Why is Walmart courting Flipkart – the valuation conundrum

Walmart is reportedly trying to court Flipkart for a business alliance. Will increasing Flipkart’s valuation by Walmart play cupid between the two this Valentine’s season?

That’s the $20 billion question that’s on everyone’s mind. Or is love so blind that the Valentine’s gift from Walmart a bit too expensive and irrational from an investment perspective?

Putting it in other words, is India’s e-commerce leader Flipkart worth $20 billion? Even though various news reports suggested that Walmart is weighing its options and is discussing a proposal that would give it as much as a fifth of Flipkart for a valuation as high as $20 billion, three mutual funds that recently filed their quarterly reports with US Securities and Exchange Commission (SEC) maintained status quo on the valuation of investments they have done in the Indian e-commerce major.

Walmart, the world's largest company by revenue, is gearing up for a renewed online push to take on Amazon in the US and across the world, said a Times of India report recently. The strategy is in line with Walmart’s recent effort to combat Amazon in Japan. Walmart has recently teamed up with Japan’s largest ecommerce company, Rakuten to bolster its effort to compete with Amazon in the Japan market.

It is to be noted that even though different mutual funds do their own independent valuation, Flipkart has always termed that the markups and markdowns from mutual funds investors a “theoretical exercise”. Flipkart didn’t respond to this story till the time of publishing this report.

So, what do the mutual funds tell us?

US-based John Hancock Funds that holds 8,519 shares in Flipkart values its total holdings at $9,56,278 for the November quarter, 2017. It values each share at $119.76. John Hancock maintained the same value even for August 31, 2017 ending quarter and May 31, 2017, ending quarter. It was only in February 28, 2017, the mutual fund company marked up Flipkart’s shares at $126.72 per piece by 16 percent from its previous valuation of $108.99 per share as on November 30, 2016.

Another US-based Vanguard World Fund that holds more than 4.7 lakh shares in Flipkart have maintained status quo in its investment in Flipkart by valuing its holding at $59.7 million in the November ending quarter of 2017. It valued its holdings in Flipkart for the same amount at $59.7 in August ending quarter of 2017 too. While in the May ending quarter of 2017, it valued its Flipkart holdings at a lesser $53.8 million.

Similarly, another mutual fund company, Valic that holds 5,378 shares in Flipkart valued its holdings at $6,03,151 for both the November and August ending quarters of 2017.

In April last year, Flipkart raised $1.4 billion from Tencent, eBay, and Microsoft. Later in August, it raised $2.4 billion from Softbank.

According to the company, funds were raised at a valuation of $11.6 billion, down about a fourth from its peak valuation of $15.2 billion in 2015.