A deal with a flip side

S Murlidharan | Updated on May 14, 2018

Walmart’s assumptions are a tad optimistic

Flipkart Ltd. has lost what’s equivalent to half of the $6.1 billion it has raised from investors since inception a decade ago. Accumulated losses of India’s largest online retailer stood at nearly ₹24,000 crore ($3.6 billion) as of March 2017, according to its filings in Singapore. That’s widened from nearly ₹10,000 crore a year ago.

Undeterred, Walmart has forked out $16 billion for a 77 per cent stake in Flipkart. That translates into a whopping ₹1,07,000 crore, a mind-boggling premium indeed. Walmart must have had its own reasons for this seeming dare-devilry. In its filings to the stock exchange in the US, it has said within four years it would make an Flipkart IPO in India at the same price or more, but not less. Obviously, Walmart was playing to its domestic audience (read investors). It wanted to assuage their feelings. US investors voted with their feet at the Walmart brinkmanship in its obsession to get even with its arch-rival Amazon.

The following issues arise in this regard:

IPO pricing: In India, as it is, one can either make a fixed price IPO, or an IPO through book building. In case it plumps for former, it can pitch its issue price high, subject to its financials warranting such optimism. One doubts if Flipkart within this short time would be able to wipe out its losses and have a track record of dividend. The alternative is to go for 100 per cent book building. Book building is a price discovery process. Has Walmart pre-empted or frustrated this process by announcing in advance what the issue price is going to be?

Walmart possibly wants to tell its US shareholders that a substantial part of the 77 per cent acquisition in Flipkart would be offloaded through offer of shares which is often a concomitant of Indian IPOs. And this way, it would liquidate a substantial part of the heavy investment.

Risk factors: What if its calculations go awry? Indian IPO market has been a roller-coaster with chastened investors denied listing gains, becoming chary and tight-fisted. One does not know what penalty, if any, is in store for Walmart’s bravado post-acquisition, but its credibility would be down if it is not able to live up to its promise.

Indian internet penetration is very low vis-à-vis the US’. How fast Smartphone connections catch up decides to a large extent whether Flipkart can register a quantum jump in its turnover so as to turn around quickly and post profits. It is something over which Walmart has no control. It is entirely possible that Walmart may be banking on an integrated government policy that views offline and online trade with equanimity. But that is a long shot. As it is, it would require a 49 per cent Indian partner in offline or brick and mortar stores. Walmart’s USP is offline.

Walmart would arrest and eliminate the heavy burn rate which while warming the cockles of consumers took a heavy toll on its financials. Can it so early in the day substitute it with a more pragmatic bulk and direct purchases discount, it is justly famous for?

Walmart to be sure would try every trick in its bag to change Flipkart business model and put it on the path of profitability but there are exogenous issues one cannot change.

In any case Walmart should remember what it paid was for, namely, control, which inevitably involves a premium. Retail investors are neither interested, nor going to get a shot at controlling Flipkart.

The writer is a Chennai-based chartered accountant

Published on May 14, 2018

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