Morgan Stanley: Why The Reported Amazon, Walmart Talks With India's Flipkart Make Sense

Two U.S. retail behemoths, namely Walmart Inc WMT and Amazon.com, Inc. AMZN, have launched a bidding war for a controlling stake in India's hugely successful e-commerce company Flipkart, according to Bloomberg.

The two companies have valued Flipkart at $20 billion, and Walmart is ahead in the race, the report said.

The Analyst

Morgan Stanley analyst Brian Nowak maintained an Overweight rating and $1,500 price target on Amazon. For Walmart, Morgan Stanley maintained an Equal-weight rating with a $99 price target.

The Thesis

India presents the largest greenfield opportunity — with an estimated $200 billion online retail total addressable market in 2027 — as online penetration increases from less than 3 percent of the retail spend in 2017 to 12 percent in the next 10 years, Nowak said in a Thursday morning note. (See the analyst's track record here.)

The analyst estimates that India accounts for a material portion of the "other" international retail business for Amazon, which is likely to drive 30 percent of total revenue growth over the next three years.

Flipkart has a 57-percent share of the budding $15-billion Indian e-commerce market versus Amazon's 30-percent share, Nowak said.

Amazon's interest in Flipkart is due to the logic that the potential buy would eliminate competition or engender a more rational environment, he said.

"It could also enable Amazon to scale its budding logistics network faster and more profitably."

Walmart has been vociferous about its intent to gain a strong foothold in the Indian e-commerce market due to the growth opportunity, according to Morgan Stanley. The discount retailer may be keen on building an e-commerce presence in India, according to the firm.

Walmart is well-penetrated in China, with over 400 stores and a 12-percent investment in Chinese e-commerce retailer JD.Com Inc(ADR) JD, Nowak said.

Walmart has been earmarking India as a focus area over the last one to two years, he said.

A partnership with Flipkart could mean Walmart is going on the offense in establishing itself in India, the analyst said.