As of today, the global retailer Walmart has contracted to buy a controlling stake in Flipkart. This mega deal is the biggest in the e-commerce space and has evinced interest for the past several months amongst commoners, academia, business and a point of hot coffee table discussions across India.
A few weeks back alumni of executive management students of IIM B grouped together over a cup of coffee and the topic of discussion turned towards Flipkart.
The discussion gave many facets to the discussion that varied from national pride to ethics to money making to competitive complications to political interference amongst many others.
The opinion was divided, nevertheless the arguments sustained interest. A gist of the discussion follows.
Praful kicked of the discussion and asked a rather direct question – “Should Filpkart sell its majority stakes to Walmart OR Amazon OR stay independent?”
Vasanth Vasudevan responded to the discussion by saying that he wanted Flipkart to stay independent. To support his statement Vasanth gave 3 major arguments.
The first being government’s support to such unicorns. He gave examples of Amazon, Alibaba and other similar engagements in the ASEAN countries (former Asian Tiger economies in the earlier decades).
He suggested that such a unicorn coming out of India is a national pride and giving away its natural advantage and market to American companies is not a good sign for future Indian upcoming unicorns.
Secondly, giving up Flipkart will put an end to India’s global vision of creating a worldwide Unicorn like its competitors.
These Indian – global unicorns would potentially grow to the level of their global competitors and hitherto make significant investments in global conglomerates like their peers like Alibaba’s stake in Paytm.
Third, the Indian economy was in dire need of such companies to create such a market and supplier base, this would create a support system thereby creating more contemporary approaches and organizations that would benefit the market and go on to become a star performer themselves such as eKart.
He emphasized that option of selling the controlling interest in Flipkart is akin to a knee jerk reaction and holding on to the organization would not only benefit the Bansals and other investors but will also benefit the country.
Many in the group like Selva and Sampath agreed and they wanted Flipkart to stay independent and not fall in to the hands of the American conglomerate.
Sampath provided an astrological element in to this discussion (in the 2nd week of April 2018) that the deal was already over and claimed that he had access to the secret channels of the Bansals.
Everybody in the group pounced on him for obvious reasons.
Anandh Pasupathy was the next to jump into the fray and had a different opinion. He set forth s few facts and figures on the current state of Flipkart.
Anandh firstly dwelled in to the financials and said “Flipkart reported a rise in its revenues by nearly a third on YoY FY 2016-17, which is good, and it means that company is growing. 2017-18 figures are still not available.
However, there has been a 29% YoY increase in revenue, INR 19,854 Cr. Nevertheless, it also had record high losses of INR 8,771 Cr”. He went on to explain that this translates in to an increase of 68% of losses from the previous year’s loss of 5,223 Cr in FY16.
In conclusion, he said “If Flipkart sells for Rs.100/- their loss on this is Rs.44/-. This number is increasing”
Secondly, he went on to add that this is in addition to the loss on fair valuation, its investments of over a Rs.6400 Crores in Ekart and PhonePe, quoting many analysts whohave observed as excessive investment by US or Chinese standards.
He said that the “Online market may be growing at 30% plus” but he also questioned if the online retail market is mature enough to help companies rake in benefits from economies of scale like the traditional stores.
Thirdly, he said that governmental rules and procedures going forward like CAPEX regulations, Angel Tax, CCI, minimum pricing policies will make survival tough for the ecommerce companies in India.
The competition from Amazon was getting intense, while they have deep pockets and their ability to pump in huge amount for staying put in top spot for the next 3 years cannot be matched by Flipkart.
To sum up his arguments, he said “would you still want government to support a sinking behemoth, whose only allure was price – which would get washed away sooner. I would take a stand that sell it when your property is hot.”
Like earlier that remainder of the group like Sathish, Anil and Praful agreed to what Anandh had to say.
Vasanth raised an interesting point to Anandh’s rebuttal. He said “It was well known that Amazon took years to see a profit. From Flipkart’s perspective there is definitely a terrific opportunity in the long term given that the market conditions and various other factors.”
He emphasized that India as a country needs companies like Flipkart just as we needed and need indigenously bred companies like Infosys’.
He said that companies like Flipkart, Paytm can be such companies and can make huge money as well as make the country proud and provide the global clout that is needed.
Balaji in replying to Anandh also felt that it was a good strategy to sell Flipkart to Walmart for 10billion USD. He said if Flipkart loses 44 INR for every 100 INR sale, this may not be a sustainable model in India.
He went on to add that “once people don’t get offers they will be happy to walk onto nearby petty shops, instead of waiting for delivery and paying for shipping charges. Indians are value buyers and it should be in good interest to to sell an unsustainable company.”
Balaji goes on to add in his reply to Vasanth, “I understand the national pride, but such pride should not be on a loss-making company. As Indians we should be smart enough to sell this company, post which we need to run a campaign stating American company destroying India’s small business and we need to boycott Walmart’s Flipkart”
Venu, furthersummed up the issues and in response to Vasanth, he said “We are in business and not in politics. Businessman should act in commercial sense.
Otherwise, it would result in companies that have the status like HMT, Air India and others”. Venu kicked of another valid point stating that “Policy failure is still gripping India”
Vasanth, in his reply said that “Walmart is not crazy to buy a company which is incurring a loss of Rs. 44 out or Rs.100 spend. There is absolutely a potential.
Why should you let Walmart or Amazon buy it and add value to the organization and why can’t one realize the same potential by staying put?” He also said “Are we saying Amazon has political links and hence are getting successful in India? Or are we saying Walmart has political links and hence will be successful?”
Vasanth emphasized that there is a potential for growth and Flipkart themselves can realize that potential and not depend on Walmart or Amazons’ of the world.
