Top factors for Flipkart’s enterprise valuation

While media reports have pegged Flipkart being valued between $12 billion and $20 billion, investment bankers working on behalf of the companies would have to doubly ensure before landing on a final figure.

As media reports speculate on the impending acquisition of Flipkart by the world’s largest retailer, Walmart, investment bankers might be racking their brains on putting a certain valuation figure on Flipkart.

While media reports have pegged Flipkart being valued between $12 billion and $20 billion, investment bankers working on behalf of the companies would have to doubly ensure before landing on a final figure.

From closely looking at the books of the company to getting the right numbers for all the assets and liabilities of the company, these men have bundles of documents to examine and inspect.

Here is a look at the top factors including future cash flow and various contingent liabilities that Walmart must have at the top of its mind before agreeing on the valuation of India’s home grown ecommerce poster boy.

Cash burn

The first and foremost concern of any investee company is ROI. While investing in startups is a high risk business, Flipkart is a unicorn and has a stabilised market share in the online retail market.

Flipkart is a 10-yearold company and is yet to make profit. Flipkart Ltd reported a 68 percent jump in losses to Rs 8,771 crore for the year ended March 2017 from the previous year. Though revenue at Flipkart group rose by 29 percent to Rs 19,854 crore.

While Walmart will definitely expect Flipkart to be profitable in the long term, its ROI will be hugely based on the value of the company, at least in the medium term to provide it a window to exit either during an IPO or before that.

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

So it’s logical to expect Walmart to be burning the midnight oil now in the US and find a proper valuation, than burning cash in India in its fight against Amazon.

Flipkart’s penetration in the fashion market

If valuation is all about future cash flow, then a word on Flipkart’s plan for fashion vertical can’t be missed. Fashion is one of the leading verticals in the Flipkart group, with one out of every unit sold on it.

After achieving over $1 billion in gross merchandise value (GMV) in its fashion business in FY2018, e-tailer Flipkart is looking to double its average annual purchase value over the next five years. Flipkart is looking to achieve an average annual purchase value of $60 by 2023, up from the current $30.

“We have garnered 35 per cent market share. We are looking to achieve 3x growth by 2020 and gain 50 per cent market share of online fashion by 2023,” says Rishi Vasudev, Head of Flipkart Fashion.

Rishi, said, “Fashion online is a dominant sales category with 34 million shoppers online in India This is expected to rise to 100 million in the next five years. Currently about 70 percent of all fashion shoppers shop on Flipkart, and we will have a base of around 75 million in the next five years. Tier 2 & tier 3 cities are adding to the customer base where Flipkart Fashion is witnessing a growth rate of 70 percent.”. He added that the market is large with huge potential to grow hence Flipkart Fashion is at the forefront, driving growth.

Flipkart’s penetration in the electronics market

Fashion and electronics are the two largest drivers for Flipkart. One of the company’s strategies is to dominate the Indian ecommerce market is to expand its smartphone sales. Winning the smartphone battle has a spin-off effect of making the smartphone customer a regular customer.

Flipkart’s initial target, is to take 40 percent of all smartphone sales in the country by 2020, from the current 25 percent, Ajay Yadav, Flipkart’s vice president for mobiles and large appliances, said recently.

Talking about the large appliances and television segments, Flipkart recently reported, “We are on track to hit the Rs 5,000 crore GMV mark in television this year. We are targeting Rs 9,000 crore in large appliances overall.”

Tax and regulatory issues

The government rules allows 100 percent foreign direct investment (FDI) in online retail of goods and services under the so-called “marketplace model” through the automatic route. But it also prohibits marketplaces from offering discounts and capping total sales originating from a group company or any one vendor at 25 percent.

But there are still allegations that these marketplaces are flouting FDI rules and creating an unequal playing field. Recently the handset makers’ lobby Indian Cellular Association (ICA) urged the Commerce Minister Suresh Prabhu to take action against Amazon and Flipkart, alleging that the ecommerce platforms were violating foreign direct investment (FDI) rules by offering discounts - directly or indirectly - on mobile phones and other products through intermediaries or partner companies.

Heeding to their request, the Ministry of Commerce & Industry has asked the RBI and the ED to look into the allegations.

The war on discounts doesn’t stop here. Reports of Flipkart having an issue with the Income tax department came to light recently. The Bengaluru I-T office had asked Flipkart to reclassify marketing expenditure as capital expenditure. Flipkart has appealed against the Rs 110 crore tax demand for the financial year 2015-16 following the tax department’s order to reclassify marketing expenses and discounts as capital expenditure.

With a section of sellers continuously blaming the marketplace for its alleged unfair trading practices and the online marketplaces’ history of run-ins with offline retailers, the issue of a level playing field will always be under the close scanner of Competition Commission of India (CCI).

Assets

A marketplace is an asset light model. But Flipkart has its own companies that are sellers in the platform. The other assets are land, building, people, and intangibles. Flipkart has around 7,600 employees, including those in functions like warehouse, and logistics. About 6,800 employees have now shifted and are working in the new Flipkart campus in Bengaluru, spread over 8.3 lakh sq ft, with a seating capacity of over 7,300 people. It is not clear whether the new facility is a leased or an acquired property. The company also has plans to acquire a 100-acre plot on the outskirts of Bengaluru to set up a logistics park spread over 4.5 million square feet.

There are multiple other factors that will directly or indirectly affect the final valuation. Flipkart’s potential growth in other verticals including the digital payment arm, PhonePe is in direct competition with Alibaba and Softbank backed Paytm.

Funding and backing PhonePe to the fullest would lead Walmart to a new three-way fight between Walmart-Amazon-Alibaba in India.