Walmart faces geographical, regulatory risks in India

The Walmart-Flipkart deal may be a compelling story but it's not without a flipside.

Some measure of that flipside could be read in the scepticism with which Wall Street greeted the news of the M&A between the two retail giants on Wednesday. The US retail behemoth's shares tumbled over 4% on the deal announcement.

Vivek Mansingh, general partner, YourNest Capital Advisors Private Ltd, told DNA Money that while there were many positives in the deal, it had also built into it some geographical risks.

"Whenever, there is a large acquisition with some perceived risk by a large company – and of course there is risk in all business – shares of that company goes down. Having said that, in this deal there is a risk of a new geography (India). There is such a large exposure (of $16 billion). Then, there is the risk of (Walmart) acquiring an ecommerce company, which is so large, for the first time. They (Walmart) are a brick-and-mortal company, by and large. They do not have much online presence," he said.

Meanwhile, Walmart tried to assuage concerns around its takeover of Flipkart, saying the deal is good for the country. While helping create millions of jobs over time it will also assist the economy through local sourcing of goods by the company.

Walmart chief executive Doug McMillon said, "It is pretty clear that this (deal) is good for customers and would create jobs and help society." He also saw 'no trouble' in getting regulatory approval needed from the Competition Commission of India (CCI) for the deal to buy 77% stake in Flipkart.

Mansingh said that India could be perceived as a challenge on taxation front; "With India, people are always concerned about taxation, retrospective taxation and other such issues. All of these may have culminated into concerns in the minds of investors (on Wall Street). And they are just concerns, we should not read too much into it".

Walmart said will it comply with any tax demand arising from its purchase of a stake in India's e-commerce leader. The company is working with all of the investors to ensure they are more compliant. "Our intent is, whether looking backwards related to our acquisition here or looking forward, we will be compliant with whatever the tax rules are," said McMillon.

Anil Talreja, partner, Deloitte India, also feels that when it comes to India, uncertain regulatory and political environment hound investors.

"We all know that there are good amount of challenges (in India); whether it is regulatory challenges or political issues. There are enough challenges but its large market is a huge attraction for any investor," he said.

One fear that is upper-most in investors' mind is that as Walmart scales up its acquired Indian ecommerce firm, there would be losses. Talreja said that any player foraying into the domestic market is well aware that India was a volume game and so would go for scale.

"Indian market is fairly attractive. It has got a huge potential and good mix of a consumers with an age profile that is very attractive. India plays on volumes, and it's a massive volume game," he said.

A presentation by Walmart-Flipkart investors shows that there were 443 million millennials along with 393 million generation Z or 66% of the population that could be taken as potential consumers of Walmart-Flipkart services.

It showed that e-commerce could see a huge surge in growth with 35% of population using internet and smartphone penetration expected to reach 58% by 2020 from 30% in 2017.

Arjun Zacharia, CEO at start-up online store Wooplr, said that by acquiring a well-established ecommerce firm, Walmart had gotten rid of many of its challenges that could have come due to entering a new market.

"They (Walmart) have done a smart thing. It would have been difficult for them to come in a new market and understand it to build such a huge online ecommerce platform. For that, they would have to understand the Indian market and the nuances of the Indian consumers, which to a large extent Flipkart has experience about," he said.

However, Zacharia felt it would take some time for the leadership of Walmart to understand how the Indian system works; "They (Walmart leadership) would have decipher how the processes worked here (India). How different it was. It is more about understanding the way businesses work in India versus the way it works in the US. Its basically that we work in a different way and you work in a different way, so how do we get down to working together for a common goal? This is a short term challenge," he said.

According to him, countering early entrant Amazon's might in the Indian market would also be a task for Walmart.

"Amazon is definitely a challenge in India (for Walmart). It's about how Walmart combines itself with Flipkart to counter Amazon. I'm sure, they are not going to be complacent with this acquisition. They are acquiring it to ensure that they are able to build on it. They would like to be a dominant player in the Indian market," said Zacharia.

And as the US retail MNC does that, it would invest out of its balance sheet to build scale in India.

"They are making money in other geographies, which they can pump in here," he said. Probably, it could have been this eventuality that could have spooked the Wall Street investors on Wednesday.

And infusing funds into Indian market will become imperative for Walmart as it tries to penetrate from Tier-I and Tier-II cities to hinterland and as it grows its market from around 60 million to 200-300 million market.