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Few sectors have captured the imagination of consumers and investors alike, the way e-commerce companies have in recent times. Sky-high valuations and billions of dollars in investments are making the more conservative question whether the brouhaha around e-tail is hype or reality. Those doubting the potential of this business need not look too far. Currently, India has 250 million internet users and about 90 per cent of these access it wireless. India's internet penetration is only 20 per cent, compared to China's 45 per cent, and it is expected to grow three times to 750 million by 2020. Clearly, the opportunity is immense.
In India, where distribution and physical infrastructure is an issue, e-commerce has found an effective way to deliver products to consumers in remote parts, where organised retail isn't present yet. For instance, the Northeast contributes a sizeable chunk to Snapdeal's total sales. It is one of the many regions sidestepped by organised retail. Given its convenience and reach, e-commerce is no longer in the test phase. Both from an investment and business potential point of view, e-commerce can easily be called the new sunrise sector.
Tony Navin, senior vice-president (electronics and home), Snapdeal, says, "The Indian e-commerce industry is at the confluence of 'Make in India' and 'Digital India' and is set to become a $100-billion industry in the next five years. It will not just provide access to the aspirations of consumers from across the country but also create tremendous employment opportunities for all participating businesses such as logistics companies and small enterprises."
Many numbers are being bandied around on the size of the market. While Snapdeal estimates the market to grow to $100 billion, UBS expects the e-tail market to grow to $50 billion by 2020. Snapdeal's optimism is based on the 600 per cent growth it has clocked over the last 12 months. But even at $75 billion (between the two estimates), it would mean a near fivefold increase over 2014-2020.
According to estimates by the Internet and Mobile Association of India (IMAI), the e-commerce sector has grown from $3.8 billion in 2009 to $9.5 billion by 2013. After considering 15 companies across e-commerce and mobile payments, Citi Research says: "We are convinced India's internet sector - still dominated by unlisted companies - offers large and long-term opportunities." India continues to be the fastest growing smartphone market in the world. According to IDC, India's smartphone market and sales (shipments) have more than quadrupled between 2012 and 2014. In the overall mobile phone business, the share of smartphones has increased from 7.2 per cent in the first quarter of 2012 to 34.6 per cent in the fourth quarter of 2014.
Currently, e-commerce accounts for 0.6 per cent of India's gross domestic product, against one-three per cent for developed economies. The pace of growth suggests the gap might narrow in a short while. The opportunity is substantial, both from a business and investment point of view. Already, the sector has seen investments of about $6 billion. Nitin Agarwal, director at Equirus Capital, says: "Two big areas where we have seen investments is retail play (Flipkart $3 billion; Snapdeal $1 billion) total $6-7 billion and the taxi space ($1 billion - Ola was $600 million), where we see strong flows in terms of capital continuing going ahead. E-commerce - retail space (excluding classified players) - will continue to attract a fair share of capital; it will see a couple of billion ($1-2 billion) inflows every year."
The classifieds space, where players such as Quickr, Cartrade and Housing.com figure, saw about $500 million of inflows last year. "This run rate would be maintained with some upward bias," says Agarwal. He estimates in logistics, business-to-consumer companies (such as those in the e-commerce sector) and on-demand logistics, which saw $150-200-million inflows last year, could see fresh funds of about $500 million in FY16.
The food delivery segment (Foodpanda, justeat, holachef, etc) is expected to be the fastest growing this financial year. Against $15-20 million in FY15, it could see an investment of $200-300 million in FY16.
Currently, only 12 per cent in India transacts online, against 64 per cent in the US and 50 per cent in China. For those looking for more evidence, e-tailing has grown at the fastest pace in India - at a 59 per cent compounded annual rate over FY09-13 - to account for 16 per cent of the market share, says Macquarie Capital. And, online shoppers are expected to grow eight times to 300 million, Kotak Institutional Equities estimates. Clearly, this isn't a bubble in the making. The growth in the number of internet users is expected to boost online commerce, too.
Despite the challenges in foreign investments and ownership, investment bankers expect some of these large e-commerce players to hit the public market through the next 12 to 24 months. Macquarie Capital says: "In our conversations with various founders and top management leaders of Indian e-commerce companies, we got a sense that most companies would hit relevant milestones with regard to revenue and profitability in 12-24 months. This should clear the way for multiple IPOs (initial public offerings) from this segment."
There are several regulatory impediments the government has to iron out before investors can participate in the public listing of these companies. Currently, foreign direct investment (FDI) isn't allowed in online companies selling directly to consumers. However, FDI is allowed in marketplace models such as those of Flipkart and Amazon and in portals engaged in business-to-business transactions. As a result, companies in which there is foreign investment follow a model where the front-end model is that of a marketplace. Officials from the sector have met the government and talks are on to liberalise the online retail sector so that foreign investments are allowed.
While policymakers and companies are likely to work to create an acceptable framework, initial hiccups aren't ruled out, as in any new business, regulations keep evolving. There are quite a few examples. "In the taxi space, the grey area continues till a new law is formed. There is lack of clarity on tax treatment for e-commerce companies - tax to be charged by state of origin or destination state, apart from issues regarding FDI. Even with a GST (goods and services tax) the challenges will remain. But people should arrive at a solution," says Agarwal.
TOP DRIVERS OF E-COMMERCE GROWTH IN INDIA
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Number of internet users in India to triple to 750 million by 2020
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Internet adoption in rural areas growing at 56% CAGR
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300 million plus middle class population
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Mobile internet users have grown 2.7 times over the last 18 months
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Reducing costs of smartphones
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Improving speeds and reducing costs of internet in India
- Cash on delivery leading to higher adoption of online purchase
This is the second part of a three-part series.
