Why All Is Not Well At Flipkart – And How To Save It

FlipKart, India’s homegrown eCommerce success story (/work in progress?) was valued at $15B last year.

Recently though it was in the news for the wrong reasons, after a trio of small funds cut their private valuations for it by up to 23% – blaming, primarily, the fact that it was spending a lot more than it was making, in its quest for marketshare, with no end in sight to its profitless days.

Amazon of course famously did that for a long time, but not having profits is not the same as not having enough operating/free cash flow, so that’s a different story.

Coming back to FlipKart, I recently read a longish post on what ails FlipKart by Haresh Chawla, a partner at an Indian PE firm, that contains many illuminating observations and advice, about FlipKart, unit economics and about startups in India.

One of the stranger things from the post is about FlipKart driving saves revenue (or GMV = Gross Merchandising Volume) by becoming the number one destination for smartphones – to the exclusion of everything else:

So Flipkart sells smartphones by funding such deep discounts that even neighbourhood mobile shops buy from them as against sourcing them directly from the manufacturer. For example, Flipkart funds a 20% discount beyond the wholesale price in the case of Micromax. Now, if you have a valuation round coming up, sign up a few exclusive smartphone deals, pump in discounts and sell a few million smartphones. And you can claim that you will hit $10 billion faster than anyone else. Incidentally, Flipkart fell short of that number by just $5 billion, as Mint reported in this roundup of missed targets by e-commerce firms.

Given the number of marquee global VCs backing FlipKart, it’s weird that no one thought to question tactics like this one that guarantee a loss on each sale without the upside of loyalty, repeat purchases or even a loss-leader strategy. Especially in a market where (a) price trumps everything and (b) fierce competitors like Amazon can afford to bleed them out for as long as it takes.

You can read the full thing here.


On India’s New “Companies Bill”

India is about to implement a new set of rules that govern corporations nearly six decades after the last set was passed. 

About time, one would think. 

But, Jen Swanson writes in The NYT’s DealBook that it might not really be able to do what is needed in 21st century Indian corporate-dom:

Yet while hopes remain high that the bill will appeal to foreign investors, and kick-start India’s economic growth, nearly a decade of revisions has left a watered-down measure lacking structure. Much of the bill depends on new committees and rules that have yet to be drafted, so legal experts have doubts about its ability to police corporations.

Bharat Vasani, chief legal and group general counsel for Tata Sons Limited, the holding company behind India’s multibillion-dollar conglomerate Tata Group, said the bill had many shortcomings. Among those, he said, it fails to adequately address corporate insolvency, stressing that ailing Indian companies desperately need protections like the Chapter 11 bankruptcy rules in the United States.

Removing the jurisdiction of the High Court was also a mistake, he said, because now the bill depends entirely on the efficiency of the tribunal.

“India’s experience with tribunals has not been very great,” said Mr. Vasani, explaining that they rarely receive the proper infrastructure, financial support or manpower.

“This entire legislation was drafted by the bureaucracy, and they’ve never experienced how corporate India functions,” he said. 

So like with many other well-intended measures in India, the ultimate success (or failure) comes down to execution and enforcement – two things where India’s track record continues to be dismal. 

India’s Outsourced Economic Functions

The Economist, in its latest edition, makes some interesting observations in its usual mildly condescending (“snarky”, the millennials might say) tone about India’s vital economic functions being outsourced to regional hubs in Asia. 

As usual, much of it rings true and makes diaspora members such as myself cringe. 

On Singapore:

The largest hub for Indian trade is probably Singapore. It is the centre for investment banking, which thrives offshore, owing to the tight regulation of India’s banks and debt markets. Reflecting this, the global exposure to India of Citigroup and Standard Chartered, the two foreign banks busiest in India, is 1.9 times the size of their regulated Indian bank subsidiaries.

Fund managers running money in India are often based in Singapore. India’s best financial newspaper, Mint, now has a Singapore edition. At least half of all rupee trading is offshore, says Ajay Shah of the National Institute of Public Finance and Policy in Delhi. Investors and firms do not like India’s fiddly rules and worry that the country may tighten capital controls if its currency falls too far, says one trader in Singapore. He denies, though, that the rupee’s fall is mainly the work of speculators abroad. “The onshore guys have as much of a role,” he says.

