Flipkart is reportedly all set to raise debt for the first time in near future by selling Rupee bonds worth Rs 3,000 crore. However, the plan is still in a draft stage for now. Additionally, last week there was a news of the company raising $550 million at a valuation of $16 billion and sources indicated that post this round it would be going for debt funding.
According to ET, Flipkart’s business model, which involves discounting to gain market share, and burning through cash, may lead investors to demand a steep interest rate as high as 16% a year if Rupee bonds are issued.
The Indian eRetail sector which is expected to be worth $50 billion, is run by the principal of ‘heavy discounting, for market dominance’ religiously followed by Flipkart and all its competitors such as Snapdeal and Amazon.
Debt financing will present a major challenge of generating and maintaining a considerable cash flow for Flipkart, as the bonds are paid back by cash, not in equity (which was the fundraising model till now)
It would be interesting to see how Flipkart manages to raise revenue in an industry run by discounts and cashburns; if it goes for an IPO soon then some respite might come.