BUSINESS

A Morgan Stanley Fund Has Slashed Flipkart's Valuation By 38%. Here's Why This Is Worrying.

This is the company's fourth markdown by the fund in nine months.

29/11/2016 6:30 PM IST | Updated 29/11/2016 9:07 PM IST
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Abhishek Chinnappa / Reuters

India's largest e-commerce player Flipkart has been dealt yet another steep markdown by a Morgan Stanley mutual fund, revising down the company's valuation by a whopping 38 per cent to $5.54 billion.

The latest markdown – the fourth by the Morgan Stanley fund in nine months – could potentially dampen investor sentiment for the fundraising hopeful which is said to be in the market to raise up to $1 billion from investors before year-end. At the time of its last round of funding in mid-2015, Flipkart was valued at $15.5 billion.

Flipkart, which is largely seen as a bellwether for other Indian e-commerce start-ups, is also said to be on the lookout for a financial adviser or an intermediary to help it raise additional capital following reports about Wal-Mart sniffing around a possible deal for a minority stake amid stiffening competition from Amazon's India foray. Flipkart's current rate of expenses and or cash burn rate means the company has enough money to last it for about 18-20 months, Mint reported.

According to the Mint report that cited people familiar with the matter, for its next round, Flipkart is seeking a valuation of about $15 billion, which is more than three times Morgan Stanley's latest valuation. The huge gap in valuation expectations could put a dent in possible deal negotiations at that price, and also potentially revise down valuations of rival e-tail startups in India.

Any difficulty in raising capital could mean additional squeeze on the company's finances and prompt further cost cutting. Flipkart has already made huge staff cuts to slash expenses this year. Earlier this year, it is said to have sacked up to 1,000 employees, a move the company's management has since justified as being a necessary step in the face of performance pressures. Its co-founder and former CEO Sachin Bansal also made a candid admission recently that he had to step aside because of "performance" issues and make way for current CEO Binny Bansal.

Morgan Stanley isn't the only investor that has marked down its investment in Flipkart. A mutual fund managed by US investment firm Vanguard also cut its valuation of the company by 25 per cent as of the end of March, regulatory filings with the US Securities and Exchange Commission, show. Other investors that have marked down their investments include Valic and Fidelity.

But Flipkart has previously dismissed these markdowns as a cause for worry in part because of the overall tech industry slowdown.

Flipkart CEO Binny Bansal had this to say to HuffPost India on the trend of mutual funds investing and marking down investments in private tech companies: "They have an opaque process for this... On the same parameter, someone will say $100 and another will say $140. So it is like a 40% variance in valuation and it is because everybody has a very different model or whatever it is that they use to do this... Some of these funds about which reports get written own like .01% of Flipkart."

To be sure, Indian e-commerce sector is hugely attractive for big brand retail companies which see the country as a promising market that has so far been dominated by the highly fragmented informal retail sector and a growing smartphone and Internet penetration. Amazon's plans to pump in $3 billion in India in what it calls its "fastest growing market" is also likely to draw interest from Amazon's competitors to India. Alibaba already backs Flipkart's rival Snapdeal in India.

Flipkart also has the avenue of stock markets to raise money eventually. Asked about its public listing plans, Bansal told HuffPost India previously the company would pursue an IPO in the next two to four years depending on market conditions.

However, India's IPO markets have seen tremendous volatility since the government's demonetisation move was announced on November 8 after seeing an uptick earlier this year from a period of slowdown in previous years. According to data by VCCircle, 26 companies had raised money from IPO markets, garnering more than Rs 20,000 crores, compared to a total of Rs 14,000 crores that 21 companies raised in the full year of 2015.

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