Can Flipkart be the next Infosys? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster
PRINTER FRIENDLY | ARCHIVES

Can Flipkart be the next Infosys? 

A  A  A
In this issue:
» High FII holdings in Indian equities is a cause of concern
» Retail investors are better off not timing the markets
» Jim Rogers not bullish on India yet!
» Employment in the last 8 years grew by an impressive 34%
» ...and more!



00:00
 
Yesterday was a landmark day in the Indian business history. In one of the biggest deals of its kind, the online retailer Flipkart raised US$ 1 bn in a single round of funding. Incorporated just around 7 years back, the company has come a long way. It is now valued at US$ 7 bn, between two-three times the value of goods sold on its site. In a period of two months, the company's valuations have doubled. And with recent funding, some believe it is already too big to fail.

The management seems confident to become a US$ 100 bn internet company in next five years. To give you a perspective, the total Indian e-commerce business is estimated at around US$3 billion at the moment.

While Flipkart seems to be well positioned, the big question is: Will it be able to sustain its growth? And that is the question one should be asking before placing it in the league of companies like Infosys. After all, the premium valuations that the company is receiving are a bet on future growth. And the answers to that are not very encouraging. Consider this. Amazon despite being in the similar business, did not seem to make money for around two decades. This was when online shopping trends, infrastructural set up and regulatory landscape was relatively favorable for the company. Flipkart, though valued at US$ 7 bn, still remains a loss making entity. With current subscribers at 22 m, the management has stated that profitability is not the metric it is focusing on; at least until subscribers base grows around five fold. And reaching there will be quite a challenge. It will involve investing in warehouses, distribution networks or mobile technology platforms. And that too with a revenue model that involves cash on delivery, with return provisions. Until then, the firm will be using stakeholder's money to fund operating losses.

As such, Flipkart seems to be a success story written too early. While it does have the advantage of fastest growing market, the same comes with a challenge of tough competition. The next day announcement by Amazon to invest additional US$ 2 bn in India is a stern reminder of the same. With no significant competitive advantage, no assurance of customer loyalty, huge competition from experienced players like Amazon, Snapdeal, eBay etc, no significant entry barriers for players with deep pockets and expected price wars, scaling up from here will come with its own set of challenges. In fact, we will not be surprised if the market matures before the company tastes profits. And post that, for such firms, one can not ignore the huge risks to earnings. The recent penalty imposed on eBay by Google is a case in point. The same is expected to have cost the firm US$ 200 m in revenues, with a major impact on the earnings.

As a lot of shopping sites plan to get listed, investors must start questioning the business models of these online retailing firms. However, such challenges are not getting due importance it seems. Infact, with management's stake at 15%, the Flipkart founders are being compared with founders of Infosys. Both made a start without having the advantage of the initial capital and meaningful entrepreneurship took them ahead. Both had first mover advantage and entered at the right time in the market. However, the comparison ends here. Both the companies have different business models. And while that of Infosys is something to marvel at, with no profits to show, Flipkart is yet to prove itself. Further, what makes Infosys stand apart is the management ethics and sound corporate Governance. It is too early to judge Flipkart on that metric. In short, with lofty valuations and profits far from visible, while firms like Flipkart can be consumers' delight, they might be a potential trap for investors.

Do you think Flipkart deserves the lofty valuations that it is fetching currently? Let us know in the Equitymaster Club or share your comments below.

--- Advertisement ---
Your Key to "Striking it Rich" with Small Caps...

Today, we'd like to reveal a time-tested and proven method to truly Striking it Rich with Small Caps.

It's a method that we've developed after years of research and in-depth analysis...

And something that has already helped us pick out small caps like 1,811% in 5 years, 217% in 3 Years & 11 Months, 250% in 2 Years 1 month, we thought we should really bring this to your notice one more time.

Yes, it's a proven approach to picking Small Caps that hold the potential to make you really rich.

So, Don't Delay!

