Walmart Q4: Flipkart’s Positive Contribution Margin Expanding, PhonePe Demerger Costs Dearly

It was a mixed fourth quarter (Q4) for Walmart’s operations in India as ecommerce arm Flipkart expanded its positive contribution margin but the demerger of its digital payments subsidiary PhonePe dragged down the numbers. 

In its Q4 earnings call, Walmart’s top executives said that Flipkart was fueling the retail major’s gross merchandise volume (GMV) and revenue growth. 

“In India, Flipkart continued its strong momentum through Diwali and other seasonal events. We are particularly pleased to see Flipkart’s positive contribution margin expanding… A lot of our GMV growth, a lot of our revenue growth is coming from, in particular, Flipkart. We see great progress over there… we’re in (a) much better position right now with respect to some of the investments that we’ve made historically,” said Walmart CFO John David Rainey.

Noting that Flipkart invested heavily in infrastructure over the past three years, Rainey said that the ecommerce giant was now reaping the benefits of this infrastructure that could be scaled at a low marginal cost. He attributed the expanding contribution profit to this, adding that the retail giant was excited about the development. 

A positive contribution margin refers to the product, sold at a price, being able to generate contributions after deduction related to fixed costs. 

Walmart said that it had a good fourth quarter in India, largely on account of ‘successful festive events’. However, Walmart’s overall Q4 year-on-year (YoY) comparisons were negatively impacted on account of Flipkart’s Big Billion Days scheduled in Q3 this year, as against Q4 last year. 

The PhonePe Bummer 

Talking about PhonePe, Rainey said that the digital payments giant processed an annualised total payments volume (TPV) of more than $950 Bn in Q4, up nearly 50% compared to the year-ago period. PhonePe, as per Walmart, aso logged more than 4 Bn monthly transactions

Senior Walmart officials also touched upon the recent separation of PhonePe from Flipkart. 

“To me this (separation) is very analogous to eBay and PayPal. Each of them can operate independently and pursue their own initiatives. They don’t necessarily need to be tied together. This is an opportunity to unlock and realise more value independently,” Rainey said.

Overall, Walmart International’s operating income plummeted 65.3% YoY in Q4, primarily on account of the separation of Flipkart and PhonePe. In absolute numbers, operating income for the quarter ended December 2022 fell to $300 Mn from $800 Mn in the December 2021 quarter. 

In December 2022, Flipkart hived off the digital payments platform as a separate entity in a deal which involved existing shareholders of Flipkart Singapore and PhonePe Singapore purchasing shares directly in PhonePe India. 

The aftermath was said to have created a tax liability of upwards of $1 Bn. At an event last month, CEO Sameer Nigam said that its investors had to pay a whopping INR 8,000 Cr in taxes to shift base to India.

Last month, PhonePe raised $350 Mn in funding from General Atlantic, Qatar Investment Authority, and other investors at a valuation of well over $12 Bn, pushing it into the decacorn club. Afterwards, the company also raised $100 Mn in capital from Ribbit Capital, Tiger Global and TVS Capital Funds.

Competing with Google Pay and Paytm, PhonePe is the country’s biggest digital payments platform, both in terms of transaction count and volume. However, the decacorn continues to be bogged down by losses. 

The fintech major recorded a net loss of INR 2,013.7 Cr in FY22 and consolidated revenue of INR 1,692.7 Cr in the fiscal year 2021-22.