Why India is a lucrative market for Alibaba?

Alibaba is the 2nd largest (1) ($204.8 Billion) e-commerce company in the world by
market value. It declared $11 billion in net income in 2016 and has cash and near
cash reserves of over $36 Billion(2) indicating extremely strong financial of the
aggregator.
Further, India has a huge consumer base with robust growth rate and promising
digitalization indictors. Since 2010, e-commerce industry in India has shown
phenomenal growth with CAGR of over 41%. Total 2015 sales amounted to $13.5
Billion which grew to $23 Billion in 2016 and are expected to reach $80 Billion mark
by 2020. Also, all the e-retail market players are much smaller as compared to
Alibaba (except Amazon) which puts this market high on investment perspective. All
these factors combined, makes Indian ecommerce a very lucrative market for
Alibaba, both as investor and standalone player.
Following data indicates the growth trajectory of the ecommerce industry. (3)

Year 2015 2016 2017 2018 2019 2020

Total 818.33 941.08 1082.24 1244.58 1418.82 1599.01
Retail
Sales
--% 14.0% 15.0% 15.0%* 15.0%* 14.0%* 13%*
change
Retail $13.31 $23.39 $37.50 $52.5 $65 $80
Ecommer
ce
--% 129.5% 75.8% 60.3%* 40.1%* 23.9%* 22%*
change
--% of 1.6% 2.5% 3.5% 4.2% 4.6% 5%
total
retail
sales
*Projected
(All figures in Billions)

PAYTM

Paytm was originally launched in 2010 as prepaid online mobile recharge

website. It can be accessed from a browser or the Paytm app is available on
mobiles compatible with Android, Windows and iOS operating systems.Paytm
wallet was launched in 2014. As of November 2016, over 150 million wallets
and 75 million Android-based apps were downloaded of Paytm wallet, making it
Indians largest mobile payment service platform. The credit for the surge in its
usage obviously goes to demonetization of the 1000 and 500 currency notes.
The huge success of Paytm attracted many investors as well. Renowned Indian
Industrialist, Ratan Tata, made the personal investment in March 2015. Apart
from this, Alibaba Group of China made an investment of $575 million while Ant
Financial Services Group funded 25% in One97 in the same month. In March
2016, Paytm borrowed 300 Cr from ICICI Bank as working capital.

The various revenue lines that they have can be broadly classified into the following
sub-categories:

1. PayTM.com (Web E-Commerce, App-Commerce etc)

2. Payments & Wallet Integration & TDR (Transaction Discounting Rate)

3. Seller Services

4. Payments Bank (Yet to Launch as of the date of writing this Analysis)

To Start with lets see how PayTM Makes Money from sale of goods on their
platform.

How Does PayTM work (Shopping) : PayTM (You have to search for the product
in the search bar to shop for any physical product as they are focusing more on
their Payments Vertical so they have changed entire landing page to payment
processing) an e-commerce portal, B2C shopping Portal, for at-the-moment,
customers ordering goods for deliveries in some parts of India. The base model
here is a MarketPlace : List Sellers for selling their products > Get shoppers
browsing through the product categories > Dole out discounts to shoppers in the
name of customer acquisition > Customer buys the desired products > Seller has to
ship the product to the customer > Product once Accepted & Not returned back until
the timeline for returning is over > Seller gets his agreed price of the product minus
the commission charged by PayTM for generating a customer. Thus the crux of the
Model is X% commission on the total sale value given to the seller for a
particular product

This sale can happen via any channel as given and approved by PayTM listed below
& For all the orders sold by PayTM for every seller on their platform PayTM will
charge a percentage (%) cut on the total sale amount pre-tax.

1. Sale via Website

2. Sale via Mobile Website

3. Sale via Mobile App (Android or iOS or others)

 4. Sale Via Affiliate networks (Bloggers, Coupon Websites, Review Websites etc)

The percentage of commission that PayTM charges varies on the category of

product that PayTM is able to sell. It ranges anywhere between 0% to 20% of the
sale value (excluding taxes and discounts). The following image will show you how
the receipts of PayTM will look like once the sale is recorded in PayTMs books of
accounts:

Business Model of Paytm

1. Web Portal (E-Commerce : Already Explained above so will not get into the
depth of this model again)

2. Listing Fee and Convenience Fee (Sellers are charged listing fee for
selling on PayTM and onboarding fee for doorstep service of explaining
everything related to selling online pretty self explanatory so wont nose dive
into this either.

3. OTA Bookings: PayTM recently ventured into Online Travel Agency Model
(OTA) where it is providing air, bus etc ticketing and hotel booking services (the
model here is again commissions similar to e-commerce model highlighted
above)

4. Payments Integration: You can now use your PayTM wallet to pay all sorts
of utility bills including cable, internet, mobile, gas, electricity etc.

5. Mobile Wallet: Integrating its wallet across major e-commerce and e-

payment enabled online sellers (replaces a traditional payment gateway with
the exact same business model but lower fee and Transaction Discounting
Rates (TDR) ).

Alibaba became the largest shareholder through its investment of $680 million.
Before that, Ant Financial had made the first round of investment in February.As per
the current shareholding pattern of One97 Communication, Alibaba's direct stake is
20% and through Ant, it has another over 20% while SAIF Partners has 30% and
promoter Vijay Shekhar Sharma holds 21%. The other investors include SAP
Ventures, Reliance Capital, Silcon Valley Bank and others. The last round of funding
raised by Paytm valued it at $3.4 billion.The Jack Ma-promoted Chinese e-commerce
and online payment major has also invested in Snapdeal and is aggressively
pursuing its interest in the Indian e-tailing space.Competition in the digital wallet
and e-commerce sector is getting fierce with every player looking to expand its
market share. In their bid to corner a higher chunk of the e-commerce market, they
are considering both organic and inorganic strategies.
Why Snapdeal would be a good acquisition for Alibaba?