Click here for full details...
---------------------------

01:30  Chart of the day
 
Quantitative easing had led to huge liquidity flow in emerging markets particularly India. Post election verdict the flow of foreign money has increased all the more. So much so that it forms nearly 2/3rds of all investments made in Indian equities. Such influence of foreign money in share market in India is a sign of worry. For one, this money could easily be deemed as hot money. And it can flow out of India on slightest political uncertainty. This puts the Rupee at risk. And also causes undue volatility in stock markets. Secondly, if speculative foreign money continues to flow in search of higher returns into India, valuations could reach a bubble territory. One may witness a disconnect between fundamentals and stock prices.

As can be seen in today's chart, FIIs have about 49% institutional holding in Indian equities. Insurance companies stand second with about 20% share. However, what we need is increasing participation by insurance companies in the institutional category. Retail participation also needs to increase. Since insurance money is long term in nature, it can reduce volatility in markets. Secondly, increasing participation by retail investors will help them benefit from the India growth story. However, the latter can rise only if there is an increase in transparency and tighter regulatory controls.

Influence of FIIs in Indian stock markets is a sign of worry


02:30
 
Even as markets are making one high after another, retail investors seem in no mood to wait and watch. At least this is what the data suggests. If a leading daily is to be believed, investors have pulled out a total of Rs 600 bn from various mutual fund schemes in June. This move comes close on the heels of a staggering Rs 1,500 bn inflow during the preceding two months. So, what explains the sudden outflow immediately after putting in what seems like a huge sum? Well, the buoyancy in the markets we believe. With the indices rallying substantially and individual stocks even more so, investors seem to be in a hurry to encash the gains.

However, this is not the right attitude to have as far as we are concerned. Study after study has shown that the best possible way to make money in stocks is to invest from a long term perspective and not give in to near term greed or fear. Therefore investors will be better off if they heed this advice and let the magic of compounding do its work. Another mistake according to us is that of trying to time the markets. However, no one's been able to do this successfully over a long period of time. What matters at the end of the day is not timing the market but the total time spent in the market.

03:15
 
Jim Rogers is a man who we hold in high regard. His knowledge, experience, track record and reputation for straight talk make him stand out from the crowd. In an interview with Business Standard, he spoke about his views on India and the global markets. He does not believe that any country in the world can be considered truly safe for investors. Thus he remains cautious on the current geopolitical situation.

What does he think about India? Well, unlike many of his global colleagues, he has not turned bullish on India just yet! Instead he says that he is still waiting for the new government to implement some hard hitting reforms. According to Mr. Rogers, India must overcome a lot of internal issues before it can become an economic powerhouse. He has red flagged inflation, the government's debt burden, currency convertibility and the ease of doing business as well as India's poor bureaucracy. We could not have agreed more. These are crucial issues that must be addressed if India has to reach its true economic potential. The previous government did not listen to sane voices like Mr. Rogers. We hope our new government does not make the same mistake.

03:45
 
India Inc may be firing on all cylinders to put in place additional capacities to boost growth. However, for industries heavily dependent on natural resources, being flush with cash alone may not help. For these industries getting access to critical resources is a much bigger factor in planning expansions. The power sector has already borne the brunt of scarcity in coal. It now seems that the steel industry, dependant on iron ore, is set to be the next victim of poor mining policies in India.

The recent closure of mines in Odisha and delays in opening up of mines in Karnataka and Goa has resulted in acute shortage of iron ore. As per Mint, iron ore production in India fell by 34% in past 5 years. It came down from 218 million tonnes (mt) in FY10 to as low as 144mt in FY14. And unless India sustains exploration activity, new iron ore resources will not be found. As per major steel manufacturers, the country's effective iron ore will be expended by 2032-33. But even before that, we need continuous improvement in efficiency of iron ore mining and better allocation of captive mines. Without that, this may be yet another sector that may hold back India's infrastructure dreams.

04:22
 
When it comes to employment, India could have something to cheer about. As reported in an article in the Economic Times, employment in the last 8 years grew by an impressive 34% to 12.7 crore. In other words, it has grown at an annual rate of around 4% when the population has been growing at 2%. Of course, there are caveats and certain sectors have not been included such as agriculture, public administration, defence and compulsory social security services activities. The other data released is the number of establishments which are up by 41.7% over the same period. However, the employment per establishment has declined and this could probably be due to some of them doing away with labour intensive activities.

