With rupee depreciation, Walmart stands to gain a ‘discount’ in Flipkart acquisition

The five percent rupee depreciation is an acquirer’s discount for entities like Walmart and Amazon looking at India acquisitions.

The current rupee depreciation may come as a boon for Walmart for its proposed deal to acquire a significant stake in Flipkart, as it would have to shell out a lot lesser.

With the rupee value falling, and experts saying the worst is yet to come with several predicting a breach of the 68 mark against the dollar, Walmart will look to take advantage of the situation and cut down its Flipkart’s acquisition cost. The rupee has already depreciated five percent so far this year, and is currently quoted between 66.5 and 66.9 against the dollar.

Rupee value depreciation is the perfect climate for a foreign acquirer looking to invest in India, as he needs to spend fewer dollars. While in the case of appreciating rupee, the situation is the opposite.

For example, if at the exchange rate of 65, and X, a foreign company, buys Y, a company based in India at a valuation of Rs 975 billion, then X would bring an amount of $15 billion to India. But if the rupee depreciates to, let’s say, 67, then X would only bring $14.5 billion. Thus, a depreciation of Rs 2 would lessen the acquirer’s burden by half a billion dollars.

Madan Sabnavis, Chief Economist of CARE Ratings, said, “In the case of depreciation of the rupee, for foreign investors buying permanent Indian assets, it becomes cheaper because you are getting more rupees per dollar. However, if you are coming in as an investor, currency depreciating is not a big deal. If they have to repatriate their profit or if they want to withdraw from the country, they will get less dollars. So, rupee depreciation is not good from the point of view of foreign investors. But for a foreign purchaser, let’s say if a company like Amazon or Walmart is trying to buy Flipkart, then Amazon or Walmart will obviously find it cheaper to buy a physical asset.”

Manoranjan Sharma, Chief Learning Officer and Chief Economist, Canara Bank, when asked about the impact of rupee depreciation impact on the impending acquisition of Flipkart by Walmart, said, “Currency depreciation will impact the valuation to a limited extent. But valuation will also depend upon a lot of other factors like the financial track record of the company, how many customers it is likely to acquire, what are the new revenue streams it is likely to generate, and others. So, rupee depreciation will play a part, but it is only a part of the story. It is not the story.”