Press Release

News | July 18
Why India's e-commerce start-ups are on investors' radars

India`s shoppers are shunning brick-and-mortar outlets for the convenience and security of the web.

A validation of the trend in the country that is set to overtake China as the world’s most populous nation came last week with Walmart-owned Flipkart – India`s rival to Amazon – raising $3.6 billion in new financing ahead of an expected initial public offering (IPO).

“We have started to see a select few players cornering most of the market share,” said Nikhil Kamath, co-founder of asset management company True Beacon and brokerage Zerodha. “Naturally, competition has gotten intense.”

Digital payments company Paytm, backed by SoftBank, is seeking regulatory approval to raise more than $2.2bn in what would be one of the country`s biggest stock market listings.

While the pandemic may dent the pace of economic expansion, online sales are growing in tandem with the increasing uptake in digitilisation of businesses amid the Coivd-19 pandemic.

E-commerce sales in Asia`s third-largest economy are projected to grow 18.2 per cent annually between 2021 and 2025 to 8.8 trillion rupees ($120bn), according to consulting firm GlobalData. E-commerce payments are forecast to grow 16.8 per cent this year to 4.5tn rupees, compared to 12.2 per cent growth in 2020.

“The Covid-19 crisis has accelerated the digital payments shift in India and opened e-commerce to a whole new set of consumers and merchants who were not using online channels earlier,” said Ravi Sharma, the banking and payments lead analyst at GlobalData.

“Rising consumer preference for online shopping, proliferation of e-retailers and emergence of new payment methods will continue to drive e-commerce growth in India.”

Major e-commerce retailers in India, such as Flipkart, Amazon and BigBasket, have seen a rise in orders every month since the outbreak of the pandemic, according to GlobalData. Online purchases of groceries, electronic goods and healthcare products have all registered strong growth, according to the consultancy.

The uptick in e-commerce has been fuelled by a rise of smartphone ownership and internet access, an increase in digital literacy and the Indian government`s digital push, Mr Sharma said.

Such a favourable environment is prompting companies in the digital space, particularly established e-commerce platforms, to go public and capitalise on investor interest that can help them expand.

Bangalore-based Flipkart is expected to go for a public listing – this year – as it aims for a $50bn valuation. The company`s latest fundraising round saw Japan`s SoftBank reinvesting in Flipkart after it sold off its 20 per cent stake to Walmart as part of a deal completed in 2018, when the US retailer took a majority stake in the Indian e-commerce start-up.
Flipkart, which has some 350 million registered users, plans to use the funds to expand its operations and boost its fashion and grocery segments.

“With increased competition from both domestic and international players, e-commerce could grow in double digits in the coming years,” said Gaurav Garg, head of research at CapitalVia Global Research, an Indian stock advisory firm.

“Especially when `unicorns` [start-ups with valuations of more than $1bn] such as Zomato, which has already launched its IPO, and other firms such as Paytm are planning to go public soon.”

Indian conglomerate Tata Sons bought a majority stake in online grocer BigBasket in May. This puts Tata – which has interests in fields ranging from real estate to consumer goods, and owns brands including Jaguar Land Rover – in direct competition with Flipkart, Amazon and JioMart, a more recent entrant in the sector that is owned by Reliance Industries and controlled by India`s richest man, Mukesh Ambani.

The impact of India’s e-commerce boom is also trickling down to associated sectors, such as payments, particularly helping home-grown players tap into the funding boom.

Digital payments firm Paytm, which is awaiting regulatory approval for its public listing, said “the country’s digital ecosystem is at an inflection point and offers a massive opportunity”. The funds would help the company to compete with the likes of GooglePay and WhatsApp Pay.

Another Indian digital payments firm Mobikwik, which is backed by Sequoia Capital, is also looking to tap the capital markets. On Monday, it filed for an IPO with the markets regulator.

These companies are digital enablers and vying to position themselves for a surge in the number of internet users, which consultancy RedSeer forecasts will increase to 970 million over the next five years from 600 million currently.

“Because a large portion of the population in rural India does not use the internet, there is a lot of space for growth in the coming years,” Mr Garg said.

But there also needs to be significant investment and effort that goes into boosting India`s digital infrastructure so that companies that rely on consumers having access to the internet can realise their full potential in the country.

“From a macro perspective, India needs to nurture the digital infrastructure, in order to host global investments,” Mr Kamath said. “I am certain that with concentrated efforts, we can make the India digital and e-commerce space one amongst the strongest in the world.”

For now, the country`s digital infrastructure shortcomings are not holding back investors from ploughing funds into start-ups that are enabling digital transactions.

Startups that are going public are looking to benefit from both foreign and domestic investors alike, as stock markets have rallied. India recorded $3.6bn worth of IPOs during the first half of this year, compared to $1.1bn during the same period last year, according to Refinitiv.

“Right now, we are in the midst of a bull run” Nitin Shahi, the executive director of Findoc Financial Services Group, said.

“The market sentiment is very positive around the digital and e-commerce story of India.”

Such positive perceptions could “enable these firms filing for IPOs to get more attractive valuations right now and as a result they can generate more funds and private investors feel they can exit at good prices”.

Last week, food delivery app Zomato launched a $1.3bn IPO.

“We see a lot of excitement around the Zomato IPO given it’s the first large consumer tech company getting listed,” said Himanshu Nayyar, lead analyst, institutional equities, at Yes Securities.

Prior to the IPO, Zomato raised $562m from 186 major financial investors, including Tiger Global, Morgan Stanley and BlackRock.

The current funding boom could also help start-ups in e-commerce and digital sectors that need liquidity to strengthen their position to compete with deep-pocketed players, including Amazon, Reliance Industries, and Tata, Mr Shahi said.

“Most of these companies right now are cash flow negative and in operating losses which makes external funding all the more valuable for them, because their focus is on increasing market share.”

“It’s pretty clear that they are not going to be slowing down in terms of funding any time soon,” said Mr Shahi.

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