Morgan Stanley explains why India’s e-commerce market is a hot investment opportunity

More packages on the way.
More packages on the way.
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Amidst devaluations and a funding crunch, Indian e-commerce companies have been battling a brutal year, but experts say explosive growth lies ahead.

Online retail in India is estimated to grow over 1,200% to $200 billion (Rs13,30,550 crore) by 2026, up from $15 billion in 2016, according to a recent report by financial services firm Morgan Stanley. By then, online retail will account for 12% of India’s overall retail market, from just 2% last year.

“This growth is being driven by a combination of rising internet penetration, a drop in data access costs, a shift to smartphones, and a flow of credit to consumers and micro enterprises,” Morgan Stanley said.

Today, only around 14% of India’s internet users shop online, compared with almost 64% in China, according to Morgan Stanley. But that is likely to change as people become more comfortable with making transactions on the web.

“An AlphaWise survey (paywall) conducted in December 2014 showed that Internet users with less than two years of activity on the internet were less prone to transacting. However, users with over five years of experience on the internet were more likely to transact online,” the company said in its report. “From financial year 2020, more than half of India’s internet population will have matured, with five years or more usage, and we think this will likely mark an inflexion point in online shopping.”

By 2026, Morgan Stanley expects India to have 475 million online shoppers, up from 60 million in 2016.

What will Indians be buying?

Mobile phones, electronics, and apparel are currently the most popular segments for online shoppers in India. But going forward, groceries, personal and beauty products, furniture, and food delivery will also have a larger number of takers.

E-commerce in the FMCG (fast-moving consumer goods) space can potentially grow to up to $6 billion by 2020, from less than $1 billion now, a report (pdf) recently released by Google and the Boston Consulting Group (BCG) said.

By 2020, there will be “very high penetration of over 10% in categories like nutraceuticals and colour cosmetics, high penetration of 7-10% in categories like weight management and baby care, moderate penetration of 3-7% in categories like hair care and laundry, and low penetration of less than 3% in dairy products and confectionery,” according to that report.

Given all this potential, it’s no surprise that several global companies are trying to tap the market. In particular, India has become a battleground for America’s largest online retailer, Amazon, and China’s biggest e-tailer, Alibaba.

Let the battle begin

While Amazon operates in India through its India arm, Alibaba has bought significant stakes in digital wallet Paytm and e-commerce portal Snapdeal. Alibaba’s largest shareholder, Softbank, also recently picked up a stake in Flipkart.

But winning in India won’t be all that easy for the two players.

“India is a more complicated market than China, and Alibaba has no operational experience in the market,” Morgan Stanley said. “The results of Alibaba’s initiatives will be affected by product localisation, strategy execution, and various other factors, some of which may be out of the company’s control.”

But in the long-term, India will be a “material driver” for Amazon’s growth, it added. “Amazon India currently has 160 million products listed on its platform, versus over 400 million for Amazon in the US. We expect the numbers in India to increase meaningfully as more merchants enter the formal economy and have better access to credit,” Morgan Stanley said.

This is how the report ranks e-commerce players in India (as per app downloads):