Flipkart deal set to hit Walmart's earnings

In order to finance its buy of 77% stake in Flipkart, the retail giant Walmart is planning to raise investment with a combination of newly issued debt and cash on hand. It might dent the EPS of the company by almost 18.3%.

The company's cash reserves stand at $6.8 billion, according to its latest SEC filling. According to rough estimates by analysts, cash to debt ratio for financing the deal will go to as high as 1:7.

Walmart also seems to be aware of the amount the company is shelling out to buy the India's homegrown ecommerce giant Flipkart. In fact, Walmart has lowered its earning estimates, in wake of this multi-billion dollar investment.

Assuming the transaction closes at the end of the August, Walmart expects a negative impact to FY19 earning per share (EPS) of approximately $0.25 to $0.30, which, according to them, "includes incremental interest expense related to the investment".

This would mean a dent of 6-9% in the company's EPS, that stood at $3.28 per share for FY 2018.

The fiscal year of the Walmart starts from February and ends in January.

In FY20, as the company looks to accelerate growth in Indian market, it anticipates an EPS headwind in total of around $0.60 per share. It comprises of operating losses of approximately $0.40 to $0.45 per share, assuming minimal tax benefit for the losses in the near to mid term. The amount also includes about $0.05 per share related to amortisation of intangible assets and depreciation of short lived assets resulting from purchase accounting, which will only last for a few years post-closing. It also interest expense of approximately $0.15 per share.

In just one-and-a-half years, after culminating this deal, the EPS of the company might get hit by almost 18.3%, owing to the costs arising out of this mega deal.

However, Flipkart’s financials will be reported as part of Walmart’s International business segment. This can prompt up the company's revenues.

In the fiscal year ended March 31, Flipkart recorded a gross merchandise value (GMV) of $7.5 billion, effectively meaning that goods worth $7.5 billion were traded through its site involving thousands of sellers and millions of buyers. It recorded net sales of $4.6 billion during the year, representing more than 50% growth in both cases.

Flipkart, as of date with $4.6 billion net sales, comprises only 1% of net sales of Walmart, as latter's net sales stood at $495.8 billion for the year closed on January 31, 2018.