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Flipkart takes over Walmart India, announces Flipkart Wholesale

Flipkart on Thursday announced the acquisition of Walmart’s Indian operations. We try to analyse what led up to this moment.

About Flipkart

Flipkart is an Indian e-commerce company founded by Sachin Bansal and Binny Bansal (no relation) in 2007. They started off by selling books online, just like Amazon did in the mid-90’s. The company quickly scaled from its humble beginnings and added electronics, home-essentials, lifestyle products and fashion to its list of products. American multinational company Walmart holds an 81% stake in the company as of 2020.

Today, Flipkart has grown into a brand quite close to the heart of every urban and semi-urban citizen. They offer a wide range of services that go beyond the line of a traditional online shopping website. Through multiple acquisitions, Flipkart has made their presence felt in the everyday lives of Indian consumers.

Out of the many subsidiaries of the company, these are the notable ones

  • Myntra.com, acquired in 2014
  • PhonePe, acquired in 2016
  • Ekart Logistics

Walmart Deal

On May 8 2018, Walmart publicly announced it had signed agreements to become the largest stakeholder in Flipkart. The deal worth $16 billion saw the US retail giant picking up a 77% stake in the Indian company. This stake was quickly raised to 81.28% within just a few months of the landmark deal. In July 14 2020, Flipkart raised a further $1.2 billion from Walmart by issuing fresh equity shares. Valuations stood close to $25 billion.

Why India?

India has been one of the fastest growing countries in the world, and with growth comes an increase in wealth. As the middle-class family in India got richer, their disposable income increased. Higher disposable income among the relatively young population of the country led to a quick increase in spending. E-commerce services began to be major facilitators of these higher spending habits, and soon Flipkart and rival Amazon(launched Indian operations in 2012) began to be recognized as household brands across the country.

Walmart’s entry into the Indian e-commerce segment was a direct result of pressure from Amazon’s growing influence in growing markets around the world. It was seen as a shift of playing field for these huge companies from the US to India. “While Walmart and Flipkart will leverage the combined strengths of both companies, they will maintain distinct brands and operating structures”, Walmart had said in its initial press release. But a lot has changed in the last 2 years.

New Developments

Flipkart has acquired a 100% controlling interest in Walmart India for an undisclosed amount, further intensifying the retail war in India. Walmart currently runs 28 Best Price wholesale stores across India. The company also announced ‘Flipkart Wholesale’, a B2B(business-to-business) service to be launched in August. The marketplace would aim to link manufacturers and sellers to micro, small and medium enterprises (MSMEs).

“The B2B market for finished goods is estimated to be worth USD 650 billion. To start with, we will be focusing on USD 140 billion of that USD 650 billion, which is largely the categories of fashion, grocery, general merchandise, large and small electronics,” Flipkart Senior Vice President and Head – Flipkart Wholesale Adarsh Menon told PTI.

Major rival Amazon has its own B2B service, established to serve the same purpose. Amazon had shown interest earlier in purchasing Future Retail’s business, to further its hopes of becoming market leader, dethroning Flipkart. The deal is said to have been closed with controlling interests of Future Retail to go into Mukesh Ambani’s hands. Reliance, earlier this month, had announced JioMart in its AGM. DMart, the retail and B2B major from India, posting a huge drop in revenue last quarter is a signal of the tightening margins in the industry.

Walmart-owned Flipkart has picked up about 27% stake in Arvind Fashions NSE 2.41 % Ltd’s subsidiary Arvind Youth Brands for Rs 260 crore, according to sources and a regulatory filing by the denim maker, as the homegrown ecommerce company looks to strengthen its mid-market fashion portfolio.

Flipkart picked up 27% stake in Arvind Fashions Limited’s subsidiary Arvind Youth Brands for Rs 260 crore, earlier this month. The subsidiary will own the Flying Machine brand, which has been retailing on Flipkart and its platforms for over six years. Flipkart is surely setting all its coins in place to prepare for the upcoming retail war.

Recently, news also came out that Amazon is eyeing a 9.99% strategic stake in Reliance Retail. Amazon, the world’s richest company, is certainly taking India as a primary focus going forward and these talks signify that. 

In Conclusion

With seemingly unlimited money being thrown from both Amazon and Walmart into India, small scale retailers face ever growing pressure to fall into line, or to go out of business. The B2B segment, in which both US conglomerates currently have their targets on, may also see high growth rates in the coming years. India, being a market with huge untapped economic potential, may also see the retail segment flourish in coming years.