Even if the employment growth data looks healthy, India will have to make sure that it is able to sustain the same going forward. Indeed, one of the factors in the country's favour is that there will be a vast young population that has the potential to contribute to GDP. But that will only be possible if there are sufficient employment opportunities to absorb these people. Further, the government will also need to ensure that the people graduating from institutions have the right skill sets that align with the job requirements in the country. If these basic parameters are not met, then India's demographic dividend could turn out to be a big burden for the government.

04:45
 
In the meanwhile, the Indian stock markets slipped deeper into the red in the post noon trading session. At the time of writing, BSE-Sensex was trading lower by 95 points (-0.4%). Majority of the sectoral indices were trading in red with consumer durables and banking stocks being the major losers. oil and gas and metal were among the few stocks trading positive. Most of the Asian indices were trading in negative led by Taiwan and Japan. However, China and Singapore markets were trading positive. European markets opened the day on a weak note.

04:55  Today's investing mantra
"Behind every stock is a company. Find out what it's doing.." - Peter Lynch
Today's Premium Edition
When is a good time to book profits?
Can over valued markets be one of the reasons to sell your stock?
Read On...Get Access
Recent Articles:
Were You Lured By Mr Market's Bait?
August 23, 2017
Mr Market lured investors into believing they'd bitten into a crash. Did you take the bait?
Why Hasn't Warren Buffett Rung the Bell Yet?
August 22, 2017
It's surprising Warren Buffett hasn't warned investors about the expensive stock market? Let us know why.
How Unique Are the Companies You Invest In?
August 21, 2017
One of the hallmarks of successful investing is to look out for companies that have a unique and enduring moat.
You've Heard of Timeless Books... Ever Heard of Timeless Stocks?
August 19, 2017
Ever heard of Lindy Effect? Find out how you can use it to pick timeless stocks.

Equitymaster requests your view! Post a comment on "Can Flipkart be the next Infosys?". Click here!

13 Responses to "Can Flipkart be the next Infosys?"

CA ABHIRAJ RANAWAT

Aug 3, 2014

Let us first look, that in what way it is different from other retail concerns.Instead of investing in costly show rooms and sales personnel at show room the company will invest in web based technology integrating various warehouses, producers who are selling their goods through the company and millions of customers. It is marketed as technology company but the real business remains selling goods through E-Portals. The web technology is also equally costly and eve changing and needs constant change which comes at a huge capex. Once goods are identified on the portal, customer orders it and pay on delivery. This style works best for branded goods like laptops, mobiles and white line goods but can any one purchase clothes, garments, shoes or other such goods just looking at the picture on the portal. The customer here has an option to refuse to accept the goods. The personalised courier and other related distribution expenses will be thrown on dealer who has placed its goods for sale through portal. Under the situation how many dealers will really stuck to flipkart or amazon. They are not reducing the cost of doing business. Expenditure on technology, procurement (appointing dealers), marketing and then recovery and processing of transaction will be huge as company will constantly have to invest tons of money in engineers, management and marketing grads and distribution network which is going to be an upheaval task requiring constant dose of money and rounds and rounds of funding without profits being in site. The business is not exclusive as number of competitors and even the so called tech companies faces tremendous redundancy. I am not sure of the accounting practices followed by these companies. Expenditure incurred on staff for setting up of business is shown as capex in the balance sheet which will show false assets annd higher profit or lower the losses without any cash inflows. Good news for employment market as many people will get employment as is the case with any new company. Need to exercise caution while investing, focus on profitability and cashflow of the company instead of hue and cry created at the markets.

Like 

Sunil Doshi

Aug 1, 2014

Reg:MF Investments by Retail Investors:
I believe a better explanation would be:
The Investment of approx.1500 bn in preceding 2 months was by New Investors in hope of change in Future Prospects of Market.
The withdrawl of 600bn this month is by Old Investors who have waited for 4 years and feel the market has currently topped out.

Rgds,

Like 

avik

Aug 1, 2014

Nice informative article. I would also like to know whether flipkart can be compared to Facebook kind of companies. I think Facebook is surviving on a bubble for quite some time. Flipkart at least has something solid to show in terms of sale of real goods. It may still die out because of competition and/or lack of innovative business ideas.

