We believe Walmart’s $16 billion purchase of a 77% stake in Flipkart (a leading Indian e-commerce player selling electronics, appliances, fashion, and apparel items) showcases its desire to expand its e-commerce presence around the world.
The strategic rationale of the deal (slated to close by the end of this calendar year) has not been lost on us, given Flipkart generates $4.6 billion in sales ($7.5 billion gross merchandise volumes) and boasts impressive growth prospects (with GMV up more than 50% a year). Further, we surmise that this addition should enable Walmart to level the playing field with one of its biggest foes, Amazon, in an attractive geographic region with a rising middle class of consumers. From our vantage point, partnering up with Flipkart also affords Walmart better insights into the preferences of local market consumers, which should aid traffic and transactions. But beyond building out its presence in India, we believe Walmart should be able to leverage Flipkart’s talent and technology to aid in the development of its Jet.com platform. And for Flipkart, we think Walmart’s scale, supply-chain knowledge, and retail expertise should enhance its logistics and overall network.
Management anticipates this tie up will constrain earnings to the tune of 5%-11% over the next two years (as Flipkart has failed to turn a profit); however, given the growth potential (we think the addition of Flipkart will enable Walmart to tap another 1.3 billion customers in an attractive market that presently represents less than 1% of sales for Walmart today but can become 10% of sales by fiscal 2026), we don’t intend to materially alter our $91 fair value estimate. Further, we think the low-single-digit percentage decline in shares is making this name a bit more attractive, trading at nearly a 10% discount to our valuation. As such, we’d suggest investors keep an eye on this wide-moat defensive retailer.
From a capital allocation perspective, we expect Walmart will fund the purchase by using a combination of cash on hand and newly issued debt. As we previously suggested, we think the sale of its majority stake in U.K. grocer Asda (for around $4 billion announced last month) should further aid in the funding this tie up. With total debt/EBITDAR of just around 2 times at the end of fiscal 2017, we don’t believe the deal suggests financial or liquidity risk is on the horizon for Walmart. Beyond pursuing select deals, we still surmise that Walmart will pay out around 40% of earnings to shareholders in the form of dividends, raising this payment at a mid-single-digit clip each year over our 10-year explicit forecast. As such, we aren’t wavering on our Standard stewardship rating.
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