Flipkart valuation downgrade by Morgan Stanley might actually be good for Flipkart

It will now be a return to realism for e-commerce…

The recent decision of Morgan Stanley to write down its investment in Flipkart pegs the market value of Flipkart at $5.5 billion. That is substantially lower than the valuation of $12 billion that the company had received a couple of years ago. What does this downgrade mean?

Eyeballs to Revenues to profits…

The big Flipkart story was based on its ability to get substantially higher eyeballs compared to competition. To the credit of Flipkart, they did manage to convert these eyeballs into higher revenues. Of course, the company is yet to report net profits, but that is expected in this line of business. Even Amazon was constantly into losses as it built up its online retail franchise. The good news is that in terms of revenues and average size of business, Flipkart still remains the predominant player in the e-commerce arena.

Pressure of competition…

What has, perhaps, queered the pitch for Flipkart is the rising competition coming from other e-commerce companies! While Snapdeal has emerged as a veritable domestic competitor, it is actually Amazon India which is giving Flipkart a run for its money. That is hardly surprising. Amazon has a market track record of 20 years and it has managed to consistently reward its shareholders. Also, Amazon is in a position to buy future sales and growth by investing heavily in disintermediation as well as in front-end logistics. That has intensified competition within the e-commerce space and the fight for volumes and value is only going to get tougher in the next few months.

What is the big proposition?

The big risk that Flipkart runs today is that it could end up becoming just another e-commerce proposition. Amazon has managed to differentiate itself with its innovative product portfolio. Amazon invented online selling, online reading, the Kindle, the Cloud and even commercial application of drones. That has resulted in Amazon getting premium valuations in the market despite its profits not keeping pace with sales. Flipkart surely needs to do some serious soul-searching here.

It will be good for Flipkart!

In the final analysis, this downgrade may actually be good for Flipkart. It needs to be remembered that they have surely built up a solid customer franchise over the last few years. They need to look beyond just price and valuations and seriously explore how to add value to their customer experience and how to offer more options for e-commerce to their customers. That is what will see them through. Flipkart has been in the right place at the right time. Now it is time to consolidate!

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