Japanese telecom and technology giant SoftBank Group Corp. posted a 49.2% jump in its first-quarter operating profit fuelled by its stake sale in India’s largest e-commerce company, Flipkart. The exit from Flipkart, which was acquired by U.S. retail giant Walmart in May, is the first public divestment by SoftBank’s Vision Fund, which has a corpus of $100 billion.
SoftBank’s profit for the quarter of April to June stood at 715 billion yen (or nearly $6.42 billion) compared with 479 billion yen (or nearly $4.3 billion) a year ago, the company reported on Monday. Softbank said its operating income was boosted by a valuation gain of 244.9 billion yen ($2.2 billion) at Vision Fund; a valuation gain of 164.3 billion yen ($1.5 billion) was recorded for Flipkart based on the expected sales price, following the sales agreement.
In May, US retail giant Walmart acquired a 77% stake for $16 billion, making it the largest cross border M&A deal involving an Indian business and the largest foreign direct investment in the country. SoftBank held nearly 21% stake in Flipkart and had invested $2.5 billion in it through its Vision Fund. With a valuation gain of $1.5 billion on the Flipkart investment, as cited by the company on Monday, SoftBank stands to make 60% returns on the investment.
“The company estimates that the sale of Flipkart shares will occur within 24 months of the inception of the investment and has calculated the deferred tax at 43.68%, being the Indian short-term capital gains tax rate expected to apply to the sale of Flipkart shares,” the company said on Monday.
Besides Flipkart stake sale, the company’s profit was also boosted by the sale of its majority stake in chip designer ARM Holding’s Chinese operations to a group of local investors.
SoftBank’s profitable exit from Flipkart is definitely much needed good news for the Indian investment ecosystem. While a lot of capital has been invested in India in startups, and growth- and late-stage firms by venture capital and private equity firms, the Indian market has not offered exits and returns expected from it. According to several estimates almost 70% of capital invested has not given returns so far. In 2017 alone, private equity and venture capital investors invested nearly $26 billion in the country, the highest in a decade.
SoftBank, in the meantime, has been betting big on India and is the biggest investor in the consumer internet space. Since 2014, SoftBank has invested over $7 billion in India in high-growth startups in e-commerce, ride-hailing apps, budget hotel aggregation and asset managing, grocery delivery services, and payment platforms, among others. In the last one year alone, it invested an eye-popping $4.3 billion in diverse companies including the likes of Ola, Flipkart, and Paytm. India is home to 10 unicorns— startups valued at $1 billion. SoftBank has invested in half of them: Ola, Flipkart, InMobi, Hike, and Paytm.
While most industry peers say SoftBank’s investment thesis is an enigma, gauging from the investments made so far, it seems that SoftBank looks for disruptive, asset-light business models targeting huge addressable markets.
“The notion of ‘leapfrogging’ is an essential part our Indian investment thesis,” said Alok Sama, chief strategy officer, SoftBank Group, to Fortune India earlier this year. “For example, SoftBank’s bet is that India will never approach car ownership thresholds experienced in the West, but rather migrate straight to a shared transportation model. Similarly, India will never likely have scaled organised retail in the form of physical department stores, but will gravitate directly toward mobile e-commerce. In finance, credit-card penetration rates will likely never approach those seen in the West, but we will move straight to a tech-enabled digital finance model.”