Pressure on multinational companies(MNCs) to go hyper-local, may also see an increase in jobs being generated in various sectors around the country. As a responsible citizen, I personally do hope that clear rules and regulations are set and enforced by the government to protect our markets and its consumers

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Editorial Market News

ONGC’s first-ever Quarterly loss amid COVID-19

ONGC

Oil & Gas Industry

One of the eight core industries in India is the Oil and Gas industry. It has a huge influence on cost and decision making of all the important sections of the Indian economy. The growth of the Indian economy has high proximity with the energy demand which thus increases the importance of investment in this industry. Geopolitical tensions and the pandemic has had a huge impact on the oil & gas industry worldwide, and not only in India. Who can forget the stunning fall in the prices of crude oil when it traded at negative $40 per barrel on 20th April 2020?

Crude oil imports significantly affect the country’s oil import bill. With the fall in the prices, this import bill will reduce but the fluctuating prices become a sign of worry for domestic E&P (Exploration & Production) companies like ONGC, Petronet, Gail, etc. The graph below shows the decrease in domestic crude oil production over the years.

India registered their lowest level of crude oil production in 18 years.

Upstream Segment- E&P Sector

The whole industry is divided into three segments: Upstream segment (extraction and production of crude oil), Midstream segment (storage, processing and transportation) and Downstream segment (refining, marketing and distribution)

Upstream segment is also known as Exploration and Production (E&P) sector. This segment is responsible to find and produce crude oil and natural gas. This includes searching for potential oil and natural gas fields, drilling exploratory wells and see if they have the potential to give back a good amount of oil and at last, recovering crude oil and natural gas to the surface. ONGC predominantly operates under this segment. A company which operates in all the three segments is known as Integrated Oil Companies (IOC).

About ONGC

State-owned Oil and Natural Gas Corporation is termed as a leader in the E&P segment in India. It was set up way back in 1955 under the leadership of Pandit Jawahar Lal Nehru. In 2010, this corporation was conferred with the status of Maharatna. They produce 72% of India’s total production of crude oil. Apart from oil, they also produce half of the gas which is produced in the country.

They have multiple subsidiaries in the form of ONGC Videsh Ltd, Mangalore Refinery Petrochemicals Ltd and join ventures with ONGC Tripura Power Company Lt, Indradhanush Gas Grid Limited, etc. During COVID-19 outbreak, Moody’s Investors Service downgraded their long-term issuer rating and with a negative outlook.

Crashed Q4 FY20 results

On June 30, ONGC reported their Q4 FY20 results which came as a shock to everyone. For the first time since reporting their financials from the year 2000, ONGC declared a net loss of Rs 3,098 crore as compared to a profit of Rs 4,226.5 crore declared in the previous quarter. Not only the bottom line, but their operating profit also fell by 30% to Rs 8,588 crore.

The fall in net profit was due to the accounting of the one-time impairment cost of Rs 4,899 crore. An impairment loss is considered when there is a reduction in the carrying amount of an asset due to a fall in its fair value. This news was greeted with a 4% slip in ONGC’s share price the next day. Thus, showcasing investor’s fear to continue investing in the company.

“Our weighted average cost of gas production is USD 3.75 per mmBtu and for newer projects in the deepsea, it is north of USD 5 per mmBtu. At current gas prices, we are losing money.” – ONGC Director (Finance) Subhash Kumar.

ONGC earned a net realization of $49 per barrel of crude. This was much below $61.93 what they realized a year back. This decrease, coupled with lower sales in the quarter, has deeply impacted the company’s profitability. This effect was not only because of the nationwide lockdown which was implemented by the Indian government but also because of the rising tensions between Arabia-led OPEC and Russia.

Return of Equity is one of the most important measures of profitability. If ROE is one, it indicates that a shareholder is getting a dollar of return for every dollar he invested. From the past three years, ONGC’s ROE has been consistently above 10%. For the year 2019-20, their ROE stood at almost 14% but this year it fell drastically to just above 5%. Return on Equity is calculated with the help of three other measures.


ROE = Return on Sales X Asset Turnover Ratio X Leverage
Even though the asset turnover ratio remained constant to the previous year, the return on sales was reduced by more than half. In 2018-19, return on sales was about 7.5%. This year, the same ratio fell to 2.4%. This return on sales tells how much profit is being produced per dollar of sales. Thus, decreasing ROS is a signal of decreased operational efficiency faced by the company this year.

Conclusion

After the fall of crude oil prices in March-April, WTI crude oil prices have risen lately to $41.41. This rise can be taken positively by the oil companies but the prices are yet to reach the level it was previous year. As the countries are fighting with the virus globally, one can expect more lockdowns in the near future.

Any disruption for the capital-intensive companies like ONGC can be daunting. Switching off and on these heavy machines might decrease productivity which can hurt companies financially. It will be interesting to see how the government will help this sector. As the national lockdown is removed, demand for oil is expected to go up once again. This increase in demand won’t be as high as it was in pre-virus times. People are still willing to go out only if necessary and not for tourism. It will be interesting to see how things unfold in this quarter for companies like ONGC amidst the pandemic.

