Saturday, 12 May 2018

Flipkart - Walmart deal


Flipkart's 77% equity picked by Walmart at $16 billion (Rs.107,200) defies all standard due diligent processes. Even after 11 years, Flipkart's operations haven't yielded any profits. Only its value is going up rapidly with future projections. But future always remains a mystery. Once the deal is complete, Walmart will own a 77% share in the unprofitable, homegrown e-commerce startup. This is the highest price any foreign company has paid for a stake in an Indian company. Flipkart started in 2007, has accumulated losses of over Rs.24,000 crore. Flipkart sales were $7.5bn in the FY that ended in March 2018 and net sales, after discounts, returns and cancellation, were worth $4.6bn. Flipkart’s revenue growth slowed down to 29% in the year ending March 2017, against 50% growth in the previous year.
  • The bid emphasizes the importance of gaining a greater foothold in online sales in India. Walmart is betting on the fact that India's e-commerce market, pegged at a modest $38bn in 2017, is expected to grow up to $200bn by 2027.
  • India is one of the most attractive retail markets in the world, given its size and growth rate. India's retail market was estimated at $470 billion in 2011 and is expected to grow to $850 billion by 2020.
  • After Walmart announced the deal on May 9, 2018, its shares tumbled 4%, a likely reflection of the high price the company paid for Flipkart. Analysts believed that Walmart overpaid for its stake in Flipkart. This widely-held view was echoed on Wall Street, wiping $10bn off its market capitalisation, taking the total loss since April to $17.5 billion. A large part of its Flipkart investment is already being considered a write-off by investors.
  • Walmart’s stock reply to all of these questions was that it felt that the long-term opportunity in a country with a population of 1.3 billion was too large to ignore.
  • Of the $16 billion investment, $2 billion will find its way into Flipkart to help its growth plans, said Walmart. But if cash will burn at the above-mentioned rate, Flipkart will need more infusions soon. With Amazon breathing down its neck as well, the need for cash infusions may become a regular affair.
  • Venture capital firms Accel and Tiger Global invested more than eight years ago when Flipkart was valued at just $50m - and they have now exited with more than 400 times what they invested.
  • Flipkart has raised $6.11 billion in equity funding till date. The transaction is giving blockbuster exits to investors.
  • This is because Flipkart is not expected to be profitable for many years. With Amazon already in India, and with intense competition and Flipkart's profitability in near future is ruled out.
  • And the Indian e-commerce market is small by global standards - 100 million customers in a country with about 1.3 billion people. But the deal gives Walmart the fastest entry possible into one of the most promising, albeit difficult, e-commerce markets. 
  • After Walmart bought the controlling stake, Flipkart is valued at more than $20bn. The deal also saves Flipkart, which was running out of cash in its battle with Amazon. Amazon and Flipkart have been "burning cash" in massive sales and discounts in a bid to acquire more customers.
  • E-commerce currently makes up less than 4% of the retail market in India, but that's predicted to change as the number of Indians using smartphones (and the internet) increases rapidly in the next decade. 
  • This acquisition allows the company to jump straight into a small but growing e-commerce market with about 100 million customers.
  • Amazon, too, made a bid for Flipkart but the merger could have faced severe scrutiny from India's antitrust regulator as their combined sales would have added up to almost 90% of India's e-commerce market.
  • The Indian market size is estimated high 400 million middle class consumer base, might be big enough to accommodate global players in multiple formats. Nonetheless, Flipkart's biggest worry is about the flooding of Chinese goods.
  • Unless Walmart-Flipkart is forced by regulators to source a minimum percentage of India-made goods, the country may soon become a huge consumer of Chinese goods.
Only venture capitalists, angel investors and crowd funding will invest in companies like Flipkart with no real assets and requires billions of dollars every year to stay afloat. No banker will lend any public money to Flipkart indicating risks involved. Future of this type of companies lies in the premise that economy will keep growing every year after year. But the reality is that nothing can grow forever. If for any reason, crude oil goes beyond $150 a barrel in next one year, entire world economy will take severe beating and will land in turbulence with runaway inflation, real wages taking severe beating and large scale unemployment.


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