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Business News/ Companies / Alibaba boost for Indian e-commerce
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Alibaba boost for Indian e-commerce

IPO makes strong case for emerging market counterparts; investors see India's potential next only to China's

The lead-up to the Alibaba initial public offering (IPO) had already contributed to turning investors’ sentiment on Indian e-commerce companies after a two-year dry spell when most firms struggled to raise money. Photo: BloombergPremium
The lead-up to the Alibaba initial public offering (IPO) had already contributed to turning investors’ sentiment on Indian e-commerce companies after a two-year dry spell when most firms struggled to raise money. Photo: Bloomberg

New Delhi/Bangalore: When Alibaba.com raised $21.8 billion in the biggest ever initial share sale on Friday, the Chinese Internet company made a strong case for its emerging market counterparts, convincing investors globally that the next set of large e-commerce companies will come from markets outside the US.

Among these markets, India is considered to be the most attractive after China, and local e-commerce firms such as Flipkart and Snapdeal are likely to continue attracting large sums of capital from investors, at least over the next two-three years, experts said.

“People who have missed this degree of value creation in China would now spend more time and invest more money in emerging markets to ensure that they don’t miss this opportunity in future and this has already begun to happen," said Aashish Bhinde, executive director, digital media and technology, Avendus Capital.

India with more than 200 million Internet users has the third largest user base in the world, according to a November 2013 report by Internet and Mobile Association of India and IMRB International. It still trails behind China with more than 600 million and the US with more than 250 million. Still, access to the Internet, especially through smartphones, is rising rapidly in Asia’s third largest economy, spurred by the availability of cheap devices.

Online retail, which is worth $3.1 billion, or just 0.6% of the overall retail market in India, is expected to surge to $22 billion over the next five years, according to a November 2013 report by brokerage CLSA.

The lead-up to the Alibaba initial public offering (IPO) had already contributed to turning investors’ sentiment on Indian e-commerce companies after a two-year dry spell when most firms struggled to raise money. This year, investors have poured more than $2 billion into e-commerce in India and they are likely to pump in an additional $1 billion before December, according to Mint research.

“A $230 billion valuation certainly validates that a company of the emerging markets and for the emerging markets can deliver mega-billion-dollar exits to VCs (venture capitalists)," said Vishal Dixit, a partner at Mayfield Fund’s India advisory team, MF Advisors Llp.

Most of the investments in India’s e-commerce have come from VCs such as Tiger Global, DST Global and SoftBank, which owns more than 30% of Alibaba, that were already betting on China’s burgeoning middle class through investments in companies such as Alibaba.com and second largest e-commerce firm JD.com (previously known as 360buy).

“Investor interest is only going to get more solid. This IPO will give investors some confidence that these are truly meaningful markets and that most action on the Internet front is actually happening in the Asia Pacific after the US," said Ankur Warikoo, head of Groupon APAC Emerging Markets and an ex-venture partner at Rocket Internet GmBh.

Online marketplace Shopclues.com is seeing strong interest from VCs and others who have not yet invested in e-commerce, said Radhika Aggarwal, co-founder and vice-president.

Investors and analysts also expect Alibaba to make strategic investments in India— which could mean long-awaited exits for investors in e-commerce companies.

“We now have a very prolific buyer likely to come on the table and that is going to enthuse entrepreneurs and investors," said Sanjeev Aggarwal, managing director of Helion Ventures Pvt. Ltd, referring to Alibaba.

However, some investors said that though Alibaba’s IPO will boost investor sentiment on India, VC firms that have been present in India over the past few years are unlikely to hand over money to every other e-commerce business.

“You will see an increase in exuberance toward India and there will be some irrational investments, especially by some fly-by-night funds who will want to get in to India just because it’s the flavour of the day," said Sasha Mirchandani, founder of Kae Capital, an early-stage investment firm. “But the smart money is not going to be that easy to come. Firms that have been present in India will continue to bet selectively."

Helion’s Aggarwal, among others, has concerns that Indian e-commerce companies may be overvalued. “Valuations have run up very high, so a lot of money will be lost. India is overpriced now and very expensive," he added.

Alibaba generates most of its $9 billion in annual sales from two marketplaces—Taobao and Tmall. Alibaba’s engines are its logistics and financial services, which manage five billion shipments a year and handled $519 billion of finance under AliPay, according to the share sale documents filed by the company.

In India, too, most firms now operate as marketplaces rather than direct retailers, partly because the country bans foreign investments in online retail. Flipkart and Snapdeal both have announced ambitions to become the Alibaba of India.

But no Indian firm has yet made a serious attempt to become an integrated conglomerate such as Alibaba—Flipkart shut down its payment gateway last month.

Experts also pointed that India is a much smaller market than China and that e-commerce and related businesses such as logistics, payment technologies and third-party sellers are likely to take much longer to achieve tens of billions in sales that Chinese firms already generate.

“Whether there will be a company as large as Alibaba in India is a question that still remains to be answered," Avendus’s Bhinde said.

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Published: 22 Sep 2014, 12:40 AM IST
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