Flipkart looks to raise debt with Rs 3,000-crore rupee bonds

 Flipkart, the nation's biggest online retailer valued at more than $16 billion, may raise debt for the first time by selling rupee bonds for as much as Rs 3,000 crore.

The plan is still a draft, said three people familiar with the company's thinking. Bond investors may not be as generous as equity investors to a company that's unlikely to turn a profit in the next few years, some analysts said.

The business model, which involves discounting to gain market share and burning through cash, may lead investors to demand a steep interest rate as high as 16% a year, said those cited above.

"It is at a preliminary stage," said one of those cited above. "Equity investors have an upside when it lists or when the fad keeps boosting its valuations. But there is nothing in that valuation for a bond investor.

So, given the financials, it may only be the wealthy investors who would take a bet, and many institutional investors can't even look at buying, given the credit profile." Given that a pure debt security will make the borrowing cost high, bankers may suggest a convertible bond issue with an equity component, the people cited said.

Flipkart did not respond to an email seeking comment. The Bengaluru-based company raised $1.9 billion last year in three rounds, giving itself firepower as it battles Soft-Bank-backed Snapdeal and USbased Amazon for dominance in an online retail market that will be worth $50 billion by 2020, according to UBS. Online retail in India has been characterised by discounting to win customers amid high cashburn rates and heavy losses.

"Conventional debt financing may be a challenge for a startup venture as they do not have any tangible security or free cash flow to offer," said Nishesh Dalal, partner at KPMG. "They may look at hybrid structured debt with an equity kicker or backend repayment options built in."

Indian online retailers such as Flipkart and Snapdeal must collectively raise $20 billion (Rs 1.27 lakh crore) in the next five years to be able to sustain growth, investment bankGoldman Sachs has estimated.

Although international investors may be willing to lend at a lower rate if the company opts for a dollar bond issue, its financials may not be good enough to secure Reserve Bank of India approval.

"Startups, or people raising funds for the first time, will need approvals from RBI under the Foreign Exchange Management Act," said Ashutosh Khajuriah, head of treasury atFederal BankBSE -1.41 %. "A company raising funds from overseas should have the capacity to repay." RBI said it will allow companies to raise funds from overseas investors by issuing rupee-denominated bonds in April. Some companies, including Indian Railways Finance Corp., plan to use this route to raise money.

Flipkart is planning to raise $550 million or Rs 3,500 crore from private equity investors. Last week, ET had reported that Tiger Global, the largest investor in India's top online marketplace, is leading the round with $100 million.

Aditya Birla's More ropes in Zop Now for online deliveries

Aditya Birla Retail's hypermarket format More has tied up with online grocery retailer Zop Now for the latter to manage home deliveries across 16 More hypermarkets in cities such as Bengaluru, Hyderabad and Kolkata.

“We are starting experimenting in e-commerce in the food and grocery segment and have appointed Zop Now as our technology partner,” Pranab Barua, Business Director, Retail & Apparel, Aditya Birla Group, was quoted as saying.

Zop Now is also currently the e-commerce partner for 15 stores of HyperCity.

“Right now, there is high level of interest for online deliveries from hypermarkets. It is an operationally heavy cost for them and most are struggling to get the business model right. Such tie-ups help generate additional revenues and sales and get profitable faster as we help in customer acquisition and online delivery,”Mukesh Singh, Founder & CEO, Zop Now, said.

Zop Now provides technology and logistics for hypermarkets for their e-commerce operations. “Hypermarkets have limited capabilities in e-commerce and we come in as partners charging 10-15 per cent of the margins. “There are about 250 hypermarkets and we are in talks with some of them,” Singh confirmed.

Sujeet Kumar, head of Flipkart’s largest seller WS Retail, quits

Sujeet Kumar, head of Flipkart’s largest seller and its captive logistics business WS Retail Pvt. Ltd, has quit the organization, according to three people close to the development.

Kumar along with another former Flipkart executive, Tapas Rudrapatna, controls 46% of WS Retail. Until 2013, WS Retail accounted for nearly all of Flipkart’s sales. Flipkart moved to a part-marketplace model in that year and is now accelerating the shift by adding tens of thousands of sellers this year.

Still, WS Retail accounts for more than half of Flipkart’s sales and will continue to play a key role as the online retailer tries to make the transition to a pure marketplace. WS Retail also runs Flipkart’s logistics arm, which employs more than 20,000 people and helps differentiate Flipkart from rivals by delivering products faster than external logistics companies.

Kumar has been running the organization since 2012. Kumar and Rudrapatna are said to be close to the Flipkart co-founders Sachin Bansaland Binny Bansal. He is also a college senior of the Bansals and was president of operations at Flipkart until 2012.

