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Walmart may Dump Flipkart Stake, Warns Morgan Stanley

Investment banking giant Morgan Stanley has warned that retail behemoth Walmart may be forced to stage an untimely exit from Flipkart due to the new FDI norms that came into effect from last week. Morgan Stanley argued in its latest report titled ‘Assessing Flipkart Risk to Walmart EPS’ that the new FDI rules cast serious doubts over long term profitability, leaving no options for Walmart but to make an unceremonious exit.

Morgan Stanley warns Walmart may be forced to dump Flipkart stake

The reported cited Amazon’s retreat from China in 2017 after it failed to foresee any profitable model, indicating that Walmart may also be forced to chart on the same path. The report claims that the U.S. retail behemoth’s chances of walking on the same undesirable path has expedited significantly since the new FDI rules will probably have an adversarial impact on some its lucrative categories – mainly electronics and smartphones.

“We estimate that Flipkart derives 50% of its revenue from this category, meaning Flipkart could face meaningful disruption and top-line pressure in the near term,” the report said.

The report’s observation is partly based on the historical fact that traditionally Flipkart’s sales and revenue have been largely driven by robust sales of smartphone and electronic products.

However, according to Economic Times (ET), Walmart has ruled out any premature exit from Flipkart in the wake of new FDI regulations. A Walmart’s spokesperson told ET that the company continues to remain optimistic despite the tough new rules, claiming that the Indian e-commerce sector is still abound with lot of growth opportunities.

Meanwhile, there is little doubt that the new FDI rule has ruffled the feathers of Amazon and Walmart owned Flipkart – two of the most dominant players of India’s e-commerce industry. Since the FDI norms that came into effect from last week, both companies have reportedly witnessed a sharp drop of nearly 25%-30% in their sales.

Amazon and Flipkart have been barred from several preferential and concessional rules by the new FDI rules. For instance, they can no longer allow their subsidiary companies to be a dominant sales partner on their platform. Nor they can be discriminatory in implementing cashback schemes on the products.

These and several other rules coming under the purview of new FDI norms has meant that the two biggies can no longer take unfair advantages of the loopholes in the e-commerce sector. As several experts have claimed, Amazon and Flipkart will now have to get adjusted to the level playing field. But does this means that days of steep discounts is now over for the e-commerce buyers. Although it may be little premature, many analysts have hinted that this indeed seems to be the case.

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