Amazon India and Flipkart are likely to see higher losses due to the fall in sales and increased compliance costs in the aftermath of the updated FDI policy for online marketplaces, according to analyst reports from Morgan Stanley.
While the losses for Amazon may double in three years, Walmart could see an incremental loss of $280 million from Flipkart — where the US retail giant acquired 77% last year — by year-end on top of the projected $1.5 billion.
This comes just as Amazon was able to curb losses in its international unit, where India contributes significantly, from a little over $3 billion in 2017 to $2.1 billion in 2018. But a note by Morgan Stanley MD Brian Nowak, reviewed by TOI, said new regulations could lead Amazon to a wider long-term loss.
“We are paying attention to the long-term impacts of this law (new FDI clarifications) which, in our view, is likely to lead to increased Amazon India investment and larger losses from restructuring its business operations…..We would also expect this to lead to higher long-term competition as this law should make it easier for other India-based companies to build and compete in e-commerce,” it added, predicting Amazon’s international business losses could swell to around $4 billion in the next three years.
Read: Morgan Stanley warns Walmart may exit Flipkart post new FDI rules
New York-based investment bank and financial services major JP Morgan has also said that Amazon’s total India revenue would be cut abruptly to about $5.3 billion at the end of March 2020 due to the new policy against the original estimate of $7.3 billion.
In a separate note, Morgan Stanley also said that if Flipkart is forced to remove 25% of products, it may cause a 40% slowdown in revenues. Adding compliance costs, it will lead to an incremental $280 million in Flipkart losses on top of a guidance of about $1.5 billion for 2019, causing a negative 1.3-1.5% impact on Walmart’s 2019 ebit/EPS. For context, both Amazon and Flipkart together reported losses of over Rs 9,500 crore at the end of March 2018. This includes their marketplace as well as wholesale arms.
The new policy puts a series of curbs on how both Amazon India and Flipkart operate — restricting discounts, no ownership in sellers on the marketplace platform, and disallowing exclusive product launches — forcing them to restructure operations and take a hit on sales. Among global investors, there is scepticism that the FDI rules hitting India business could impact the March quarter sales for Amazon, the note by Morgan Stanley said.
The JP Morgan report added that gross sales for Amazon, which were estimated at $15 billion as of March 2020, would fall short significantly at $10.8 billion. It estimates a similar gross sale target for Amazon India in March 2019. Morgan Stanley estimates that Flipkart holds about 48% market share, which could change under the new rules as it is easier for competitors to enter the market now. A drop in market share could also reflect in slower gross sales.
Domestic industry experts added companies like Amazon and Flipkart are trying to adapt to new guidelines but it could still take some time before normalcy is restored. Legal experts have also told TOI that creating new seller firms or working with a new set of existing but smaller sellers creates “operational inefficiency” and also delays delivery timelines. Amazon has already seen about half a dozen new sellers gaining prominence on the marketplace.
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