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Editorial Market News

The Rally of the Pharma Sector- COVID19

The Pharma sector has boomed. It is not difficult to guess why. It’s because of the ripples of the COVID-19 pandemic. The NIFTY Pharma happened to move sideways around the new year until March 2020, when the stock price fell for a short period. The NIFTY Pharma Index captures the performance of the pharma sector. This was because of the global economic slowdown. Moreover, indecisiveness on part of leaders to declare a lockdown in their country made the incident even more uncertain for the Pharma sector.

Nevertheless, the pharmaceutical market managed to meet the sudden peak in the demand for PPE Kits, Drugs, Safety Kits, Masks, Sanitizers and the paramount need to find a cure or a vaccine for it.

Investors, promoters, philanthropists, institutions and governments infused huge amount of funds into these Pharmas for R&D and mass production of safety kits.

The NIFTY Pharma stocks performed as given below:

Captured on TradingView.

The chart shows the percentage return between the start of lock-down in India i.e. 23-03-2020 and 21-07-2020(DD-MM-YYYY). It shows NIFTY Pharma performance in the topmost frame and the top four pharma stocks(by market cap) in the frame below it. On the right is the percentage return in various colour schemes.

It was such that when the entire market fell Pharma came to rise. The following is the price action for 6 months comparing NIFTY and NIFTY PHARMA. As the confirmation for a COVID vaccine is nears you can expect a highly bullish sentiment on Pharma.

Following are the top 5 performers by

Stock %Change in last 3 months Net Profit Qtr Growth YoY %Net Profit QoQ Growth %
Aurobindo Pharma Ltd. 24.18%
48.24%
23%
Biocon Ltd.19.41%
-34.21%
-28.27%
Cipla Ltd.11.86%
-35.14%
 -31.47%
Cadila Healthcare Ltd.6.00% -13.71%
13.47%
Lupin Ltd.4.82%32.35%146.39%
Source:Trendlyne
TABLE 1

You can obtain more fundamental data regarding the stocks given above by clicking here

What can be deduced from the above table(TABLE 1)?

  • Lupin recorded the highest Net Profit Qtr Growth QoQ
  • Whereas, Aurobindo pharma recorded the highest % change in price in the last 3 months. Additionally, it also recorded the highest Net Profit Qtr Growth YoY %

It can be seen that the pharma as a sector overall hasn’t performed well on a YoY basis in terms of profit generation and revenue generation. This could be temporary, yet a very long-lived bubble which was inflated due to uncertainty and volatility in the market surrounded by COVID.

CIPLA rallied when it was announced that it was going to launch its own version of the COVID drug Remdesivir along with its competitor Mylan(Not listed in India).

What are the challenges faced by Pharma?

According to Charu Sehgal, Partner and Leader, Lifesciences and Healthcare, Deloitte India, in an interview with Economic Times, the the industry faces the following issue

  1. Manufacturing units/warehouses not working at full utilisation, due to unavailability of staff.
  2. Non-Availability or disrupted supply of raw materials and packing materials.
  3. Absence of seamless internet data connectivity with staff is creating issues in day to day work.
  4. The marketing staff of pharma companies are having problems generating sales due to lack of logistics and communication channels since they are not able to conduct meetings in-person.
  5. The companies that have operations across the globe are facing issues concerning their operations and staff in those locations. Every country has devised its policies and guidelines.
  6. As with all industries, implementing effective and robust cybersecurity measures is a challenge in the work from home scenario.

What do I take from here?

  1. It is evident that the only entity keeping the pharma market afloat is the COVID-19 Pandemic.
  2. India’s active pharmaceutical ingredient (API) industry is expected to generate $6 billion in revenues by the end of 2020.
  3. India has been meeting more than 20 per cent of the world and almost 50 per cent of the US’s generic drug requirements.
  4. India relies heavily on China for Pharma raw materials, this is about to change after political tensions have given rise to “Aatmanirbhar Bharat” and “Make In India”.
  5. The only major shortfall for the Indian Pharma Market is SCM or Supply Chain Management. Watch out for transport and logistics stocks.
  6. China has been losing credibility and momentum in the global market due to its lack of transparency about the COVID situation in the country.
  7. The Physicians and other doctors were closed so far.The number of surgeries and demand for surgical instruments had reduced. As these avenues open up and the need for other drugs and instrument rises the dependency of Pharma market on COVID shall decrease.
  8. According to Research and Advisory firm Firm Nirmal Bang: In the US, there is a sharp drop in patients visiting physicians, especially in the ophthalmology and dermatology categories, which should have an adverse impact on Sun Pharma and Glenmark
  9. There was also a substantial decline in hospitalization (non-COVID patients), which should affect injectable sales of Aurobindo Pharma and Dr Reddy’s.

