India set to become world's fastest growing e-commerce market

To grow from $2.9 bn to $100 bn in 2020, market capitalisation of internet businesses may hit $160 bn

India is on route to becoming the world’s fastest growing e-commerce market, if current projections are anything to go by. This growth story is being driven by robust investment activity in the sector and the rapid increase in internet users. Internet users in India have gone up from 50 mn in 2007 to 300 million in 2014.

Last year, smart phone shipments doubled to 80 mn from a year-ago period. The prospect of connecting 1.24 billion people to the internet may be an opportunity in itself. But what analysts are excited about is the prospect of selling products and services to this digital population. Investment banks believe India is on way to becoming one of the largest internet markets in the world, with implications for consumers and investors.

Morgan Stanley expects the size of the Indian internet market to rise from $11 bn in 2013 to $137 bn by 2020 and market capitalisation of these internet businesses could touch $160-200 bn from the $4 bn at present. Currently, only three internet companies are listed in India but with the pace at which venture capital (VC) firms and private equity  (PE) firms are pumping money into India, several internet companies could possibly look at listing in the next couple of years. India’s internet market was at $11 bn (gross merchandise value) in 2013, of which $11 bn was online travel and e-commerce was $3 bn.

As the market matures and more companies get listed, the market cap of internet companies will expand too. Analysts at Morgan Stanley believe that India's internet market can grow to $137 bn by 2020 (a CAGR of 43 per cent) and e-commerce will form the largest part of the internet market at $102 billion. In relatively more advanced markets like China and the US, top 30 listed internet companies account for 12 per cent and four per cent, respectively, of the total market capitalisation. Internet commerce tends to account for more than 50 per cent of the market cap among listed internet firms. Morgan Stanley expects India’s e-commerce market (revenues) to grow from $2.9 bn in 2013 to over $100 bn by 2020, making it the fastest growing e-commerce market in the world.

The basis of this argument is the kind of equity investments made by PE and VC firms in 2014. The total equity investments made in Indian internet companies is $4.5 bn. The growth in internet businesses will also give a fillip to other related businesses like logistics and payment solutions.