India: Flipkart Stares At A Dent In Valuations  Ahead  Of listing

News reports just six months ago had said Flipkart is eyeing an IPO (initial public offering) at a valuation of $45-50 billion. Of course, there is no official word about these valuation numbers but, as it turns out, tech stocks have indeed corrected in the past month.

Valuations of global e-commerce firms such as Canada’s Shopify Inc., Singapore-based Sea Ltd and Argentina’s MercadoLibre Inc. have declined about 17-25% since mid-February. Shopify warned investors last month that as countries roll out vaccines in 2021, some consumer spending will likely rotate back to offline retail, and the ongoing shift to e-commerce, which accelerated in 2020, will likely resume a more normalized pace of growth.

Ritesh Jain, a global macro investor and a former executive at BNP Paribas Asset Management India Pvt. Ltd, said: “Rising bond yields reduce liquidity in the system, which was earlier going into equities of loss-making, high-growth tech firms. Higher yields tighten the financial conditions, which will make life difficult for companies that are living on purely lofty valuations not backed by commensurate profits.”

Jain added, “Against this background, it’s not surprising that Flipkart’s valuations may have also corrected.”

In some cases, using the SPAC route may result in slightly lower valuations. As Bloomberg columnist Matt Levine wrote in his column, “The SPAC structure is less risky for the company than an IPO, which means that it’s riskier for the SPAC (than just buying shares in a regular IPO would be), which means that the SPAC should be compensated by getting an even bigger discount than regular IPO investors.”

SPACs are publicly listed bank cheque companies that are set up with the express intention to merge with a private target company, enabling it to trade publicly. In other words, SPACs are touted as a faster route to IPOs, which, as Levine says, reduces risks for firms looking to list.

Rajiv Sharma, an analyst with expertise in internet and telecom firms, says, “In a regular initial public offering, the investment bankers conduct meetings with prospective investors before the issue opens. During these interactions, bankers get a sense of the demand for the issue and, accordingly, take a view on pricing. However, in a SPAC listing, there are no conventional road shows by the bankers, which makes the process of price discovery challenging (because of covid, road shows have been tough).”

“For Flipkart specifically, reports indicate its recent performance has lagged that of Amazon, and that could also have had a bearing on valuations,” added Sharma.

In February, The Ken said in a report that Flipkart lost the smartphone crown to Amazon, which clocked a 47% market share in the April-June quarter of 2020, while Flipkart had to settle at 42%. Flipkart believes it clawed its way back to the top after its Big Billion Days sale in October, the report added.

In a recent transcript, Walmart said, “Flipkart’s GMV (gross merchandise value) growth was impacted by a 53-day shutdown in the first half of the year. But the business rebounded and exited Q4 with strong momentum, delivering GMV growth roughly double that of the full year.” Competition is also increasing from the likes of Reliance Industries Ltd’s JioMart, and the Tata group’s recent moves in the e-commerce space.

Further, there is always the risk of a further tightening of foreign direct investment (FDI) rules for e-commerce companies in India, and investors are likely to price that in.

Meanwhile, a Reuters report has said that a traditional stock market listing is much more likely for Flipkart as compared to a SPAC listing. Either way, the company may need to settle for slightly lower valuations now, given the recent correction in tech stocks. But even at a valuation of $35 billion, it represents handsome returns for Walmart for its acquisition, which is less than three years old. In 2018, Flipkart was valued at $21 billion.

This article was first published on livemint.com.