HYDERABAD: Walmart's acquisition of 77 per cent stake in Flipkart is "credit positive" for the US retail giant, though the Indian e-commerce firm is expected to continue to make losses for the next few years, said rating agency Moody's in its Credit Outlook report issued today.
On May 9, Walmart Inc said it is buying a 77 per cent stake in Indian e-commerce retailer Flipkart for about USD 16 billion, but it is yet to disclose financing plans.
Moody's said it expects the deal to initially weaken Walmart's credit metrics, with retained cash flow (RCF) to net debt ratio likely dropping to the low-30 per cent range from 40 per cent currently and debt to EBITDA (earnings before interest, tax, depreciation and amortisation) ratio likely to double from 1.6 times currently.
"Despite this deterioration, the acquisition is credit positive because it provides immediate scale in India's burgeoning retail e-commerce sector and we expect that a combination of increased cash flow and debt reduction will push the RCF/net debt ratio back above our 35 per cent."
"Although we expect that Flipkart will continue to generate losses for the next few years, our credit-positive view is based on India's compelling features, including its 1.2 billion residents and an economy that generates more than 7 per cent annual GDP growth," Moody's said.
India has more than 400 million millennials, a growing middle class and exploding smartphone penetration, all of which are critical as shopping continues to shift online, the rating agency said, adding "Following the announcement, we affirmed Walmart's Aa2 rating and stable outlook."
"As Flipkart is expected to generate meaningful losses for at least the next few years, this is clearly an investment for the future," Moody's Vice President Charlie O'Shea had said.
Walmart has been embracing a more acquisitive approach to ramping up online growth, rather than attempting to do so organically, given the importance of rapidly building scale as other fast-growing online competitors such as amazon RPT amazon keep expanding.
In August 2016, Walmart acquired US-based Jet.com for about USD 3.3 billion, Moody's said.