E-commerce valuations: To invest or not to invest?

In recent years, India has seen startups mushroom in the e-commerce sector. Boosted by cheaper data and penetration of smartphones to more households, mobile users today have greater access to e-commerce portals. The rapid adoption of e-tailing has seen the rise of Indian e-commerce players that are looking to be the next Amazon or Alibaba. “Unicorns” such as Flipkart, Snapdeal, Zomato, Quikr, Paytm and Ola have received billions of dollars of funding in the past five years.

However, the recent markdown on Flipkart’s valuation by Morgan Stanley, T Rowe Price, Valic Company 1 and Fidelity Rutland Square Trust II, coupled with international stars such as Twitter, Fitbit and Alibaba seeing a drop in valuation after going public, have sparked questions as to whether there is a bubble in e-commerce.

India’s e-commerce sector is an attractive investment proposition due to five key factors. First, the percentage of Indians shopping online, albeit fast growing, is still a small fraction of the organized retail segment. The potential for the market to grow remains immense (Morgan Stanley estimates the Indian e-commerce sector will be worth upwards of US$119 billion by 2020). Second, more than 60% of the Indian population is in the 18 to 40 age group, which has a high disposable income and is comfortable with transacting online. This demographic dividend has a huge role to play. Third, while broadband outreach in India is still poor compared to Western Europe or North America, the availability of 3G and 4G telecom networks and smartphones has helped make the internet accessible. Fourth, the government’s policy in relation to e-commerce has undergone a shift. Since March of this year, 100% foreign investment under the automatic route has been permitted in e-commerce marketplaces. Lastly, e-tailing has the added bonus of reducing the grey or black economy in India, which has knock-on effects for bringing more transactions within the banking system and widening the tax net.

Natashaa Shroff is a partner at Shardul Amarchand Mangaldas & Co. The views expressed in this article are those of the author and do not reflect the position of the firm.