While demonetisation of the Indian economy coupled with a devaluation by Morgan Stanley may mean a double whammy on India‘s flagship unicorn Flipkart, it could also be a godsend for Indian e-commerce for bringing businesses back to real fundamentals.
Homegrown e-commerce major Flipkart which was devalued by Morgan Stanley, the third time this year may not mean much for the investment bank which holds just about 1 percent in the Bangalore-based company.
It may be a routine exercise for the New York-based bank which may be using its valuation methodologies marked against an Amazon or a Walmart, who knows.
However, for the investors who entered Flipkart when it raised USD 1 billion in 2014, at a valuation of USD 5 billion, the next devaluation may mean a decline in their portfolio investment. The recent exercise by Morgan Stanley values Flipkart at about USD 5.5 billion compared to the USD 15.2 billion it was valued at in May, last year.
Singapore’s sovereign wealth fund GIC and US-based investment firm T Rowe Price entered Flipkart at a valuation of about USD 5 billion in 2014.
Existing investors Tiger Global, Russian billionaire Yuri Milner’s DST and its earliest backer Accel Partners also participated in the funding round. Investors such as Baillie Gifford, Greenoaks Capital, Steadview Capital, also entered the company in late 2014.
Here are five key things we can garner from Flipkart’s new devaluation round and what it may mean for the company and India’s e-commerce sector:
1) The devaluation will mean more control by investors over Flipkart management, as they will look to control further damage. Flipkart brought back Tiger Global's Kalyan Krishnamurthy to head its category management after the company saw significant churn at the top and a devaluation by T Rowe Price and Morgan Stanley.
While nothing has changed per se in Indian e-commerce potential, the entry of foreign MNCs in a sector means that homegrown companies have to improve their business metrics in order to justify high valuations. Foreign companies which come with truckloads of capital, also come with a template of how to quickly improve business fundamentals. The homegrown companies start getting benchmarked against their fundamentals. Amazon for instance has already committed USD 3 billion additional investment in India in next three years. This will take its capital commitment in India to over USD 5 billion, almost equivalent to Flipkart’s entire valuation, at present.
(Data source: Tracxn)
2) PM Modi’s demonetisation drive along with a devaluation may bring a double whammy on Flipkart. Sales of e-commerce companies have already gone down since the November 8 announcement. This could mean that Flipkart’s GMV may dip lower in the quarter ending December this year, against last year’s GMV in the same period.
While the potential of India’s e-commerce is bright in the coming years, ‘not so great’ business fundamentals will affect the company’s future funding round, as well.
Rivals Snapdeal and Paytm do have a payments arm to flaunt to garner more funding; Flipkart which shut down its payments arm PayZippy in 2014, a year after its launch, stands to lose out in the melee.
Like Flipkart, smaller ‘mom and pop’ e-commerce companies which sell fashion and electronics will also suffer due to demonetisation.
3) Though Morgan Stanley’s devaluation exercises may not mean much when it comes to negotiating a valuation on the table, it would be foolhardy to say that it won’t come up in talks.
Incoming investors would be happy to grab a piece of Flipkart’s pie at a lower valuation, but existing investors may not agree to it on the table. It may lead to a deadlock and a delay in the next funding round.
The devaluation of Flipkart could also trickle on its smaller peers in e-commerce who may be benchmarked against their bigger rival by an incoming investor.
4) Even as the company struggles to stabilise operations after demonetisation, it may be a godsend. Sachin Bansal CEO of Flipkart told a gathering this month that even when it launched cash on delivery as a convenience for customers, it was a thought to be a temporary phenomenon. PM Modi’s new currency ban, may be a godsend as it offers a chance for Flipkart to improve its fundamentals and reduce burn rate. Morgan Stanley’s devaluation may not mean much with a healthier Flipkart balance sheet.
With demonetisation, India is also likely to rapidly adopt smartphones and wallets as a cash mechanism. This may mean reorienting the strategy back to mobile first which Flipkart had adopted two years ago.
5) Morgan Stanley’s regular exercise to devalue India’s flagship unicorn startup has also served as a reminder to others who look for further funding. There is a risk of getting a listed company on board as an investor, even if at attractive terms. Their regular filings on exchanges may hurt a startup’s funding plans. It would also mean that attracting top talent will get tough as the value of ESOPs could go down, unless they are locked at a certain price. If the next funding round gets delayed as a result of devaluation and demonetisation, expect lesser ads by the Bangalore e-commerce major on TV, online and Print. It could also mean lesser discount offers for consumers.
On a positive side, it would mean more focus of e-commerce companies on real business metrics and turning profitable than sustaining a business on external money.
(This is an opinion piece. Views are personal.)