Flipkart’s Myntra acquisition: on a wing and a prayer
Flipkart India Pvt. Ltd’s acquisition of Myntra.com will help add scale and gain share in the key fashion segment. This will help when the company plans an initial public offering (IPO) of shares, which according to news reports is on the cards.
But prospective investors will also find that losses of the merged entity are far higher and that the rate of cash burn is also likely higher. Currently, foreign investors are lapping up shares of Internet companies in a repeat of the tech bubble at the turn of the century. Evidently, the company will hope that investors will focus on its growth numbers and market share, rather than worry about its losses and cash burn.
In Thursday’s merger announcement, there wasn’t any mention of cost synergies by either company, showing how little this aspect matters in their scheme of things. Myntra’s chief executive officer Mukesh Bansal said in a Mint report that it aims to achieve sales worth Rs.20,000 crore by 2020, for which it needs to make a cash investment of $200 million (Rs.1,172 crore). Flipkart said it will invest $100 million in the fashion business after the deal. Of course, there wasn’t any talk of when the merged business will turn profitable.
Both companies are running heavy losses and have had to repeatedly dilute equity to raise funds. Valuations of the companies are already absurdly high, with both being valued at about 1.6 times the value of annualized monthly sales. Note that sales here refers to gross merchandise value (GMV), of which the company’s revenue is likely to be only a fraction (the commission it earns on the sale). China’s online retailer Alibaba, which is listing in the US, is reportedly expecting a valuation of $150 billion on the back of an annual GMV of $250 billion, translating into a valuation of about 0.6 times GMV. Of course, Alibaba generates adequate profit and cash, is expected to grow at a much slower pace and is far from comparable. One can argue that Flipkart is expected to grow at a much faster pace and deserves a higher multiple.
Be that as it may, the key question investors should ask if the company can continue to get access to funding to and continue to offset cash burn. Competition is just picking up, with Amazon.com Inc. increasing its presence in India. What’s more, wiser from the experience in western markets, traditional retailers are increasingly offering online retail options for customers.
In this scenario, pure online retailers such as Flipkart and Myntra have little option but to continue offering discounts to attract traffic. It does look like the businesses will continue to run losses for some time and require regular funding. All this has the trappings of a bubble, where early investors are just waiting to offload investments to a greater fool.