INDIAN ECOMMERCE

BOOM OR BUBBLE?

Facts and furore behind Indian ecommerce sector

Introduction

• Within the last 15 months foreign hedge funds, asset managers and investment firms

have invested almost $4 billion in just 26 Indian technology and e-commerce start-ups.

• Indian e-tail market—which is currently valued at $16 billion will grow to an astonishing

$50 billion by 2020. The report also projected that the ‘loss making’ sector will begin to

make clear profits by 2020 – UBS Report

Indian e-commerce industry is at a fascinating point of its journey, but

one needs to have a more realistic view on its growth engine.

The Rosy Picture

• The Indian e-commerce sector received more than $5 billion in funding in 2014

• Flipkart raised some $1.9 billion while Snapdeal found about $1 billion in funding.

• Together, these two online shopping firms are now valued much, much higher than the

total market capitalisation of India’s major brick-and-mortar retailers

5

1.6

0.76

0

1

2

3

4

5

6

Funding into Indian e-commerce business (in $ bn)

2014 2013 2012

12.5

5

0.8 0.6 0.6 0.2

Flipkart Snapdeal Trent Future RetailShoppers StopPantaloons

Valuation in $ bn

Valuation in $ bn

Why is it sunshine?

• Internet population - With 200 million active Internet users, India is next only to America’s 250 million and China’s 550 million internet users

• Rising incomes levels – India’s per capita income has risen to $1,500 increasing the purchasing power, especially for 350 million strong middle and upper class

• Demography – Two-thirds of India’s population is under 35 -- the demographic that makes up the largest share of the country's Internet users

• Expected long term profitability of e-commerce firms – With the market maturing and consolidating, the discount regime will fade away improving profitability

• Drawing parallel between India’s e-commerce market with that of China’s – India is often looked upon as China of mid 2000s

Reality check?

The highly anticipated

deal between Alibaba

and Snapdeal fell apart in

March

Disagreement in valuation

was blamed

Snapdeal was looking for

a valuation between $6

billion and $7 billion while

Alibaba wanted to

commit for a

valuation under $5 billion

“…..E-commerce is a hard

business. You need time and

scale to make money. But at

some stage there must be an

intention to make money. I

think there is no plan to make

money because of the infinite

supply of investment capital.

I’m not surprised they are not

making money because they

are not even planning on

making money…”

K VaitheeswaranFounder of Indiaplaza.com

30 28 26

68

5243

0

20

40

60

80

Flipkart Amazon(I) Snapdeal

Revenue 2014 (in $ million) Loss 2014 (in $ million)

Flipkart, Amazon India and

Snapdeal reported a combined

revenue of $85 million and a loss of

$163 million in FY14. To put it simply,

for every $ earned, $ 3 were spent

by the companies.

Thorns in the Rose

• India has been placed at 115th rank on broadband speed in a recent united nations’ study on

ecommerce environment

• India’s regulatory environment for e-commerce remains unclear as the government is strongly

opposed to the idea of 100% FDI in B2C ecommerce, often citing close environment in China and

Japan

• India’s tax authority has also had troubles in aligning tax laws for the e-commerce industry leading

to arbitrary actions which has affected the overall business ease in the segment.

• India ranked 83rd out of 130 countries in terms of its e-commerce environment, judged by factors

such as the number of Internet users, availability of secure servers and credit-card usage

• India failed to make into the 30 country list by AT Kearny’s 2015 Global E-commerce index based

on parameters such as online market size, Consumer behaviour, Growth potential and

Infrastructure

India like China? Hold your guns!

• At $1,500, India’s per capita income is less than a quarter of China’s $6,800 which does not seem

to be catching up anytime sooner

• China has the biggest e-commerce market volume in the world at $ 426 billion which happens to

be about 85 times that of India’s e-commerce market, just too big to compare at this point

• Chinese internet users are much more sophisticated users than that of Indian users. One third of its

online users are connected continuously while 58% are online between 2- 4 times a day

Flowery comparisons have been made between Indian and Chinese e-commerce

markets and many have conveniently believed that just like the e-commerce sector grew

by leaps and bound in China, the fate of the Indian e-commerce market will be a replica

China, the ecommerce giant

426

305

8271 63.3

38.3 33.1 24.6 17.4 16.25

35%

16%17%

14%

22%

12%13%

17%16%

22%

27%

0 2 4 6 8 10 12

0%

5%

10%

15%

20%

25%

30%

35%

40%

0

50

100

150

200

250

300

350

400

450

Volume 2014 ($ bn) Growth (on 2013)

10%

7%

13%

5%

7%

5%

9%

5%

2%

3%

1%

0%

2%

4%

6%

8%

10%

12%

14%

Online Retails as a % of overaall Retail

China US UK Japan

Germany France South Korea Canada

Russia Brazil India

So ?• With only 39 million online buyers, that translates into approximately 3.2% of the total population,

online market place still is at a nascent stage in India

• Though the 27% growth in the e-commerce market in India in 2014 looks flattering, the high growth

figure is actually due to its very small base

• The sector is currently seeing headwinds in terms of sky rocketing valuations and huge employee

benefits, but monetising and making the industry profitable will remain a challenge in coming days

• Government support is absolutely critical on infrastructure point of view to increase user

penetration.

• Also, a more transparent policy on regulation and tax structure will go a great way to strengthen

the fundamentals of e-commerce industry in India.

Finally,

e-commerce industry in India is going through an aggressive transformation and while it

can be the sunshine sector for growth, it is imperative to understand the limitations and

risks in the sector, and handle these risks effectively

Addressing these risks should be our top most priority to avoid this boom turn into a bubble.

It is possible only when euphoria over virtual cash flows, imaginary cash rich P&L

statements and outrageous valuations makes way for a structured growth plan across the

business parks and government corridors, backed by more realistic aspirations, but of

course, with the same enthusiasm.

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