The industry currently has 3 big players in terms of Gross Merchandising Value,
namely Amazon, Flipkart and Snapdeal. Amazon has been growing at an
unprecedented pace in the last 2 years.
Flipkart is bleeding money and quickly losing its market share to Amazon.But it is
still the market leader. Snapdeal was pipped by Amazon in March16 quarter to
become the 2nd largest player in e-retail market.

Snapdeal

Snapdeal has raised around $2billion in total, from about two dozen investors
including SoftBank (33%), Alibaba (3%), Foxconn, eBay Inc., Bennett Coleman & Co.
Ltd, and venture capital investors such as Bessemer Venture Partners, Intel Capital,
Kalaari Capital, among others.
With the last round of funding for Snapdeal in Feb 2016, the company was valued at
$6.5 Billion.

The reason being that the losses for Snapdeal have more than doubled in 2016
[http://www.livemint.com/Companies/Qt7vyAZ1ywO0y9e3P1MjcI/Snapdeal-losses-
more-than-doubled-in-201516.html]
Snapdeal posted a 150% increase in loss from Rs1,328 crore previous year to the
year ending March 2016 [ loss of Rs3327 crore]. Revenue posted a growth of 56%
from Rs933 crore to Rs1,457 crore. The year-to-March 2016 numbers include the
financials of digital payments platform Freecharge, which was acquired by Snapdeal
in April 2015.

In FY2016 the company invested capital in building capabilities across technology,

logistics and seller ecosystem to support the long term growth of the business. As
per the company officials, In order to deliver the best in class customer experience
and to set up the necessary infrastructure for future growth, there was an increase
in fulfilment and overhead expenses

Snapdeal is trying to seek new funding at a valuation of $3-$4 Billion,but hasnt

been successful so far.
For Alibaba, for an entry to the ever growing Indian online retail market, Snapdeal
seems to be a good acquisition where it already holds 3% minority stake, for the
following reasons:

Snapdeal is currently #3 and has a good online presence

It is currently cash stripped, with no funding coming in from other investors

and only a player like Alibaba with its deep pockets is the need of the hour

Indian online retail market is growing leaps and bounds, as clear for the graph
above. This presents a good business opportunity for Alibaba to enter Indian
market which is still at its nascent stage

Alibaba had launched AliExpress in India mobile app through which

customers could place orders from sellers in China. But this wasnt able to
make any inroads with the Indian customer

The information around consumer behaviour can be understood better with

the help of a major existing player for the last 7 years, against an
independent venture into Indian market

Merging PayTM and Snapdeal

Alibaba completed an acquisition of 60% stake in PayTMs online marketplace, thus
becoming the majority shareholder.
The online marketplace was recently demerged from its parent online wallet and
digital payments firm One97 Communications which owns the PayTM brand.
Alibaba along with its payments affiliate Ant Financial had a combined shareholding
of 40% in the unit. With the latest investment, the Chinese major will increase its
holding to 62%.

After acquiring Snapdeal, Alibaba can merge the operations of both PayTM and
Snapdeal to build a etailing powerhouse.

By leveraging Snapdeals market penetration, logistics services and technological

progress acquired over the years with PayTMs brand value, reliability and suppliers,
Alibaba is set to be a major player in the online retail game.
By pitting Alibaba backed etailing directly against Amazon and Flipkart, the market
is going to become more competitive, with Alibaba having the ability and resources
to counter Amazons deep pockets.
The retail industry in general and etail industry in particular are growing at a fast
pace.
As per a PwC report, Indian retail market is going to be the 3 rd largest retail market
in the world after China and USA

Furthermore, Alibaba having already operated in a much larger Chinese market can
leverage its strengths in the Indian context.
By understanding the Indian market using PayTM as a stepping stone, Alibaba can
understand the Indian market and then Snapdeal acquisition will help it to be a
major etailing player.

References:
1. US Securities and Exchange Commission.
http://www.alibabagroup.com/en/ir/pdf/agm160524_ar.pdf
2. List of largest internet companies in the world.
https://en.wikipedia.org/wiki/List_of_largest_Internet_companies
3. Indias retail ecommerce sector is small but growing.
https://www.emarketer.com/Article/Indias-Retail-Ecommerce-Sector-Small-
Still-Growing/1014342
4. http://www.livemint.com/Companies/Qt7vyAZ1ywO0y9e3P1MjcI/Snapdeal-
losses-more-than-doubled-in-201516.html
5. http://www.livemint.com/Companies/5TfT5EzBLPCKc4gf49zeKJ/Snapdeal-in-
talks-with-SoftBank-to-raise-funds-at-lower-valu.html
6. http://www.pwc.in/assets/pdfs/publications/2015/ecommerce-in-india-
accelerating-growth.pdf
7. https://yourstory.com/2017/03/paytm-mall-indias-latest-unicorn/
8. http://economictimes.indiatimes.com/industry/services/retail/amazon-pips-
snapdeal-to-become-indias-2nd-largest-online-marketplace-after-
flipkart/articleshow/52017176.cms
9. http://techcircle.vccircle.com/2016/11/08/snapdeal-ola-valuation-knocked-
down-again-by-softbank/
10.http://www.iamwire.com/2016/02/snapdeal-funding-ontario-teachers-
pension/132147
11.http://www.ibef.org/industry/indian-retail-industry-analysis-presentation
12.http://www.ibef.org/download/Retail-February-2017.pdf
13.http://economictimes.indiatimes.com/small-biz/money/alibaba-to-hike-stake-
in-paytms-marketplace-for-177-million/articleshow/57428717.cms