 "Flipkart drain on Amazon forces it to up commissions")
US-based mutual fund Morgan Stanley's exercise of marking down the value of Flipkart to $5.58 billion will put pressure on the company to raise funds in order to compete with Amazon at a lower valuation.
The US-based firm marked down the value of Flipkart for the sixth consecutive time, lowering the value of its shareholding by 38 per cent on a quarter on quarter basis. The markdown comes at a time when Flipkart has been struggling to raise funds at a valuation higher than or equal to $15.2 billion.
In a filing with the US Securities and Exchange Commission on November 28, Morgan Stanley valued its holding in Flipkart at $52.13 per share for the three months that ended September, down from $84.29 a share in the previous quarter.
Flipkart's value is down from $142.24 a share in June 2015 when the company closed a $700 million round that gave it its peak value. While the US mutual fund does not disclose reasons for its markdown, analysts and industry watchers expect the exercise is on account of the growing clout of Amazon in India.
"It may be a theoretical exercise but all processes of valuation are theoretical as there is no set formula with which to calculate this. If Morgan Stanley has put this value then no investor anywhere in the world will be able to go much beyond that," Harminder Sahni, founder and MD at Wazir Advisors. "This is Morgan Stanley we're talking about, they have their logic and no one can ignore it. How it will impact is yet to be seen, but it will definitely have one."
Flipkart's valuation has been weighed down not just by Morgan Stanley, but also by mutual fund investors Valic and Fidelity. In the quarter that ended August, the two firms marked down the value of the e-commerce giant by 11.3 per cent and 3.25 per cent.
The slew of markdowns has put pressure on Flipkart's upcoming fundraise, for which the company is looking at hiring an investment banker to reach out to new investors. Prospective investors such as Walmart are believed to have walked away from a $1 billion round after disagreements over the company's valuation.
"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," said a Flipkart spokesperson.
While rival Amazon's massive $5 billion war chest to win India has given investors the jitters, in the most recent diwali sales in October the US company was outperformed by Flipkart. The Indian company over the last year has pulled up its socks focusing on improving customer experience rather than chasing revenue growth at the cost of losing money. It also has cut costs, improved efficiency and has created additional revenue streams by opening up its logistics arm for third party customers.
Even with this improvement, industry watchers say Flipkart would still struggle to raise fresh funds at its peak valuation of $15.2 billion or higher.
Overall there seems to be a downtrend in the valuations of Indian startups, with ride hailing company Ola's valuation being marked down by its largest investor Softbank on hand of an increasingly aggressive push by Uber in India.
How Morgan Stanley valued it's investment in Flipkart
