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Investment views

Is India the next China?

23 January 2019
Author: Varun LaijawallaAssistant Portfolio Manager, 4Factor


Notes from the road

  • I travelled to Bangalore and Delhi to explore developments in India’s burgeoning e-commerce sector
  • In contrast to China, the listed market cap of internet stocks is small – in fact 200 times smaller!
  • Several positive developments have made India a much more fertile ground for e-commerce companies in recent years and private capital is already rushing in to capture value in the sector
  • China’s e-commerce story surpassed expectations over the last decade − could India follow suit?

  • Varun Laijawalla,
    Analyst, 4Factor Equity


The Indian internet bazaar

Indian e-commerce, in contrast to China’s, has flown under the radar. Despite boasting the second-highest number of internet users globally (355 million, behind China’s 738 million), there are only three listed companies with a combined market capitalisation of a meagre US$ 5 billion, versus China where over 15 companies weigh in just shy of US$ 1 trillion.

Two things really stood out from my meetings with a range of Indian unlisted e-commerce insurgents: how nascent the market is and, more importantly, how the market potentially sits poised at an inflection point.

India’s population and internet speeds compare favourably to China’s.


Source: CLSA, Euromonitor, Google, World Bank, September 2018.

India’s population and internet speeds compare favourably to China’s. Unfortunately, the similarities end there. Despite having the fourth largest retail market in the world, India’s e-commerce market only ranks ninth.

The key reasons for this are India’s low per capita GDP (US$ 1,939.6, a quarter of China’s) and internet penetration rate (26%, only half that of China). Based on these two metrics, India is 7-15 years behind China. This perceived development lag in India’s market should not deter us from looking closely at India’s e-commerce market now, largely because of material positive developments that have occurred in the past two years that could help narrow this gap.

Figure 1: Global e-commerce compared

INDIA 2,597 749 40 1,841 1,307 355 86
CHINA 12,237 2,935 710 7,310 1,383 738 502
USA 19,390 3,636 629 58,270 325 241 196
JAPAN 4,872 1,178 132 38.550 126 112 78
BRAZIL 2,055 393 32 8,580 209 124 45
MEXICO 1,149 243 18 9,719 124 71 19

Source: CLSA, Euromonitor, Google, World Bank, September 2018.

Jack Ma’s Iron Triangle Framework

The ‘iron triangle’ framework proposed by Alibaba founder Jack Ma provides a useful prism through which to evaluate India’s e-commerce industry His framework identifies the three key determinants of success in e-commerce. India has made significant progress in delivering on the first two areas in recent years, with much work still required in the third.

Mobile data usage in India is growing rapidly


1 | Data/internet

India has enjoyed a step change in data/internet availability with the launch of Reliance’s Jio in August 2016. Jio’s investment in its network led to a domino effect, with peers Bharti Airtel, Idea Cellular and Vodafone following suit. These developments, totalling a whopping US$ 118 billion in investment CAPEX in the past five years, gave birth to a pan-India 4G network.

The disruption continued on the pricing side as Jio slashed data tariffs by 99% to INR3/GB (from the INR250/GB industry price that had stood since 2012), and followed that up with a suite of free video content. Unsurprisingly, data usage in India is growing rapidly. Around 95% of smartphones sold in India now include 4G capability vs. 40% in fiscal year 2016. Monthly data usage has increased more than ten-fold, making India the third largest consumer of mobile internet data, and the largest on a per-subscriber basis.

To accelerate the digitalisation of payments through a secure platform, the Reserve Bank of India launched the Unified Payment Interface.


2 | Online payments

India’s fast-developing online payments capability is arguably as significant as the first pillar of success, considering that as a broadly cash-based society, Indians still settle 68% of transactions in cash.

To accelerate the digitalisation of payments through a secure platform, the Reserve Bank of India launched the Unified Payment Interface (UPI) in August 2016. UPI permits users to link multiple bank accounts using a mobile app to facilitate peer-to-peer and peer-to-merchant transactions.

UPI uses a unique ID associated with each user, which means consumers can avoid having to disclose sensitive information such as bank account details when completing transactions. This has given way to a host of new payments apps built using the API infrastructure. UPI adoption has been meaningful, with over US$ 6 billion in cumulative transaction value since inception.1

3 | Logistics

India faces the challenge of structurally lower urban density than in China. While Flipkart and Amazon have invested in building out fulfilment centres as well as last mile delivery in India, and Alibaba invested in logistics operator XpressBees earlier this year, the e-commerce industry has a long way to go to build the third pillar of success. However, India saw more deals of US$ 50 million in 2017, due to a resurgence of big-ticket consumer tech investments.

