Analysts don’t seem pleased with Walmart’s plan to buy India’s top e-tailer, Flipkart,
for a seemingly heady $16 billion. Their concerns are: will it pay back? And, does this take the pedal off the global retailer’s plan to buyback $10 billion of its stock over the next two years?
The “against” argument is that Flipkart will continue to suck in more funds, as a battle with Amazon in, perhaps, the last big e-tail market on the planet (both have had limited success in China) will lead to more blood-letting till a clear winner is established.
Even if we assume that no further investments are made into Flipkart and the Indian e-tailer starts delivering a 5% net profit margin a year from now, growing sales at a CAGR of 30% per year, it would return only about $2.4 billion in 10 years, at a discounted rate (IRR) of 15% — Walmart’s return on investments in FY18 and FY17 ranged between 14-15%, according to its annual report.
But the investment by Walmart, obviously, is driven by a different perspective. One way to view it, is as an opportunity to entry in to what is seen as emerging as the world’s third largest retail market.
Flipkart is the number one e-tailer in several product categories and seen as a strong contender to emerge winner in what is largely seen as a two-horse race, with Amazon. This can give Walmart strong leverage for a swift entry and expansion in India, through an on-the-ground and online strategy.
India’s retail sector can grow to about $2 trillion by 2027 from the near $700 billion today (as per an IBEF report), growing at a CAGR of 12% per year. The organised retail and online retail segments at about 9% and 2.5% of this market today could swell to a combined 27% by 2027—growing at 20% and 25%, respectively.
If Walmart plays its cards right and captures a strong 25% of the combined organised and online markets in 10 years, at a net margin of 5%, this could yield $6.7 billion in 2027. This is an optimistic projection.
If we mathematically assume a constant share and margin for the next 10 years for its retail business in India, this could return near $10-15 billion over the next 10-15 years. While this might be an unreasonable expectation, given the competitive scenario, we need to consider the time horizon with which the world’s largest retailer, and biggest company with $500 billion in sales, would view such an investment.
To give you a perspective, Walmart was founded in 1962 and has been in business for 55 years now. If it is taking a 20-30 years view on India, there is a good chance it may get its money back and much, much more.
Besides, Walmart with annual sales growth of about 1-2% over the past few years and annual free cash flow generation of $16-20 billion in the past three years, needs to find new markets for growth. India offers such an opportunity.
Today, Walmart has 5,945 retail and 365 wholesale outlets outside the US. In China, where it is still struggling, it has 424 retail and 19 wholesale stores, in sharp contrast to just 20 wholesale stores in India. In the UK alone, it has 617 retail stores. The buy into Flipkart gives Walmart, a channel for direct access to the Indian consumer for the first time, and it is bound to look for ways to leverage this.How successful Walmart will be in India, only time will tell. But one thing is clear, it isn’t throwing over $16 billion in the ring to walk away in a hurry. And that is enough to put other Indian retail majors on notice.