In this post we will cover how E-Commerce plays role of smart money trail for the growth opportunity?
India’s e-commerce sector may not be the focus for most stock investors (for now), but American and Chinese internet platform giants, as well as venture capital players, have been doubling down on the sector. The joining of foreign financial muscle with popular content and domestic access to the planet’s second largest population could catalyze advertising and e-commerce revenues.
India offers an under penetrated yet enormous consumer market. Hence, its potential growth rate is among the highest in Asia and worldwide.
Natural key to unlocking the market is first getting people online
A fixed connection can set a user back INR 499 (USD 6.70) to INR 9,999 (USD 135) a month depending on the data limit. In contrast, a mobile contract costs INR 129 (USD 1.70) to INR 349 (USD 4.70), making India one of the most affordable markets globally. India’s average mobile data user consumes 9.8 gigabytes per month, compared to 7.1 in China and 6.7 in Western Europe, according to Ericsson.
With just under half of the population using smartphones today, we expect adoption to surge and potentially reach full penetration by 2025. The country’s internet population could very well double over the coming years, offering significant opportunities in the internet space.
Internet business models fall into two broad categories:
a) Advertisement based, which is often coupled with search, social media, general information and entertainment;
b) Transaction based, which spans merchandise, groceries, food delivery, ride hailing, etc.
In India, Google and Facebook dominate the first group. Their network and scale effects, thanks in large part to ads of global consumer brands, provide them competitive advantages. Local players are better positioned to compete in the second group.
E- Commerce Market:
The e-commerce market is still in its relative infancy, at USD 71bn gross merchandise volume (GMV),
and the platforms are loss-making. We forecast it to grow to USD 350bn by 2030, equivalent to a 17.3% annual growth rate. While India is likely to attain a higher growth rate than China over this period due to the latter’s more mature stage, our 2030 estimate for India would put the country where China was between 2013 and 2014.
The current market leader is homegrown Flipkart, which includes its Myntra offering. Flipkart itself was an early consolidator, taking over eBay India. To operate in India’s physical multi-brand retail space, foreign firms are limited to 51% ownership of any local business. The online segment is much less restricted and, hence, an easier way to enter the consumer market. As such, Walmart took a 77% stake in Flipkart, whose other other investors include Tencent, Tiger Global and Microsoft. Amazon India, fully owned by the Seattle-based giant, is the exception to the rule.
Ride Haling Market
The vast ride-hailing market is split 50/50 between SoftBank-backed Uber India and Ola, which is also backed by SoftBank as well as by Tencent and Tiger Global. Interestingly, their estimated valuations, while not observable in the listed space, broadly reflect the current market size. This means investors aren’t attaching high growth multiples to these names, which may be because of the degree of competition and cash burn. As we discuss later, some form of equilibrium or consolidation is needed in the long run.
Online travel transactions account for 55% of all air tickets; 22% of bus tickets, which is an important domestic mode of transport; and 20% of hotels booked. We expect online travel bookings to reach USD 26bn in total by 2025 (vs. USD 10bn today), even allowing for a temporary dent caused by COVID-19 related travel restrictions. This segment has seen consolidation. In 2018, MakeMyTrip (which is Nasdaq listed but still loss-making) acquired the former number two player (Ibibo) to command 60% of the market. Cleartrip, as the next biggest player, controls about 20% market share. Yatra holds a dominant position in corporate travelling, and was recently acquired by US-based software producer Ebix.
Online Food Delivery :
The biggest player is Zomato, which in 2020 acquired its smaller competitor UberEats and now boasts 52% market share. Zomato is backed by India-listed InfoEdge as well as, among others, Alibaba’s Ant Financial, Sequoia and Singapore’s Temasek. The not-too distant number two is Swiggy, which also lists impressive anchor investors such as Naspers,Tencent and Meituan.
In concrete numbers, the food delivery market accounts for 7.4% of all food services spending. We project the food services market overall to grow by 8% over the coming years, with the online penetration rate almost doubling to 16.7%. This would amount to a solid 23.5% growth rate over the next five years and a still decent 14.4% for the decade.
Early days for B2B, but a space to watch
One interesting segment is the so-called Kiranas, or mom-and-pop segment, which claims just over 10 million stores across the country. Only 12% of India’s retail sales are conducted via organized channels, and only 5% are done online. Reliance Industries, India’s largest firm, hopes to connect 40% of them to an online platform that includes payment facilities, inventory management and sourcing support. Reliance Retail already has logistics in place via its ownership of retail branches for groceries, electronic goods and others, as well as the JioMart platform.
One issue for e-commerce in India is that for every piece of clothing sold, four are returned. For instance, a Kirana shop would be invited to become the gateway point, allowing them to sell to their customers directly and the merchandize procured via Reliance’s channels. When a customer orders something, the platform would show nearby Kirana stores to choose from. It would then be the shop’s responsibility to fulfill the delivery.
Listed space likely to become bigger, at least in pockets
India’s e-commerce landscape is mostly the domain of private equity funds and institutional financial
investors. Companies like Alphabet and Facebook have not listed their overseas units anywhere, for
example. Public listings are more probable for the domestic-oriented transaction businesses. SoftBank recently announced a reduction in its Alibaba stake. The Japanese firm stated more nerally that it wouldn’t buy new stakes for now and would be more discerning in new funding rounds in its existing investments.
In China, SoftBank backed both ride-hailing leaders—Didi and Uber. They merged eventually and Didi is now the undisputed market leader without any major competitor. Likewise in India, it backs the two main operators. The business logic to merge at some point is compelling, in our view. The listing value of a combined entity would normally be higher than that of the two competing ones combined. India’s online food delivery business, which is led by Zomato and Swiggy, may also at some stage consolidate.
Conclusion : India’s e-commerce gems are mostly owned by a handful of global companies
which have investments in other countries. They likely view extremely fierce competition to be economically unviable, making them more open to consolidation to recoup the losses accrued while keeping the platforms running and growing. Given the tendency for consolidation, some of the larger companies may one day reach market values of over USD 100bn. It is possible to see Singapore or Hong Kong as listing destinations for India’s emerging e-commerce champions.
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Source : UBS Report