Kumar’s influence and importance was evident in his compensation package. Apart from his pay, he was eligible to earn a bonus of Rs.15 crore for the year ended March if WS Retail’s sales exceeded Rs.2,500 crore, according to documents with the Registrar of Companies (RoC).

WS Retail posted revenue of Rs.3,135 crore on a profit of Rs.67 lakh for the past financial year, documents show.

Kumar, who is also a director on WS Retail’s board, did not respond toMint’s email query.

Mint could not independently verify if he will continue to hold the board position or not.

Apart from providing business benefits for Flipkart, WS Retail helps Flipkart show it’s a marketplace, at least on paper. India bans foreign direct investment (FDI) in direct online retail but allows it in the marketplace business.

WS Retail was owned by Flipkart co-founders Sachin Bansal and Binny Bansal until September 2012. The Bansals and two of their relatives were also board members at WS Retail.

In September 2012, Flipkart was forced to sell a large stake in WS Retail to former OnMobile Global Ltd chief operating officer Rajeev Kuchhal, just weeks before Indian regulatory agencies launched an investigation into the company’s business relationship with WS Retail. Both the Bansals and their relatives gave up their board seats, too.

Future Group CEO Kishore Biyani questions logic behind investors' e-commerce funding

Organised retail entrepreneur Kishore Biyani has questioned the rationale behind investors committing billions of dollars to India's e-commerce sector in the recent past. The Future Group chief also expressed concern that online retailers, flush with cash, may eventually look at buying into traditional brick and mortar companies. 

"These days, the media only looks at e-commerce. However, you must also ask if gross margins of any such company are positive or not. There is hope of survival for them when their gross margins are positive. I'm not saying it is sustainable or it is not sustainable. They're getting private equity money in the hope that one day they'll have their own products and brands," Biyani said. 

At present, most e-tailers act as market places, selling other companies' brands and through exclusive tie-ups in certain categories. 

The comments from Biyani, who is credited with making the organised retail sector a force to reckon with over the last 15 years, come within three months of online retailer Flipkart raising $1 billion in a new round of funding at an enterprise valuation of a staggering $7 billion. 

The Flipkart announcement was followed up with American e-tailer Amazon's statement of committing $2 billion as investments in the country.

Brokerages wake up to e-commerce boom

As the Indian e-commerce story begins to play out and the hunt is on to find India's next Alibaba, brokerage houses are quickly doing a mid-course correction and rushing to cover e-commerce stocks such as Just Dial and Info Edge.
Foreign brokerages such as Goldman Sachs, CLSA, Credit Suisse, HSBC, JPMorgan and UBS have all started tracking these stocks, as they sense the potential of the e-commerce space, and its big-bang impact on Dalal Street. 

Sample this: Last July, only three brokerage houses were covering Just Dial, which has jumped to 23 at present, even as the stock has surged nearly three times since its listing in June 2013. Similarly, Info Edge is currently tracked by 24 brokerage houses, against 16 in July last, while the stock has jumped 120% in one year, according to Bloomberg data. 

"The e-commerce space is the next big emerging theme in the markets, and brokerage houses don't want to miss the bus. We expect many success stories to unfold in the listed space, and currently we are at the beginning of an e-commerce boom," Kunj Bansal, ED and chief investment officer at Centrum Wealth Management, said. 

Analysts believe that in the e-commerce space, there are multiple enablers for explosive growth, including a rapidly growing number of internet users, steady rise in the proportion of online shoppers within the internet community, growth in the per-shopper transaction value, and continuous flow of capital investments, making these firms attractive bets. 

"The money which has been raised by Flipkart and Snapdeal has grabbed everybody's attention. The trend of online shopping by Indian retailers hold great promise in the e-commerce space," said Dipen Shah, head, private client group research, Kotak Securities. 

Online shopping in India of physical goods is estimated to reach around $4 billion in 2014, and will multiply by over 11 times to hit $45 billion by 2020, according to MOSL report. "We have initiated coverage on Info Edge with a buy rating and Rs 1,100, as we see the comprice target of company in direct and high-quality play on the exploding e-commerce opportunity," said Rajat Rajgarhia, managing director, institutional equities at Motilal Oswal Securities. 

One of the reasons why brokerages are gung-ho is India's growing internet population, which is estimated to grow to 400 million by 2016, making it the second largest in the world. 

"On Just Dial, we have a buy recommendation with a target price of Rs 1,800, as the company is the leader in local search engines with a strong e-commerce presence, which is a winning formula," Rajgarhia added.