Indian Ecommerce Headed For Shakeup As Walmart Steps In

Flipkart, India’s leading ecommerce company, founded and headed by Sachin and Binny Bansal, is on the verge of selling a controlling stake to Walmart (NYSE:WMT) rather than Amazon (NASDAQ:AMZN) , according to a recent Bloomberg report. The deal values the company at around $20 billion.

Walmart’s entry is expected to come from a stake sale by Softbank and Tiger Global Management, but there could be other sellers. The company may also issue fresh shares that will in effect dilute ownership of all parties.

Initial reports (rumors have been going on for at least a year) said that the company would acquire only a minor stake, but later reports said it could be as high as 50%.

It is broadly understood that a Walmart deal will close more smoothly than one with Amazon, because it would increase competition in the space and therefore be preferred by regulators.

About Flipkart

Having been around for a while, the company already offers a good online platform, a nationwide network of warehouses, the requisite logistics and a range of payment options. This has been possible because of the steady flow of resources over time through Japan’s Softbank, China’s Tencent and America’s Microsoft (NASDAQ:MSFT) , eBay (NASDAQ:EBAY) , Tiger Global, Accel Partners, Naspers and IDG Ventures.

Flipkart recently consolidated its position by swallowing smaller rivals Myntra and Jabong. The company also has plans to buy an 8-10% stake in Future Lifestyle Fashions Ltd, one of the largest branded apparel retailers in the country, which could be one of the reasons it is trying to raise cash. Last year, Amazon bought a 5% stake in Shoppers Stop, another leading retail brand.

So as things stand today, Flipkart is Amazon’s main rival in India, with the two together accounting for 80% of online B2C ecommerce in the country. Snapdeal is third.

Government Allows 100% FDI (with Caveats)

The Indian ecommerce market has gained momentum over the last 5-6 years, mainly on account of the constantly increasing Internet penetration, increasing use of smartphones, a growing middle class and a young population.

Interest in the space has spiked after the government, in March 2016, clarified regulatory frameworks within which foreign companies could operate. The new rules allow 100% foreign direct investment (FDI) in ecommerce companies, as long as they operate as marketplaces and hold no inventory of their own.

The department of industrial policy and promotion (DIPP) of India has defined a marketplace model as an information technology platform run by an e-commerce entity on a digital and electronic network to act as a facilitator between buyer and seller. So 100% foreign ownership is permitted as long as these companies stick tothe provision ofwarehousing, logistics, order fulfilment, call center/customer care and payment collection while staying away from the creation or sale of retail inventory of their own or the provision of after-sales services. The government’s goal in this was to promote the interests of small sellers by giving them a platform to reach more people and stimulating job creation in the process.

The revised rules also said that these online platforms wouldn’t be able to influence prices, seeking to put a stop to the huge discounts that smaller or brick-and-mortar operations wouldn’t be able to match. But workarounds appear possible. Amazon for example reportedly has what it calls “promotional funding” that allows it to advise retailers to heavily discount their items. If they agree, Amazon pays them the difference.

Another protection for small sellers comes in the form of a ceiling on the amount that a single seller can contribute to the platform (currently capped at 25% of the total turnover of the ecommerce company).

There are also provisions that require the name and contact details of the seller to be displayed on the website.

Recommendation

Walmart has a Zacks Rank #3 (Hold) while Amazon shares carry a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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