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How Important is India to Walmart's (WMT) Future?

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Quartz India reported on Monday about protests taking place across India in response to Walmart’s (WMT - Free Report) $16 billion takeover of e-commerce giant Flipkart. Up to a million shopkeepers were expected to protest the takeover over concerns that the buyout will create a monopoly in the retail market and drive small mom-and-pop stores out of business. However, in an update on Tuesday, reports stated that fewer than 100 people would go on to show up to a protest in New Delhi, India’s capital city.

As it stands, up to 90% of the nation’s $670 billion market transactions take place through small businesses, and protestors do not want that to change. Flipkart, which holds a third of the e-commerce market share in India, has been in direct competition with Amazon India (AMZN - Free Report) , which is right behind it, with about 30% of the market share. Walmart, which has not been able to grab a significant foothold in region, is instead leveraging Flipkart to build its presence.

Walmart is recognized as one of the giants in American retail, but how important could India be to the firm’s operations in the future? Let’s take a look.

By the Numbers

Walmart had a solid Q1 FY19 earnings report in mid-May, posting earnings of $1.14 per share on revenues of $122.7 billion, representing 14% and 4.4% respective year-over-year growth. US net sales rose 3.1% to $77.7 billion while international sales went up by 11.7% to $30.3 billion. Specifically, eight out of its overall eleven markets delivered favorable comps, four of which are in its largest markets.

One of the big highlights however was Walmart’s e-commerce growth over the quarter. Sales jumped 33% compared to a 23% boost from the previous quarter. This improvement was mainly guided by strength in Walmart.com and online grocery. Forward looking management remains optimistic about achieving 40% growth in FY2019.

As part of the deal, both Walmart and Flipkart will continue to operate as distinct brands. However, Flipkart’s financials will become part of Walmart’s international segment following the conclusion of the transaction. It is also worth noting that Walmart’s purchase includes a $2 billion investment into the firm, which is expected to help propel growth.

According to a report by the Economic Times, Flipkart posted revenues of $3.09 billion in FY 2017, representing a 29% year-over-year increase.         At the same time, it posted an overall loss of $1.3 billion, representing a 68% increase from FY16. This was however mainly guided by a five-fold increase in finance costs due to the company’s degraded valuation of $11.6 billion in April 2017 compared to $15.2 billion in 2015.

Flipkart is not the only firm feeling the pain, as Amazon also saw a loss of $2.1 billion in its international segments in FY17. Part of the reason why these big firms are not yet turning a profit in India is because the online retail market in the region is not yet mature. Furthermore, FDI policies make it so that firms must bring more sellers on board and reduce the share of revenue made by in-house vendors.

Outlook

All things considered, Walmart’s investment in Flipkart is based on the enormous amount of promise that the region shows. According to a report by the India Brand Equity Foundation, a trust established by its Department of Commerce, the nation’s e-commerce industry is expected to surpass the US to become the second largest e-commerce market in the world by 2034. The market is projected to approach $64 billion in value by 2020 and $200 billion by 2026 compared to $38.5 billion in 2017.

Estimates are guided by projections on the number of internet users in India growing from 429.2 million people as of September 2017 to 829 million by 2021. Digital literacy in the region is growing, and the nation’s population is quite young overall. The expectation is that as the rate of smartphone adoption increases, e-commerce will continue to surge.

These numbers are promising for Walmart, which is up 12.4% over the last 12 months compared to a 25.3% industry average. With as large as it has become in the US, new revenue streams will characterize its growth in the future. India is both a young and large market that could potentially become the next big catalyst for the firm.

Walmart currently sits at a Zacks Rank #3 (Hold).

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