Flipkart to acquire a 7.8% stake in Aditya Birla Fashion. How is this deal going to redesign the future of Indian retail?

Flipkart and Aditya Birla Fashion entered into a strategic partnership aimed at enhancing the consumer fashion experience.

The Walmart-owned e-commerce company, Flipkart in a move to strengthen its presence in the apparel fashion segment will acquire a 7.8 percent stake in Aditya Birla Fashion & Retail Limited (ABFRL) for Rs. 1,500 crores ($203.78 million). According to the reports, ABFRL said that the equity capital will be raised at Rs. 205 per share. The promoters will be left with a respectable number of 55.13 percent stake in the company after the completion of the deal.

This deal between Flipkart and ABFRL is being considered as a second big deal in two months in the domestic retail market. Earlier in August, Reliance Industries’ unit Reliance Retail Ventures acquired retail and wholesale business and the logistics and warehousing business from the Kishor Biyani-promoted Future Group as going concerns for an amount of Rs 24,713 crore. 

The move is seen as a part of the larger trend of consolidation of the e-commerce and offline sales channels, witnessed post the outbreak of the pandemic. Even though e-commerce only constitutes around 5 percent of the retail business in India, the growth of online marketplaces has accelerated due to the arrival of the pandemic.

Kumar Mangalam Birla, Chairman Aditya Birla Group said, “This partnership is an emphatic endorsement of the growth potential of India. It also reflects our strong conviction in the future of the apparel industry in India, which is poised to touch $100 billion in the next 5 years.”

Aditya Birla Fashion & Retail Limited

Aditya Birla Fashion & Retail Limited (ABFRL) is an Indian clothing retail chain, headquartered in Mumbai. ABFRL emerged after the consolidation of two branded apparel businesses: Pantaloons Fashion and Retail (PFRL) and Madura Fashion & Lifestyle (MFL). The company apart from Pantaloons also runs brands like Allen Solly, Peter England, Louis Philipe, Forever 21, Ted Baker, Ralph Lauren, and Van Heusen. 

The company has more than 3,031 brand stores in around 750 cities all across the country with the presence of 35 million loyal customers.

What advantages Aditya Birla Group is likely to gain from the deal?

Aditya Birla Fashion & Retail Limited (ABFRL) and e-commerce giant Flipkart entered into an agreement that would see the latter infuse Rs. 1,500 crores into the company for a 7.8 percent stake. As per the reports, the deal will result in Aditya Birla Fashion “aggressively accelerating” its omnichannel strategy through which it will expand the reach of its portfolio brands.

COVID has forced ABFRL to relook at their business strategies. It is believed that engaging with e-commerce platforms will make them less vulnerable during these difficult times and will also help them save rental and other asset-heavy costs. Instead of fighting against the growing prominence of online retail, ABFRL found it more appealing to join hands with Flipkart in order to gain profit with the collaboration.

Also, Flipkart’s investment will enable Aditya Birla Group to understand the technological functioning and know-how of online retailing through its various platforms like digital money app PhonePe, Google Pay, and e-commerce platforms Flipkart and Myntra. According to sector experts, such engagements, help companies like Aditya Birla particularly to understand the transformation from physical to online stores.

What is Flipkart going to gain?

Flipkart through this deal will benefit by strengthening the range of brands offered on its e-commerce platform including Myntra. According to Flipkart, getting international and domestic brands associated with ABFRL on its platforms will attract more customers to the company.

For Flipkart, the deal also means to have a strong offline partner in Aditya Birla Group to raise the stakes in its battle with Amazon, which had invested in Future Group last year. 

With this deal, it is believed there is a chance of Flipkart increasing their stake in ABFRL in the future. Flipkart cracked this deal at Rs. 205 per share. The e-commerce platform gained the deal at a discount as ABFRL was trading above Rs. 250 during February 2020 but later due to COVID-19, the company’s share tumbled to Rs. 102 in May.

However, Flipkart is paying more than the current market price of the stock which implies that Flipkart gets pre-emptive rights, or the right to buy additional shares from ABFRL before the general public for a period of 1-5 years that allows the online platform to increase their stake in the company in near future.

COVID-19 played a major role in the deal:

The business of manufacturing and retailing of branded apparel suffered massively during the lockdown. Aditya Birla Fashion & Retail reported a revenue of Rs. 323 crore in Q1FY20. This was 85 percent below Rs. 2,065 crore they reported in the same quarter the previous year. The company reported a net loss of Rs 410 crore as compared to Rs. 21 crore profits they declared in June 2019. 

As the lockdowns are getting eased, with the arrival of festivals Navaratri, and Dussehra, people are returning to the shops for purchasing. Even though the company has reported disappointing first-quarter results, the revenue of the company is expected to bounce back in Q3. With Indian festivals just around the corner, the company is highly optimistic about its sales and return of its customers.

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