Flipkart Readies To Burn Billions With Walmart’s Backing

Flipkart will burn cash as India’s largest online retailer scales up its business on Walmart Inc.’s firepower.

That’s based on the outlook the world’s largest retailer gave investors, saying earnings per share could take a hit of 25-60 cents in the next two financial years because of its acquisition.

Walmart agreed to acquire 77 percent in Flipkart for close to $16 billion as it takes on Amazon.com in India. The deal, it told investors in a call after announcing the buyout, is expected to be completed by the second quarter of 2019.

The Bentonville, Arkansas-based giant is betting that e-commerce penetration in India will triple by 2023 to 6.2 percent and that online retail will grow four times faster than the brick-and-mortar industry.

Walmart told investors that it will face headwinds in financial years through January 2019 and 2020. Here’s what it said in the call:

• If the transaction were to close at the end of the second quarter of this fiscal year, Walmart expects a negative impact to FY19 EPS of approximately $0.25 to $0.30, which includes incremental interest expense related to the investment.
• In FY20, as we look to accelerate growth in this important market, Walmart anticipates an EPS headwind in total of around $0.60 per share.

What does that mean? Losses for Flipkart, according BloombergQuint’s calculations based on Walmart’s EPS loss on its 77 percent stake. When stripped off interest expense of 7 cents in FY19 and 15 cents for FY20:

Flipkart closed the year ended March 2018 with a gross merchandise value of $7.5 billion and net sales of $4.6 billion, Walmart said in its statement.

The online retailer has been reporting losses for at least three years, according to its filings with the Singapore regulator. These mounted nearly threefold to Rs 8,771 crore in three years through March 2017.

Hopes To Stem Losses

The retail giant is hopeful of a turnaround. “In the mid to long term, as the business scales and efficiencies are realised, Walmart expects losses to decline and returns to improve.”

Walmart is financing the deal with a mix of debt and cash in hand. And it’s open to raising funds from news investors in addition to $2 billion it’s infusing.

It has been in discussions for many weeks and months with new investors, a Walmart official aware of this fund raising told BloombergQuint requesting anonymity. New funds will depend on needs of the business as it continues to scale up, he said.

Walmart, in its statement, said its stake will get diluted when new investors come in, though it will continue to have majority control.

India Expansion

The company will keep Flipkart and existing cash-and-carry business in India separate, according to its statement. The person quoted above said the retailer will continue to keep the two businesses separate and will not be integrating them with Walmart India or globally.

That’s because of India’s foreign direct investment rules that don’t allow overseas companies to directly sell to consumers but only to smaller retailers.

Walmart will increase its cash-and-carry stores, the person said, adding that at least five to seven new outlets could come up this year.