Venu responded saying that it should be economic and business sense that should be held on and considered while a deal is being constructed. Giving room to nationalistic pride may not be practical.
He also went on to add that Walmart had huge pockets which is unmatched, and their sustainability is longer. Venu said unicorns like Patanjali exist and will continue to grow.
Vinod reminisced his student days of having done a Capstone study and was wondering what would be the other areas / questions that need to be answered before a decision has to be made.
Venu also wondered if Patanjali will grow if government changes? Will it Flipkart get the support like Patanjali? To which he himself said “NO. Sell it off when u r considered big”
Vasanth shot back saying “Patanjali never needed BJP/Congress to get where they are… Let’s not politicize everything. They can get far and market (not just India, but the entire SE Asia) provides a wonderful opportunity which they could capitalize.”
Vinod questioned Vasanth “DoesFlipkart have the right guys to make another Reliance? What are their other markets? Survival in US & India are different.”
Anandh came back to the discussion and said, “True Vasanth, agreed. But there is also a time factor that you need to comprehend.
You cannot expect a Narayanmurthy or Nandan Nilakeni or a Ramadurai to recreate another Infosys and TCS respectively as of today. For a major part of 1990 and 2000s there were no separate ministry for Information Technology and hence sans governmental interference.
Today is not the case, you may know the case of CCI and IT on Flipkart and the subsidiary within Ministry of Commerce for Startups. So, it is just not politics, it is also a matter of fact and well-known truth that if an Indian government opens a ministry for a sector – that sector will be immensely regulated to start with.
Also, the valuation of companies is partly based on scientific facts, but a major part is a wild figment of imagination based on a select hedge funds and private equity investors based on some potential growth which none can verify or predict into the future – this was acknowledged even Masayoshi Son of Softbank.
If you look at ratios / fundamentals etc. of Walmart and Amazon;one can still not decipher on why a Walmart share is hovering at 84 USD while Amazon is 1582 USD. In this case, Walmart beats every single ratio, figures etc. in comparison to Amazon. Today Amazon’s higher valuation in US today is attributed to their other business but not online retail.
Also, in the US, amazon is no more the cost leader and is slipping heavily to Walmart, SEARS and Costco. That is the reason their forays beyond retail to cloud, home entertainment and gaming and their reliance on retail is coming down Y-o-Y.
Vasanth disagreed with Anandh, he said “Firstly, Indian eCommerce market is slated to be $200 billion by 2026 (quadrupling) from this year. Amazon has invested $1 billion in 2017 alone.
VC has invested $9.6 billion on eCommerce again on 2017 alone. The CAGR of the eCommerce is expected to be 31.2%. the primary categories the growth is going to come is from Electronics and Apparel. Just to add, Online Retail will be still ~6.2% of entire retail industry in India.”
He sighted Porter’s 5 forces, he said the bargaining power of suppliers are low, threat of substitutes is higher, more rivalry, buyer power, new entrants’ threatsare medium to high.
Secondly, he said “From policy standpoint, 100% FDI is permitted and no reason why more investment can be encouraged. In 2018-19 budget, 8000cr is allocated for BharatNet project which will increase the connectivity.
In Dec 2017, DIPP introduced state ranking based on startup ecosystem. 153.5cr rewards given for people embracing digital payments and many more. He said “Net-net there is enormous potential for ecommerce retail business. I can share very similar data points for the entire south east Asia and MENA (Middle east and North Africa) regions.
Thirdly, he dwelled on why Walmart was trying to purchase.
- Walmart sees an enormous potential in India
- For Walmart it is a matter of survival while competing with Amazon. He recalled the acquisition on Jet.com, the recent merger of Sainsbury’s with ASDA. He said that this explains why the stock value of Walmart is lower than Amazon. It is no brainer that whoever wins the online war holds the key for the market share.
- Despite the acquisition of Jet.com, Walmart online revenue missed expectations and Amazon already holds a whopping 34% market share of the online market share in US alone. It’s all about what can be done in the future and the stock market plays on this fact and not the current revenue which might be triple than Amazon’s.
- He also quoted a reference https://www.investors.com/news/technology/walmart-vs-amazon-retail-stores-e-commerce/.
- Another note that he added was, Amazon was mentioned in 1400 earning calls as opposed to Google which comes 2nd at around 300 mentions. This is a metric to watch in terms who competitors are looking for. So, it is not a fad why Amazon is $1582, and Walmart is $87, and sentiment was just one of the factors.
In summary he said, “Walmart is looking at this idea primarily for its survival and Flipkart will not be thinking of selling if Walmart was thinking of buying it (it had its foray in the past as well).
Flipkart has a fantastic opportunity in terms of market factors, technology, competition and if they strategize it well instead of looking at quick money making, they can go a long way and that is what we need.”
Vasanth insisted that acquisition has not happened and hoped that this will never happen. He said Indian entrepreneurs lacked guts to do business as Americans would do.
Venu suggested that analyst report not necessarily CEOs report and there would be interpretations.
Vinod summed up the discussion. He said the question was not about potential but the intent of promoters and the psyche of people who run a company like Flipkart in the background of Indian circumstances.
He said an effortless way out and making money when the sun shines the brightest has been the approach in India and Flipkart may not be any different.
And as I write this today on May 9, 2018, I am afraid to think on the levels of desperate globalization that companies like Amazon and Walmart can get in to.
However,I hope Walmart with its global experience in an eminent economy, will transform Indian retail with affordable prices across consumer goods and Amazon’s competition will ensure that prices remain competitive and they don’t create situation of duopoly / oligopoly as is common in American conglomerates.