Like 

Sankara Rao

Aug 1, 2014

The analysis on 5min.wrap up is very insightful with proper justifications. I certainly doubt the valuations of the company as there is no quality service rendered in Indian business.

Like (1)

Rajesh

Jul 31, 2014

Analysis about Flipkart is quite insightful and it is very timely to dispel the myths that are just about to cross the thresholds to get victimized

Like (1)

krishnaMurthy

Jul 31, 2014

I will put money in American market, because they are cheater number one in the world.

Like (1)

PRABAL BISWAS

Jul 31, 2014

Camera maker NIKON has stated that Flipcart is not authorized to sell its products. CANON is likely to follow suit.
What goes up too fast comes down with the same velocity. So lets hold on to our guns.

Regs

Like (1)

Sundaravaradan S

Jul 31, 2014

Hi,

I suggest that we need to rate the Progress of INDIA's growth, in ALL important KEY aspects, at least once a week.
(Inflation, Infrastructure, Deficit, GDP , Ease of Doing Business, etc.) Equity Master can give %-age rating, graphically, each week/Fortnight/Month)

Like (1)

kailash thakur

Jul 31, 2014

mr jim roger,s views on indian economy must be brought
to the knowledge of indian prime minister,finance minister,foreign minister,commerce minister,elite,intellectuals,political analysts,economists,thinkers so as to modify our economic policies in such a manner so as to save our economy from any devastation.we must plan & live within ourselves.we must rely upon oursenves rather than unusual faith on foreigner investors as bliss.
kaiash thakur,bhagalpur,bihar

Like (1)

H K Prakash

Jul 31, 2014

Repeat of 2000 IT boom/ crash? Smart promoters cashing in while the NiagraM effect is there on the stock/ debt market?
Amazon is not the only competitor, there are snapdeal, ebay india and any other who cares to enter like Birlas. Easy to enter, no high technology involved = commodity pricing. Flipkart will be lucky if it just pays for kharcha out of earnings even 5 years down the line

Like (1)
Equitymaster requests your view! Post a comment on "Can Flipkart be the next Infosys?". Click here!

MOST POPULAR | ARCHIVES | TELL YOUR FRIENDS ABOUT THE 5 MINUTE WRAPUP | WRITE TO US

Copyright © Equitymaster Agora Research Private Limited. All rights reserved.

Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement

Disclosure & Disclaimer: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. The Author does not hold any shares in the company/ies discussed in this document. Equitymaster may hold shares in the company/ies discussed in this document under any of its other services.

This document is confidential and is supplied to you for information purposes only. It should not (directly or indirectly) be reproduced, further distributed to any person or published, in whole or in part, for any purpose whatsoever, without the consent of Equitymaster.

This document is not directed to, or intended for display, downloading, printing, reproducing or for distribution to or use by, any person or entity, who is a citizen or resident or located in any locality, state, country or other jurisdiction, where such distribution, publication, reproduction, availability or use would be contrary to law or regulation or what would subject Equitymaster or its affiliates to any registration or licensing requirement within such jurisdiction. If this document is sent or has reached any individual in such country, especially, USA, the same may be ignored.

This document does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Our research recommendations are general in nature and available electronically to all kind of subscribers irrespective of subscribers' investment objectives and financial situation/risk profile. Before acting on any recommendation in this document, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek professional advice. The price and value of the securities referred to in this material and the income from them may go down as well as up, and subscribers may realize losses on any investments. Past performance is not a guide for future performance, future returns are not guaranteed and a loss of original capital may occur. Information herein is believed to be reliable but Equitymaster and its affiliates do not warrant its completeness or accuracy. The views/opinions expressed are our current opinions as of the date appearing in the material and may be subject to change from time to time without notice. This document should not be construed as an offer to sell or solicitation of an offer to buy any security or asset in any jurisdiction. Equitymaster and its affiliates, its directors, analyst and employees will not be responsible for any loss or liability incurred to any person as a consequence of his or any other person on his behalf taking any decisions based on this document.

As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407