Questions remain on Flipkart

Despite latest vote of confidence by investors, industry watchers unsure on what lies ahead

The latest round of funding in Flipkart.com, of $200 million (around Rs 1,200 crore) on Wednesday, would provide the e-retailer a significant leg-up. However, it might not mean the tough times are over for the largest e-commerce company or that pessimism surrounding the prospects of the segment have been allayed.

According to sector officials and watchers, the funding (among the largest so far in the segment) from its existing investors — Naspers, Accel Partners, Tiger Global and Iconiq Capital — might be a sign of confidence they have in the company but it’s still unsure if it will be enough for Flipkart to turn a corner and become profitable.

Yes, the market estimates its valuation at $1.2-1.5 billion, up from $850-900 mn last year, when it raised $150 mn from the same set of investors. However, experts argue that as the company has been not getting much external funding and the latest round is also from existing investors, the valuation doesn’t matter much. “It is in everybody’s interest to up the valuation,” said a top private equity (PE) executive who is aware of the company’s funding history. “Even if the investors have to pump in more money for a smaller stake, the worth of their overall investments goes up.”

Issues
Indian e-commerce is running on a capital-intensive model, where companies are burning more cash than they’re generating. Almost all the entities are surviving on multiple rounds of funding from PE companies. “Most of the traditional investors are currently shying away from putting more money into the sector, as no one knows when it will turn profitable. There are only a few PE players like Tiger or Accel which have taken long-term bets on market leaders in countries like China and the US and have succeeded. They are hoping the same will happen in India.”

Flipkart has been under the Enforcement Directorate scanner for alleged violation of the Foreign Exchange Management Act. It is trying to turn the tide by making a transition from an inventory-led model to a being marketplace player. As foreign investment is barred in e-commerce, many online retail entities, including Flipkart, have had a complex corporate structure to attract international funds. But a marketplace model, which is about hosting brands on the site without maintaining any inventory, ensures no restriction on a company getting foreign investment. It is also bracing for tough competition after the world’s largest e-retailer, Amazon, announced its India entry last month.

The chief executive of an e-commerce company which closely competes with Flipkart said although it has tried to focus on products with higher margins, it is yet to be seen how they fare. “The money will obviously help them to take on Amazon and other rivals such as Snapdeal better but their burn rate is still very high.” The executive, who requested anonymity, said the company was burning $8-10 million a month, which meant the money received would last them for one and a half to two years at the most, after which they would again require more funding. “So, it doesn’t stop here. But, it will definitely help them to keep their market leadership, which is important for attracting future funding.”

The defence
On whether the company tried to raise funds from other investors this time, Binny Bansal, co-founder and chief of operations of Flipkart, told Business Standard, “We cannot comment on the specifics of our fundraising. What is important is that our existing investors have reinstated their faith by investing $200 mn in us, the largest amount to be ever raised by any Indian internet company.” In the e-commerce segment, it’s important to have scale and be a large player, a retail  expert said. “Getting this kind of funding will help Flipkart achieve scale.”

Bansal added the current investment validated the belief their investors have in the company's long-term plans. "They have invested in us before and an additional round is an emphasis on the fact that we are all aligned to grow the company and retain our market leadership at all times.”

On whether the current investors have indicated any time frame for exit from the company, he said, “We are all thinking long term. The industry has a lot of potential to grow and we want to be at the forefront. Our focus is on expansion and an eventual public offering at some point. Neither we or our investors are focusing on anything else at present.”

Associate Vice President at Avendus Capital, Karan Sharma said globally Amazon also took several years to become profitable and even though Flipkart has not turned profitable right now, the marketplace model to which it is slowly moving to “makes sense and finds favour with the regulators also.”