Is this Flipkart’s last fundraise on road to IPO?

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India's largest e-commerce company Flipkart's recent fundraise of $1.4 billion (around Rs 9,000 crore), the biggest-ever in the country's burgeoning consumer internet sector, has undoubtedly filled its coffers for now, but it also begs some important questions. Will this be the company's last round of external funding as it looks to turn profitable? Is a stock-exchange listing by 2019 Flipkart's next destination?

While the cash infusion gives the company a decent runway, of possibly up to two years, and enough ammo to take on competition, industry observers and experts are divided on these questions.

Some feel the merger of eBay India and the potential acquisition of the troubled Snapdeal will result in significant spend even as Flipkart looks to curb cash burn, making it incumbent on the company to raise funds externally. Others feel Flipkart is inching closer to profitability and a public listing will propel it to the next level.

No stopping cash burn

“Flipkart is operating at losses even at the gross margin level, and has been burning significant cash to counter competition from Amazon. Also, until operational efficiencies kick in, eBay and the Snapdeal acquisition would further add to its burn rate as Snapdeal is not cash flow-positive. Besides, the cost of maintaining separate brands would compound the cash burn,” says Swetabh Pareek, head of transaction advisory services at Aranca, a global research and advisory firm.

That's not to say Flipkart would have managed to be thrifty if the eBay and Snapdeal mergers were not happening. Staying ahead of its arch-rival, the world's biggest e-commerce company Amazon, tops its agenda anyway. Not only does Amazon have access to a seemingly endless pool of wealth, it's been open about its India ambitions, committing as much as $5 billion in investments last year.

“They have the big daddy Amazon as their competitor, which is very well-funded. They are playing a game of poker, of very high stakes. You can’t walk off the table right now,” says Arvind Singhal, chairman at retail consultancy Technopak Advisors.

Then, there is the Chinese e-commerce behemoth Alibaba, an 800-pound gorilla that can change the very dynamics of the market in one fell swoop. It is perhaps still gauging the Indian market, waiting for an opportune moment. But more on that later.

About to turn the corner?

There's no denying that Flipkart has managed to bring down its cash burn. A report in The Economic Times in January said it was looking to slash its monthly spend to $20 million from nearly $45 million six months ago.

Niren Shah, managing director of Norwest Venture Partners India (not an investor in Flipkart), feels the homegrown e-commerce major has exercised fiscal prudence by bringing down its burn rate by half, and it was only a matter of time before it turned profitable.

Similarly, Sanchit Vir Gogia, chief analyst at Greyhound Research, feels this is a strategic funding round. "It sends a strong message to the investor community that Flipkart wants to change, invest in new businesses and achieve profitability in two years' time. 2018 will be very critical for Flipkart," he says.

The merger games

The merger and subsequent integration of eBay India, and the potential acquisition of Snapdeal that is being orchestrated by Japan's SoftBank, may itself soak some of the $1.4 billion, making more funding necessary.

Devendra Agrawal, co-founder at investment bank Dexter Capital Advisors, says Flipkart may have to come back to the market in two years to raise an even bigger round, courtesy these acquisitions.

“Around $250 million of the $1.4 billion raised will go into acquiring eBay India, and the remaining amount will be deployed to scale up overall operations," he adds.

However, a prominent investor told VCCircle, while requesting not to be named, that eBay was a complementary addition to Flipkart even if it appeared otherwise—it throws open cross-border avenues for the homegrown e-commerce company. Besides, eBay is burning very little cash.

“Flipkart would be buying Snapdeal purely for its customer base in Tier II centres. Snapdeal has dramatically reduced its burn rate to $30-40 million. In terms of material debt, they might have just $10-15 million," he added.

He also hinted that should the deal happen, Flipkart may not on-board the entire team, implying job cuts are imminent.

The road to IPO

How far is Flipkart from an initial public offering (IPO)? While media reports say two to five years, a section of industry observers feel it could happen as early as 2019.

Gogia of Greyhound Research feels that if Flipkart wants to catapult itself to the next stage, there has to be either a sell-off or, preferably, an IPO.

“A lot of investors have placed huge bets on Flipkart. A PE sell-off, at this juncture, cannot justify the valuation. It has to be an IPO,” he says, adding that Kalyan Krishnamurthy at the helm of the company positions it favourably.

“Binny and Sachin are great innovators, but Kalyan is a matured hand who has seen it all. He understands the consumer side of business and is also good at managing investor sentiment,” Gogia adds.

There is no doubting that Flipkart has braved choppy waters and effected a turnaround of sorts. Till about six months ago, it was looking at mounting losses, exodus of senior-level executives and markdowns by investors that valued the company at under $6 billion, a far cry form from its heyday when its valuation stood north of $15 billion.

“Flipkart has already demonstrated its ability to achieve a turnaround with Jabong and Myntra, which, in all likelihood, may turn profitable or go public even before Flipkart. Even if an Indian listing is not possible, Flipkart might still go for a Nasdaq/NYSE listing,” says Shah, adding that it all boiled down to timing.

However, Munish Aggarwal, director of capital markets at investment bank Equirus Capital, says it makes "tremendous sense for Flipkart to look for an India listing as it will help it create another touchpoint with the target consumer."

“A US IPO may not offer any significant advantages. Flipkart may have to prove their business case against e-commerce companies from across the globe, a problem that can be partially avoided through an India listing,” Aggarwal adds.

However, Technopak's Singhal feels it is premature for Flipkart to go in for an IPO. “The classic fundraise at this stage is usually from private equity players. You will go for an IPO only when there is a clear path to profitability,” he says.

Last men standing?

While the Indian e-commerce narrative has largely pitched Flipkart and Amazon as the two major players and arch-rivals, experts feel the market is big enough to accommodate a third player. That's where Jack Ma’s Alibaba comes in.

The Chinese e-commerce behemoth has already set up shop in the country, laying the foundation of its India team with crucial hires. By backing Paytm Mall, the Paytm E-Commerce Pvt. Ltd-run horizontal online marketplace, it has already made its intentions clear.

“Alibaba’s India e-commerce strategy will be closely tied with Paytm's. In fact, Paytm’s recent restructuring exercise of spinning out its e-commerce vertical, and investments by Alibaba in the business, strongly point towards this,” Pareek says.

VCCircle reported earlier this week that Alibaba eyed Flipkart last year for a potential acquisition, but talks fell over the $6-billion valuation it offered.

Experts feel Alibaba is currently focusing on the payments sector, and is in no hurry to enter Indian e-commerce.

“Maybe they feel it's still early. Assuming Flipkart does put itself on the block later at a much higher valuation of, say, $20 billion, Alibaba still has the financial muscle to buy it out, leading to a potential Alibaba-Amazon equation. Having said that, I believe the market is big enough for all three," Shah adds.

Gogia feels once the dust around the Flipkart-Snapdeal merger settles down, the e-commerce space will see new players emerging.

“Alibaba has already cracked the Internet e-commerce playbook in one of the most consumerist markets in the world while Paytm Mall has a fantastic back-end transaction infrastructure. The Flipkart-Amazon narrative will trifurcate with the addition of Alibaba. Let us also not rule out Walmart yet, which has a huge sourcing relation with India,” he adds.

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