Indian e-commerce firms often get their data crunched in Singapore, using web-hosting and cloud-computing firms, such as Google and Amazon. Amitabh Misra, of Snapdeal, says bandwidth costs less, technology is better and you avoid India’s headaches—such as finding somewhere to work, coping with state-run telecoms firms and having to wait to import hardware.

Singapore is also a centre for legal services. International deals involving India often contain clauses which state that disputes be arbitrated outside India, with its clogged courts. Singapore, along with London and Paris, has become the preferred jurisdiction. “The level of comfort Indian companies get from Singapore is unmatched,” says Vivekananda N of the Singapore International Arbitration Centre.

Dubai (ignore the Dawood Ibrahim bit):

Dubai’s ports, air links and immigration rules also make it a better logistical base than India. Dawood Ibrahim, a Mumbai mafia don, ruled from Dubai by “remote control” before eloping to Pakistan in 1994. Since those wild days legitimate Indian firms have thrived in Dubai. Dabur, which makes herbal soaps, oils and creams, runs its international arm from there. Dodsal, which spans oil exploration in Africa to Pizza Huts in Hyderabad, is based in the emirate. Its boss, Rajen Kilachand, moved from Mumbai in 2003. “Dubai is a good place to headquarter yourself,” he says, adding that a “Who’s Who” of Indian tycoons has a presence. Dubai is gaining traction in finance, too. Rikin Patel, the chief executive of Que Capital, an investment bank, says Indian firms are raising debt in Dubai to avoid sky-high interest rates at home.

and Mauritius:

About 5,000km (3,000 miles) south of Dubai lies Mauritius, an island so beautiful that Mark Twain said God had modelled heaven on it. About half its people are descended from labourers brought from India when Britain ruled both places. It is the main conduit for foreign investment into India with 30-40% of the stock of foreign capital sitting in funds domiciled in the island. A 1982 tax treaty allows investors using Mauritius to pay tax at the island’s rate (which, in practice, is zero), not the Indian rate. Foreigners also like the stability of Mauritius’s rules and its army of book-keepers and administrators. Many investors also use “P-Notes”—a kind of derivative with banks that gives them exposure to Indian shares without having the hassle of directly owning them.

At what point will the Indian government learn from these better managed, well-run hubs? And make sweeping changes to both its laws and enforcement mechanisms to attract jobs and economic activity back to its shores?

Or, given its fractious politics, an elite that doesn’t care and the inability of the masses to endure short term pain in the interest of the long-term, can it?

Tata’s $1.6B Corus Writeoff – The Backstory

In 2007, Tata Steel of India bought British steel maker, the Corus Group, for $12B. This was nearly $3B more than what it offered initially (the reason for the extra? a bidding war). Recently though, it announced a $1.6B write down in connection with the acquisition.

So why did the write-down occur more than 6 years after the acquisition?

A plausible reason is that it did take Tata Steel this time to realize that the full forecasted cost-side synergies, market power synergies, or both, were not going to materialize.

But The Economist, citing data that shows that 5 years is the average time across the world between “error and admission”, argues that these lags are often a result of companies’ internal politics – in the sense that write-downs are seen as (tacit?) admissions of mistakes on the part of a CEO, the board, or other executives. 

Specific to the Tata case, it makes two interesting observations:

So what does Tata’s write-down signify? Ratan Tata, the patriarch of the Tata group, retired as chairman of Tata Steel on December 28th. Until he left it was probably impossible to recognise that Corus, his biggest deal, was a flop.

His successor, Cyrus Mistry, has several underperforming businesses to deal with. Yet Mr Mistry has opted for a small write-off. Corus, analysts estimate, is worth a third or less of the $13 billion Tata paid for it, meaning the impairment should be much bigger. So this is no cathartic moment, of the kind that Hewlett-Packard and Rio Tinto sought. Instead of admitting defeat Mr Mistry probably hopes to sell all or part of Corus, or allow it partially to default on its debts (which are ring-fenced and not guaranteed by the Tata group).

