Flipkart, the nation's biggest online retailer valued at more than $16 billion, may raise debt for the first time by selling rupee bonds for as much as Rs 3,000 crore.
The plan is still a draft, said three people familiar with the company's thinking. Bond investors may not be as generous as equity investors to a company that's unlikely to turn a profit in the next few years, some analysts said.
The 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, said those cited above.
"It is at a preliminary stage," said one of those cited above. "Equity investors have an upside when it lists or when the fad keeps boosting its valuations. But there is nothing in that valuation for a bond investor.
So, given the financials, it may only be the wealthy investors who would take a bet, and many institutional investors can't even look at buying, given the credit profile." Given that a pure debt security will make the borrowing cost high, bankers may suggest a convertible bond issue with an equity component, the people cited said.
Flipkart did not respond to an email seeking comment. The Bengaluru-based company raised $1.9 billion last year in three rounds, giving itself firepower as it battles Soft-Bank-backed Snapdeal and USbased Amazon for dominance in an online retail market that will be worth $50 billion by 2020, according to UBS. Online retail in India has been characterised by discounting to win customers amid high cashburn rates and heavy losses.
"Conventional debt financing may be a challenge for a startup venture as they do not have any tangible security or free cash flow to offer," said Nishesh Dalal, partner at KPMG. "They may look at hybrid structured debt with an equity kicker or backend repayment options built in."
Indian online retailers such as Flipkart and Snapdeal must collectively raise $20 billion (Rs 1.27 lakh crore) in the next five years to be able to sustain growth, investment bank Goldman Sachs has estimated.
Although international investors may be willing to lend at a lower rate if the company opts for a dollar bond issue, its financials may not be good enough to secure Reserve Bank of India approval.
"Startups, or people raising funds for the first time, will need approvals from RBI under the Foreign Exchange Management Act," said Ashutosh Khajuriah, head of treasury at Federal Bank. "A company raising funds from overseas should have the capacity to repay." RBI said it will allow companies to raise funds from overseas investors by issuing rupee-denominated bonds in April. Some companies, including Indian Railways Finance Corp., plan to use this route to raise money.
Flipkart is planning to raise $550 million or Rs 3,500 crore from private equity investors. Last week, ET had reported that Tiger Global, the largest investor in India's top online marketplace, is leading the round with $100 million.