer, there is the same vehicle, same driver, same amount of fuel, but efficiency is six times higher so that’s how it really works. The beauty of e-commerce really kicks in. So those efficiencies have been the main driver in the profitability increase and ever since we bootstrapped this company, from the beginning, my eyes were always locked on the bottom line, not the top line so therefore we will keep increasing those efficiencies.

NM:

So, Dulith, just a few more days before the IPO opens. What message would you like to give to the investment community?

DH:

I think this is a stock that many first-time investors who have never traded before would understand and this is also a category that has unlimited scope. Again, if you look at the market, it is only 1% of retail. That gives you a huge runway in front of you and there’s only one or two players in Sri Lanka, even at this point. So, imagine having very less competition and having a nice runway in front of you so it’s an excellent opportunity for especially the first-time investors who have never installed the CSE app to install it and try this. Lastly, if you buy one share of Kapruka today, I become responsible for you. It’s not like today where I just wake up in the morning and make my own decisions and drive the company. So I look forward to being accountable to every single shareholder and it’s very emotional because I started this company when Kapruka was a little baby in diapers and it feels like I’ve sent it to preschool all the way to the college, I bootstrapped this guy and today it’s ready for marriage and it’s a really emotional moment for me because I know after that I will have less control, because when you were in diapers I can say sit down, do that and all, but now after this point I’m not the only one in the game. It’s going to be exponential growth after that in my mind and that’s the dream as a father for this brand, that I have in my heart, so let’s see how it works out.

Thank you Dulith and I think that was a great analogy for how you’ve seen this company through. I know it’s been a very long and emotional journey and all the best to you with this IPO and thank you very much for joining us on the program today.