Why investors are betting big on Indian e-commerce firms
They hope these companies will gain sizeable market share as more young people with higher disposable incomes start buying online
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Mumbai: Investors are pumping huge sums of money in yet-to-be profitable e-commerce firms in India in the hope that these companies will gain sizeable market share as more young people with higher disposable incomes start buying online over the next five years, say analysts.
Already, this year has seen 10 transactions worth $288 million (around Rs.1,785 crore) in the space, according to VCCEdge, a deals tracker.
On Tuesday, Mumbai-based online and mobile classifieds firm, Quikr India Pvt. Ltd, said it has raised $90 million from Investment AB Kinnevik of Sweden. “The proceeds (of the $90 million) will be used for marketing, talent acquisition and improving customer experience,” said Pranay Chulet, co-founder and chief executive of Quikr.
On 26 February, Snapdeal.com, one of India’s largest online marketplaces, said it was raising $133.7 million from existing investors, including eBay Inc., a company that has struggled in India despite being an early mover.
In comparison, 2013 saw 57 deals worth $602 million in the space.
Despite the show of confidence by investors, India lags behind China and the US in e-commerce.
The e-commerce market is growing at an average annual rate of 34% since 2009 and was expected to touch $13 billion by end 2013, according to a 2013 report on e-commerce by the Internet and Mobile Association of India (IAMAI) and audit firm KPMG.
According to the report, travel operators (rail and air tickets and the like), were expected to account for 71% of this, with sales of other goods accounting for the rest.
E-commerce models also face several infrastructural, reach, trust and regulatory issues in the country.
The IAMAI-KPMG report established a direct co-relation between the number of Internet users, the number of online buyers, the value of e-commerce, and openness to FDI (foreign direct investment)—India is the only one among a list of developed and developing economies that does not allow such FDI.
The report noted that the US had 245 million Internet users and 156 million online buyers; China had 538 million users and 270 million online buyers; Sri Lanka had 3.2 million users and 2 million buyers; and India 137 million Internet users and 25 million online buyers.
The report was released in September.
A subsequent report in December put the number of Internet users in India at 213 million.
The report put the size of the e-commerce market in the US, China, and Sri Lanka at $224 billion, $220 billion, and $2 billion, respectively. It said the market was worth $13 billion in India.
Analysts expect the situation to improve with growing access to the Internet penetration and the availability of broadband, and the rapid adoption of smartphones and tablets which could prompt more young people to shop online. An Internet penetration of 25% could be the tipping point for e-commerce growth, the IAMAI-KPMG report said.
According to Samiron Ghoshal, partner and leader of IT advisory services at EY, the current spate of investments in e-commerce firms suggests “the huge potential within”. “We have barely scratched the surface,” he said, adding that investors are banking on the emerging shopping habits of a growing middle class made up of younger people with more income to spare.
The rise in incomes and growing access to the Internet even in smaller cities had ensured that e-commerce gets a lot of attention from investors, said Vinayak Burman, associate partner, Economic Laws Practice, a law firm.
Young people in India spend 16% of their disposable income online and an estimated 828 million Indians will be less than the age of 35 in 2015, the IAMAI-KPMG report said.
These people increasingly use mobile devices to shop, and the increasing penetration of smartphones in the country can only help the cause of e-commerce say experts.
According to research firm Convergence Catalyst, smartphones sales in India more than doubled in 2013 to reach 41-43 million units. For the first time, monthly sales crossed four million units in the December quarter.
According to a September report by Avendus Capital, smartphone penetration in India is forecast to touch 382 million by 2016 while research firm International Data Corp. (IDC) predicts that 155.6 million smartphones will be shipped to India in 2016 alone (some of them will be sold to people who already own a smartphone and are replacing it).
Total tablet sales in India grew from 1 million in 2011 to around 3 million units in 2012 and this number was expected to double in 2013 to reach 6 million units, according to Avendus.
India had 28 million people on 3G telecom networks and 85.6 million people who accessed the Internet on mobile devices in March 2013.
While these numbers and the obvious potential for growth make investments in e-commerce logical, investors could still find it difficult to exit, said Burman.
“Most of the marquee investors have put in their money in the top e-commerce firms which makes secondary transactions slightly more difficult. Lack of secondary exits can be a spoiler in the absence of an IPO market.”
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