Flipkart-Walmart deal: Near-term pressures to rise for listed retail firms

The $16-billion (Rs 1.08 trillion) acquisition of Flipkart by Walmart could lead to heightened competition for India's listed retail companies. While analysts believe the growth opportunities are large for the overall space, the near term could see some pressure on the listed ones. This is because of the $2-billion equity infusion by Walmart and its stated intention of focusing on growth over profit.

Harit Kapoor and Mehul Desai of IDFC Securities expect the intensity of discounting in the near to medium term to remain elevated. For, both the majors (Amazon and Walmart-Flipkart) will focus on driving growth, ramping up scale and gaining market share—they have the money to do so. This could force the offline retail entities to keep discount days elevated, limiting margin expansion, they add.

The other area of focus for the two online retail giants would be the food and grocery space. Walmart has indicated it will develop supply chain infrastructure in this area. Analysts led by Avi Mehta of IIFL say that after the acquisition, food and grocery retailing should see aggression from the three large global players — Walmart, Amazon and Alibaba (Big Basket). This, they feel, will force offline entities Avenue Supermarts (Dmart) and Future Retail to adapt their business models.

Over the medium term, strategic tie-ups between online and offline players —such as the one between Amazon and Shoppers Stop where both use each other’s strengths to improve presence through the omni channel route — to offer a wider portfolio of products to gain market share and improve profitability, are expected to increase. It could also trigger further consolidation. While Future Retail has been on such a drive (having acquired Bharti Retail, Heritage and HyperCity), Prabhudas Lilladher’s Amnish Aggarwal and Nishita Doshi believe there could be further consolidation in the organised retail space, benefiting some of the domestic entities.

However, despite entry of a deeply pocketed rival and consolidation, analysts believe the market for organised listed retail is large and both the online and offline ones should do well. Analysts say offline retailers are trying to mitigate the threat through their own online platform, as well as omni channel presence. Aggarwal of Prabhudas Lilladher, while not ruling out a price war and deep discounting, says Walmart would focus more on white and private label products (jargon for products branded by a reseller for sale to the general public) by sourcing from multiple manufacturers at a cheaper price and offering these through various platforms, as has been its business model.

He also says that unlike in the past, when players struggled with higher cash burn and weak balance sheets, things have improved significantly for offline retailers. This will allow the sector to grow at a much faster rate, helping all entities. Finally, categories such as jewellery, fruit and vegetables, and apparel are segments which will continue to thrive in the offline model, given the look and feel, as well as customer habit. Offline retailers are likely to depend on the online platform to sell electronics, white goods and mobiles, where there is less need for the experience factor. While organised retail is 15 per cent of the overall retail segment, online is expected to grow at a much faster, given the smaller base. Offline retail is expected to see 18-20 per cent annual growth over the next five years.

The deal values Flipkart at slightly less than $21 billion and at 4.5 times the FY18 enterprise value to operating profit (EV/OP). Clearly, a substantial premium to existing listed players. This is on account of management control and scarcity premium (a company of this size), as well as the fact that Amazon would have become a dominant player if the transaction had not gone through. The valuations are, however, not comparable, as online entities are still in investment mode.

Analysts believe most listed retail entities, barring Avenue, are trading at reasonable valuations. This is on the back of double-digit growth in same-store sales, a much better balance sheet position over a couple of years earlier, and a multi-year 20 per cent growth story. While Avenue trades at four times the FY20 EV/OP estimates, the other listed retailers (Trent, Future Group Retail and Lifestyle, V Mart and ABFRL) trade at 1-3.5 times.


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