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May 29, 2019 | Global Equity
E-commerce Mega-Trends in India

Global Research Analyst

Rita Spitz, CFA, partner, is a global equity research analyst focusing on ESG integration. Previously, she was a research analyst covering global and U.S. large- and mid-cap consumer stocks, and she served as director of research from 2001 to 2008. Rita joined William Blair in 1986 as a sell-side research analyst covering advertising and marketing firms, a role she held for 13 years. She is a member of the CFA Society Chicago, the CFA Institute, and The Economic Club of Chicago. She has also served on the advisory groups of several financial accounting standards boards since 2002, and is currently a board member of the Transition Resource Group for Revenue Recognition and a trustee of The Joffrey Ballet. Rita received a B.B.A. in finance and Spanish from the University of Wisconsin–Madison and an M.B.A. from the University of Chicago’s Booth School of Business.

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E-commerce Mega-Trends in India

As a global equity analyst, one of the most interesting aspects of my job is identifying companies with innovative technology and solutions that disrupt mature industries.

But in emerging markets, sometimes the forces of disruption don’t affect a single industry. Sometimes they affect a country’s entire economy. That is happening in India today.

In the world’s second-most-populous country, several major trends are coalescing to transform the way Indian companies and consumers transact. Changes spurred by 2016’s demonetization, surging smartphone usage, and investments from large, multinational players point to big changes ahead for India’s digital economy—and powerful opportunities for investors.

The upside for e-commerce is enormous.

Early Stages of E-commerce
E-commerce is widely viewed to be at an inflection point in India. While the country trails only China in the number of internet users, both the percentage of the population with internet service and the penetration of e-commerce usage in India significantly lag international standards.

Only about a third of India’s population was on the internet as of 2016, and cash is still the preferred payment method in the vast majority of transactions.[1]

As a result, the upside for e-commerce is enormous. India’s e-commerce market is expected to grow from $39 billion in 2017 to $120 billion in 2020.[2]

Demonetization Spurs Digitalization
Indian Prime Minister Narendra Modi sought to bring banking to India’s poor by semi-mandating free banking accounts for the population at large.

While this increased access to banking, it didn’t gain much traction in terms of increasing usage of banking and digital transactions.

But that changed when the Indian government announced its demonetization initiative in November 2016.

The move to electronic payments got a big boost when the Indian government replaced all 500- and 1,000-rupee banknotes in circulation. While the move was designed, at least in part, to help with tax collection by bringing the shadow economy into the light, a follow-on effect has been a boost to digital transactions.

One study found that Indian online marketplace transaction value rose 93% and transaction volume increased 84% following demonetization.[3] Cash is still preferred in most cases, but the dramatic increase in the number of citizens with access to digital wallets bodes well for surging e-commerce penetration in the future.

The effect of smartphones will be revolutionary.

Smartphones Go Mainstream
Another factor supporting the growth of India’s digital economy is surging growth in smartphone usage.

India’s smartphone revolution caught fire in 2016 when Reliance Jio stormed the market with low-cost service offerings, with customers paying an average of $1.35 per month.

The effect will be revolutionary because consumers who previously had no access to communications via a landline now have internet, talk, text, and data—and all of the benefits and opportunities they bring.

Buoyed by cheaper smartphones, faster connectivity, and affordable services, the number of smartphone users in India is expected to grow from 292 million in 2017 to 491 million in 2022.[4] Smartphone adoption is expected to grow at close to 16% in 2018, the highest growth rate in any country included in eMarketer’s study.

E-commerce Attracts Major Investments
Perhaps the strongest indicator of the potential upside for e-commerce in India is the breadth and depth of investment interest that’s coming from international companies such as Walmart, Amazon, Softbank, Tencent/Naspers, and Alibaba.

In May 2018, Walmart announced its $16 billion investment in Flipkart, India’s leading e-commerce company. Amazon and Alibaba have both made multibillion-dollar investments in India as well. This level of interest and investment will act as an accelerator for e-commerce adoption.

India’s e-commerce industry is benefiting from several strong tailwinds that are pointing to sustained, transformative growth.

Opportunities in Mature Industries
India’s e-commerce industry is benefiting from several strong tailwinds that are pointing to sustained, transformative growth.

While hurdles remain, including a societal preference for cash over electronic payments, rising e-commerce penetration should create ample opportunities for digitally native companies to gain share in this massive market.

We are particularly interested in seeing how this will play out in mature industries. One such industry in India that is ripe for disruption is the travel industry. We are interested in seeing how digitally native companies in India are able to grow their earnings and capture a larger piece of the value chain while the country continues its transition to a digital economy.

To access more insights about how William Blair is reaching beyond traditional investment analysis to think about the white space between asset classes, sectors, geographic regions, and investment teams, we invite you to explore other posts about sessions at our CONNECTIVITY conference.

1 Central Intelligence Agency World Factbook
2 India Brand Equity Foundation (IBEF).
3 Agarwal, Sumit; Basu, Debarati; Ghosh, Pulak; Pareek, Bhuvanesh; and Zhang, Jian, “Demonetization and Digitization” (June 17, 2018).
4 eMarketer

Rita Spitz, CFA, is a research analyst on William Blair’s Global Equity team.

References to specific securities and their issuers are for illustrative purposes only and are not intended as recommendations to purchase or sell such securities. William Blair may or may not own any securities of the issuers referenced and, if such securities are owned, no representation is being made that such securities will continue to be held. It should not be assumed that any investment in the securities referenced was or will be profitable.

 

Global Research Analyst

Rita Spitz, CFA, partner, is a global equity research analyst focusing on ESG integration. Previously, she was a research analyst covering global and U.S. large- and mid-cap consumer stocks, and she served as director of research from 2001 to 2008. Rita joined William Blair in 1986 as a sell-side research analyst covering advertising and marketing firms, a role she held for 13 years. She is a member of the CFA Society Chicago, the CFA Institute, and The Economic Club of Chicago. She has also served on the advisory groups of several financial accounting standards boards since 2002, and is currently a board member of the Transition Resource Group for Revenue Recognition and a trustee of The Joffrey Ballet. Rita received a B.B.A. in finance and Spanish from the University of Wisconsin–Madison and an M.B.A. from the University of Chicago’s Booth School of Business.

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