Morgan Stanley cuts Flipkart value by $4 bn to $11 bn

Experts say future fund-raising by the e-commerce giant may face stress

India’s largest e-commerce firm Flipkart is staring at a drop in its $15-billion valuation after Morgan Stanley, a minority but key investor, marked down its investment value.

Morgan Stanley’s investment in Flipkart was valued at $58.9 million in December, down 27 per cent since June 2015. This is part of the $3.15 billion the Indian e-commerce giant has raised so far. Plans to raise another $1 billion, could be a down round as investors could benchmark Flipkart at $11 billion, the valuation the US mutual fund has set. Flipkart did not respond to queries.

The markdown comes at a time when Flipkart is facing increased competition from Amazon, whose founder Jeff Bezos has an open cheque to conquer the Indian e-commerce market, and Chinese e-commerce giant Alibaba making strategic investments in Snapdeal and Paytm. Amazon, which dominates the US, has lost the Chinese market to Alibaba and does not want a repeat of that in India.

"That these valuations were hyperinflated was known and it was a matter of time before reality struck," said Haresh Chawla, partner at India Value Fund, a venture capital firm. “The bigger issue is whether fund-raising will become stressful for Flipkart and its options will narrow to a strategic sellout,” he added.

In 2015, Indian start-ups raised nearly $5 billion as global investors led by hedge fund Tiger Global and Japan's Softbank invested aggressively. Since these global funds slowed down investments, startups that burnt more money servicing customers than they could generate in revenue started tightening belts to show value in their business.

 

At Flipkart, a leadership change with co-founder Binny Bansal taking charge has also led a shift in strategy to  focus on operational efficiency, building infrastructure and profitability.

"If you look at most of these mature unicorns in India, they had been valued keeping in mind predictions the funds competition had," said Debabrat Mishra, director at Hay Group. He said there could be three reasons why Morgan Stanley marked down its investment in Flipkart: continued losses, drying up of funds and the economic outlook for India.

In February, Snapdeal's valuation increased to $6.5 billion after it raised $200 million from the Ontario Teachers’ Pension Plan among others.

The total gross merchandise value (GMV), or the value of traded goods, among Flipkart, Amazon and Snapdeal was $13.5 billion, with Flipkart having the lion's share at 45 per cent, a Morgan Stanley research report said last week.

Snapdeal followed with 26 per cent and Amazon, a late entrant, had 12 per cent of the GMV.  But it also warned of increased competition with the two smaller rivals attempting to close the gap with Flipkart.

“The e-commerce market was dominated by the three large general merchandise companies in 2015, with a combined GMV market share of 83 per cent. Snapdeal, Amazon and Paytm have all raised their competitive intensity to close the gap with Flipkart,” Morgan Stanley said in its report.

Chawla said the Bengaluru-based e-commerce firm had begun yielding market share to Amazon. "Flipkart is an A-class act, but somehow seems to have wandered off the path over the last couple of years and has yielded market share to Amazon without putting up a major fight," he said.

"This will impact valuations across the sector. But the bigger question is who will now make the funding available for these companies?" said Chawla. "The (e-commerce) sector needs another $20 billion to reach sustainability, the issue is whether venture capitalists have the appetite and patience or will these companies have to go hunting for capital elsewhere," he added.

"For unlisted companies, the valuation is all on paper. It is based on term sheets, projections and the business model," said Mishra. "The fundamentals are being questioned. Firms will have a tougher time raising funds," he added.