$2 bn cash burn budget for FK in Amazon battle
ONLINE RETAIL Projected burn rate affirms Walmart’s focus on sales growth
BENGALURU: Flipkart Ltd is likely to burn through as much as $2 billion in cash over the next 18 months—an affirmation that sales growth, rather than cutting losses, remains the top priority for India’s largest online retailer after its takeover by Walmart Inc.
Flipkart’s projected high cash burn rate means that rival Amazon India will have to double down on its committed investment of $5 billion if the company is to keep pace with Flipkart. Amazon, which is a close No. 2 in India, has invested roughly $3.5 billion toward expanding its business in the country, regulatory filings show.
On May 9, Walmart said it will pay $16 billion to buy 77% in Flipkart, in a deal that is an extension of Walmart’s battle with Amazon in the US. Walmart said that if it closes the Flipkart acquisition by the end of July, the deal will hurt its earnings for the year ending January 2019 by $0.25-0.30 per share and its FY20 earnings by $0.60 per share.
Walmart’s forecast implies that Flipkart’s operating losses over the 18 months starting August will be close to $2 billion, FY18 GMV FY20 oper rating losses* Flipkart to burn rate FY18 revenue
according to Mint’s calculations. The overall hit to Walmart’s earnings from the Flipkart deal, including Flipkart’s losses, will be between $2.5 billion and $2.7 billion.
Flipkart’s implied burn rate represents an increase from the company’s current spending pattern. Two people familiar with the matter said that Flipkart, which owns fashion retailers Myntra and Jabong and the mobile payment app Phonepe, currently has a burn rate of Amazon India will have to soon top up its
commitment
$70-80 million per month, or as much as $1.44 billion over 18 months at the current pace. They spoke on the condition of anonymity.
Walmart, Flipkart and Amazon didn’t respond to emails seeking comment.
Amazon and Flipkart are expected to spend hundreds of millions of dollars towards expansion over the next few years. For both companies, sales growth is a bigger priority than cutting losses and analysts say that they are nowhere near profitability. That’s to be expected in a tough market like India where infrastructure is poor and spending power is unevenly distributed, making it expensive for e-commerce firms to deliver products to customers.
But after two years of poor growth, India’s online retail market is seeing a pickup in growth. The e-commerce market may expand to $28 billion in 2018, up from $17.8 billion last year, according to Redseer Consulting, a market researcher.
The heavy spending required to expand the market means that an IPO for Flipkart is unlikely for years to come. Mint reported on May 14 that Walmart has told Flipkart’s leadership team to not worry about an IPO anytime soon. Walmart is viewing Flipkart as a long-term bet that may take decades to yield excellent financial returns. Google Inc. and others are likely to become minority investors in Flipkart after the Walmart deal closes.
Over the next few years, Walmart’s approach toward Flipkart’s financials is likely to be determined partly by its investors in the US. Walmart’s stock fell by 4% on the day it announced the Flipkart acquisition.