Finally, The demand has slumped since clinics all around the country remain slumped, yet the Pharma Benchmark continues to rise. Once a conclusive vaccine is found and till the time it doesn’t saturate the market you can expect quite some price action.

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Editorial

The entire Telecom AGR saga

agr

What is AGR- Adjusted Gross Revenue?

Whenever a company makes money, they are liable to pay tax to the government. Telecom companies charge Interconnect Usage Charge (IUC) but it is not a part of the income which stays with them. They have to pass it to different operators. Thus, this charge only inflates their total revenue. It won’t be fair if the government taxes a telecom company on this inflated number. Hence, the total gross revenue is adjusted downwards which is known as Adjusted Gross Revenue.

Where it All Began

After 1994, telecom companies were allowed to operate in a fixed license system which was very expensive. From 1999, the government allowed the telcos to migrate from the expensive license-based model to the revenue-sharing model. This model helped the company to share a part of what they earned rather than paying out a high fixed amount. The payment under the new model was divided into two parts annual license fee (LF) and spectrum usage charges (SUC). The former would be 8% of AGR and the latter would be 3%-5% of AGR.


This AGR was the base of the argument which started in 2005 when the Cellular Operators Association of India (COAI) challenged the definition of AGR calculation that was followed by the government. This leads us to dive deep into the definition given by both the parties and the dispute which continued for a decade and a half.

The “AGR Definition” Dispute

The telecom companies believe that the government should be charging tax from the revenue generated only from the core business and not from other businesses. For example, a telecom company like Airtel will generate revenue not only by providing services in the telecom area but also by selling off its assets or by investing in equities or bonds.

Now, the DoT says that AGR includes the revenue generated by the company as a whole and not only from its core business. They believe that companies are earning revenue only because they are allowed to do business in the country. Hence, they are liable to pay taxes on their total AGR, no matter if it is coming from the company’s core business or the non-core business. 

We bring you a timeline of things that have shaped this whole saga –

October 24, 2019

The judgment day. After 14 years of indecision and uncertainty, the Supreme Court of India announced their mammoth verdict. The SC decided to widen the definition of AGR and include revenues coming for non-core items for taxation. The bombshell was that the apex court has asked the companies to pay all their dues amassing Rs 1.19 lakh crore by 23rd January 2020.

January 23, 2020

Vodafone Idea, Bharti Airtel and others miss the deadline citing poor financial health of their companies. The government also asked DoT not to take any action against the defaulting on payments.

February 14, 2020

As expected, the red-hot SC blasted the Centre, DoT and the telecom companies for not respecting their orders. The apex court declared March 17 as the new deadline for the companies to clear all their AGR dues. 

March 18, 2020

In the past few weeks, telecom companies started clearing their dues but only partially. Supreme Court was asked to give 20 years for companies to clear their AGR dues. The apex court fiercely rejected the idea and also declared that companies won’t be allowed to self-assess their dues. 

June 18, 2020

Supreme Court cooled its stance a tad bit. They asked the companies to present a detailed plan of action as to how they intend to clear their dues. This plan of action should consist of the years that the companies would be asking for and the guarantees they will be giving in the meantime. No allowance for staggered payment would be issued if companies fail to provide adequate bank guarantees and a proper roadmap for payment in upcoming years. 

July 20, 2020

The Supreme Court reserved its orders for the AGR payment timeline. They reiterated that the calculation done by DoT is final and binding. Vodafone accepted the dues levied on them but requested 15 years to pay back the dues. Their counsel stated that the company is in “deep waters”. They even asked the government to retain the Rs 8,000 crore worth of GST refunds for this year.

With all this, the Supreme Court voiced their concern on how they can “rely” on a company to pay their dues in future if they already are in shambles. The next hearing is scheduled on 10th August 2020.

AGR Dues for Vodafone Idea: 

Dues Outstanding: Rs 58,254 crore

Dues Paid: Rs 7,854 crores 

Balance Due: 50,400 crore

Vodafone’s counsel told the Supreme Court that the company is “barely afloat”. If the apex body forces the company for an upfront payment, they will be forced to shut down their operations in India which will directly impact over 1100 employees.

AGR Dues for Bharti Airtel:

Dues Outstanding: Rs 43,980 crore

Dues Paid: Rs 18,004 crore 

Balance Due: Rs 25,976 crore

Airtel has paid 60% of the total dues paid by the telecom companies till now. Several analysts believe that Airtel is in a much better financial condition when compared to Vodafone and will be able to pay its dues soon. Doubts remain on the survival of Vodafone Idea.