Too big a write-off might suggest he would accept a low price, or cede control of Corus to the banks. Tata’s goodwill charge, then, tells you that the firm is not yet ready to walk away from its European arm. Given that this arm is losing about a billion dollars a year of free cashflow, that could be an expensive decision.

“India Rising” – Aberration or Inevitable?

Over the last several years, while some parts of India have seen extensive development and life for the middle class in selected pockets has gotten largely better, hundreds of millions of Indians have been left behind.

And this manifests itself today as a slowdown in GDP growth (but note: that is a slowdown in the rate at which GDP is growing, not a decline in GDP itself).

Raghuram Rajan, a University of Chicago Finance Professor and the chief economic adviser in India’s finance ministry, writing on a website called Project-Syndicate, attributes this to multiple reasons.

First, India probably was not fully prepared for its rapid growth in the years before the global financial crisis. For example, new factories and mines require land. But land is often held by small farmers or inhabited by tribal groups, who have neither clear and clean title nor the information and capability to deal on equal terms with a developer or corporate acquirer. Not surprisingly, farmers and tribal groups often felt exploited as savvy buyers purchased their land for a pittance and resold it for a fortune. And the compensation that poor farmers did receive did not go very far; having sold their primary means of earning income, they then faced a steep rise in the local cost of living, owing to development.

In short, strong growth tests economic institutions’ capacity to cope, and India’s were found lacking. Its land titling was fragmented, the laws governing land acquisition were archaic, and the process of rezoning land for industrial use was non-

The rest of the highly readable article discusses other reasons, and remedies. 

India’s Airlines – Major Changes Ahead

The UAE’s Etihad Airways just bought a (24%) stake in India’s mostly domestic Jet Airways – after foreign direct investment in the airline industry was relaxed by the Indian government last year.

While Jet Airways gets liquidity for growth and expansion, Etihad gets a nice foothold in India’s growing domestic market. On top of that, and equally importantly, this can help it offer convenient “one carrier” routes from major international hubs and destinations to and from India – something that can help it compete with Emirates, Qatar and probably even major European carriers with global networks such as Lufthansa.

In other words, more competition for Indian air travelers which may translate into lower fares and more convenience.

The one entity that may not be too happy about this though is Air India, India’s state-owned airline that has had various management and profitability issues over the years.

An interesting excerpt on this, from Knowledge@Wharton:

Air India’s leadership has already begun complaining about “unfair competition.” Others have sounded warning notes as well. “Instead of giving Air India the time it needs to consolidate as well as expand its network, [the Jet-Etihad deal] will only hasten its demise,” said former federal railway minister Dinesh Trivedi in a letter to the prime minister. In a previous article, Wharton management professor Saikat Chauhuri told Knowledge@Wharton that “external shocks” could derail the initial signs of a turnaround at Air India. “I have been a vociferous supporter of government backing for Air India,” he noted.

Critics, however, say that a turnaround at Air India is an oft-repeated story. “It is no longer credible,” says Jitender Bhargava, a former Air India executive director who is writing a book about the airline.

And the national carrier is likely to face even more competition soon. The Foreign Investment Promotion Board has already cleared a joint venture proposal between the Tata conglomerate and Kuala Lumpur-headquartered budget airline AirAsia. AirAsia would hold a 49% stake, Tata Sons 30% and Arun Bhatia of Telestra Tradeplace the remaining 21%. Bhatia runs Hindustan Aeronautics and is related by marriage to L.N. Mittal of ArcelorMittal.

But if foreign equity investments increase the profitability, and stability (ref: Kingfisher), of various private airlines in India, surely this is good news for not just travelers, but also Air India’s pilots and employees who now have other avenues of employment?

Which leaves a few assorted politicians who might bemoan the ultimate (and unavoidable?) demise of Air India. That’s OK, though. In this day and age, the Indian government has no business being in the airline business. 

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