Figure 2: Consumer technology sector accounts for surge in big ticket private equity deals

Deals of more than US$ 50 million only; does not include healthcare, education, media & entertainment deals.
Source: Bain PE deals database 31.12.17

Mergers and acquisitions activity surging

These positive developments in India’s e-commerce have not gone unnoticed in private markets as 2017 saw a surge in the value of deals in consumer technology. The momentum has continued into 2018, which will be remembered for Walmart’s blockbuster acquisition of Flipkart at a US$21 billion valuation.

Grass roots societal change

Anecdotally at a grass roots level, Indian society appears to be undergoing fundamental behavioural changes. For example, graduates are increasingly seeing the consumer technology sector as a legitimate career option, whereas in the past they mainly sought their futures within IT services. This change should not come as too much of a surprise given that graduate salaries at the likes of Flipkart (marketplace), PayTM (payments) and Ola (ride-hailing) are now at a small premium to companies such as Tata Consultancy Services, Infosys and Wipro. This phenomenon is also evidenced at the prestigious Indian Institutes of Technology (IITs) across the country, where both domestic and foreign tech companies have noticeably ramped up on-campus recruitment efforts.

Capital washing in

Likewise, the sector is awash with capital, with heavyweights Amazon, Softbank, Alibaba and Tiger Global investing across India’s e-commerce value chain. Beyond providing financial capital, these foreign investors have also shared their intellectual capital and best practices, further helping their Indian counterparts scale up. Case in point, the Indian payments platform PayTM, backed by Alibaba and Softbank, has over 300 million users and 15 million merchants, making it by far the most popular digital payments provider in the country.

Heavyweights Amazon, Softbank, Alibaba and Tiger Global are investing across India’s e-commerce value chain.


Recently, PayTM has also broadened its services to include accepting deposits, as well as operating a money supermarket for third-party loans. What makes PayTM particularly interesting is that it fits into Alibaba’s broader strategy of how to achieve success in a market, i.e. Jack Ma’s iron triangle approach. With a dominant position in payments, Alibaba acquired PayTM Mall in 2017. Its asset-light marketplace model contrasts with Flipkart and Amazon’s capital-heavy, inventory-based approach, allowing PayTM Mall to grow faster. Despite only launching last year, it generated a gross merchandise value (GMV) of US$3 billion in calendar year 2017, half that of market leader Flipkart. While readily available private capital may mean that the most compelling companies in India, such as PayTM, need not consider listing for several years, we will continue to monitor their progress.

Will India also exceed expectations?

China’s e-commerce story surpassed expectations over the last decade. Indian e-commerce may now be set to follow suit.

In case you missed it, in my first postcard, I examined investment developments in China’s tech sector.


11 Take-up was given a major boost post November 2016 when the government ‘de-monetized’ high-value legal tender.

All investments carry the risk of capital loss and past performance is not a reliable indicator of future results.

Developing market: Some countries may have less developed legal, political, economic and/or other systems.

These markets carry a higher risk of financial loss than those in countries generally regarded as being more developed.

For further information on investment process, specific portfolio names and the investment team, please see the important information section.

Important Information

This content is for informational purposes only and should not be construed as an offer, or solicitation of an offer, to buy or sell securities. All of the views expressed about the markets, securities or companies reflect the personal views of the individual fund manager (or team) named. While opinions stated are honestly held, they are not guarantees and should not be relied on. Investec Asset Management in the normal course of its activities as an international investment manager may already hold or intend to purchase or sell the stocks mentioned on behalf of its clients. The information or opinions provided should not be taken as specific advice on the merits of any investment decision. This content may contains statements about expected or anticipated future events and financial results that are forward-looking in nature and, as a result, are subject to certain risks and uncertainties, such as general economic, market and business conditions, new legislation and regulatory actions, competitive and general economic factors and conditions and the occurrence of unexpected events. Actual outcomes may differ materially from those stated herein.
All rights reserved. Issued by Investec Asset Management, issued January 2019.

Varun Laijawalla
Varun Laijawalla Assistant Portfolio Manager, 4Factor

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