Will Flipkart markdowns hurt its fundraising prospects?
Bengaluru: A mutual fund managed by Morgan Stanley has slashed its estimate of Flipkart’s valuation down to just $5.54 billion, which is about two-thirds lower than the company’s peak valuation of $15 billion and nearly 40% lower than Morgan Stanley’s previous estimate.
The mutual fund holds 1,969 shares in Flipkart and disclosed in a filing with the US Securities and Exchange Commission that it reduced the value of its holdings in Flipkart by about 38% to $52.13 a share, as of 30 September, down from $84.29 a share at the end of the June quarter.
“Mutual fund mark-to-market is a purely theoretical exercise and is not based on any real transactions. We are seeing a strong traction in our business momentum and operating performance. We continue to be focused on innovating for the customer, growing the market and executing on our long term growth agenda,” a Flipkart spokesperson said by email.
While Flipkart has seen its valuation marked down earlier (four times by Morgan Stanley itself in nine months), the magnitude of the latest cut by Morgan Stanley is particularly worrying. It comes as Flipkart is on the verge of hitting the market for a new round of funds and at a time when the demonetization exercise has hit sales at all online retailers including Flipkart.
If Flipkart’s valuation isn’t marked up quickly by at least some of its other investors, the company may have to accept a significantly lower valuation in its next funding round than its preferred price of $15 billion, experts said. Already, cab-hailing service Ola, another top Indian unicorn, is facing a so-called down round as it is likely to raise its next round at a lower valuation than the $5 billion it fetched in its previous round, two people familiar with the matter said. (Ola didn’t respond to an email seeking comment.) The Economic Times reported Ola’s funding round on Friday.
“ New investors will be more reluctant to meet Flipkart’s terms, but we also need to wait and watch what other institutional investors and mutual funds say in their reports over the next few weeks. If we see markdowns from all of them, it becomes tougher for Flipkart. But if the top two or three investors hold firm, there is still a chance of getting a decent valuation . Still, it will be a down round in either case,” a Flipkart investor said on the condition of anonymity.
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Markdowns by existing Flipkart investors may help new investors drive down the company’s valuation, said Harish H.V., partner, Grant Thornton India.
“But no investor puts in money just based on these things. If an investor is bullish on Flipkart and on e-commerce in India, it will invest in Flipkart regardless of markdowns. What the valuation will be is the question,” he added.
Five mutual fund investors at Flipkart now value the company in the range of $5.54 billion to $11 billion. The marketplace, which is India’s most valuable Internet firm, last raised cash at a valuation of $15 billion some 18 months ago.
The company plans to hit the market before the end of the year to raise $500 million to $1 billion in fresh capital.
Morgan Stanley’s latest markdown comes at the end of the worst-ever quarter for Flipkart. Its monthly sales fell to a yearly low in July and it was overtaken on a standalone basis by arch-rival Amazon India in July and August. Flipkart bounced back in the festive season and beat Amazon by a clear margin. Then, as Flipkart was drawing up plans to maintain its momentum, it and other online retailers were hit with the unexpected snag of demonetization, which was announced by the government earlier this month.