Is ecommerce in India a bubble waiting to

burst?
The key drivers for e-commerce in India will be significant percentage of
young population.

It was not too long ago when stock market investor Rakesh Jhunjhunwala in a TV
interview asked his fellow investors Ramesh Damani and N Jayakumar this question.
"Where is Flipkart's complete business model? Forget about valuation. I want to know
Flipkarts business model. I want to know how you will be profitable?," questioned
Jhunjhunwala.
The zooming valuations and ease at which e-commerce companies have been able to
raise money have given rise to such questions of business viability of various players.
These companies have been burning capital at the same speed at which they are raising
them.
Is the ecommerce sector in India a bubble waiting to burst?
A recently released UBS report titled Is India in an eCommerce bubble? A framework
for assessing emerging markets e-commerce seems to answer this question.
The report says that investor concerns about e-commerce being a bubble in India are
misplaced.
UBS says that according to their estimates the sector will start making operating profits
by 2020.
They have analysed the supply chain of offline retail by category and found out there is
adequate margin for etail in future.
The inherent operating leverage and a 700 basis point discount, as a percentage of Gross
Merchandise Value, lower discounting should lead to operating profits in 2020.
According to UBS, Indian etail market will grow 10 times by 2020 to $50 billion.
This projection is based on a study of the accessibility -- internet penetration,
affordability -- income levels, adaptability by different categories and accountability.
The key drivers for e-commerce in India will be significant percentage of young
population (below 35 years of age) with higher acceptance of technology; growing

middle class, multi-fold increase in internet penetration driven by mobile (3G and 4G)
and availability of capital to fund the initial growth phase.
The Internet & Mobile Association of India estimates the Indian eCommerce market
currently at $16 billion.
Etail is the most recent segment but with highest growth rates and potential.
The marketplace model, according to UBS should gain prominence, given that it is
scalable and requires less capital and time.
Out of the current market size of $16 bn, travel bookings with $9 bn has the lion share of
the market.
Airlines accounts for 56 per cent, rail 34 per cent and hotel and others 10 per cent.
The best example of successful Indian eCommerce is a government venture.
Govt railway booking site IRCTC had $3 bn GMV in 2014 with online bookings now
accounting to 43% of all bookings.
Its success indicates that the Indian consumer is willing to accept technology if it is a
compelling value proposition.
When it comes to e-commerce, it is generally said that India will mirror China in
growth.
According to UBS, internet penetration in India in 2019-20 will be similar to China's in
2012.
India's population is comparable with China's but only in total size and not by income
level segments.
While China's e-commerce began growing in 2007, a similar trend in India might not be
obvious, given a much smaller middle-income population.
UBS says that Indias middle class in 2020 of around 66 million will be smaller than
what China had in 2008, which was 75 million.
Further, Chinese companies like Alibaba benefited from a relatively closed economy in
China.
India however, will benefit from technological advances and more powerful analytical
tools, which was present in Chinas e-commerce growth years.

There is another differentiator in India. Indian consumer wallet spend is different from
consumers in China and the US. Grocery forms a significant proportion -- 65 per cent of
the retail market in India.
Etail, in India is at a nascent stage and companies are concentrating on growing as fast
as possible rather than being profitable.
This is aided by capital availability, leading to aggressive discounting, which is driving
up GMV.
UBS says that this does cloud objective analysis and many investors as well as offline
retail companies view it as a bubble which will burst shortly.
But this does not seem to be the case, as per the report.
Etail is basically replicating the role of distributor/wholesaler and the retailer.
If margins of these two components of the supply chain currently in offline is adequate
to cover the operating costs of etail (including logistics), then etail is definitely a viable
business.
Etail operating costs (ex-discounting) range from 10 per cent to 15 per cent of GMV in
various categories and it's viable categories are those that have low handling & logistics
costs but higher margins for distributors and retailers, such as apparel, footwear and
personal products.
As for Rakesh Jhunjhunwala and his fellow investors, they will have to wait till 2020 to
invest in a profitable e-commerce company.
But in the meantime, investors can participate as per UBS in logistics providers, mobile
internet providers, online classifieds and travel companies and companies selling
premium products on the internet