Should you look for an Indian Alibaba? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Should you look for an Indian Alibaba? 

A  A  A
In this issue:
» Will 2014 be the worst year for IPOs?
» India's retail market offers a huge opportunity.
» Is the macro picture improving for India?
» G20 leaders sound a warning to markets...
» ...and more!

These days one company is the talk of the entire investing world. Chinese e-commerce giant Alibaba, has captured the imagination of investors with its dream debut on the New York Stock Exchange. This 15 year old company is already the world's largest e-commerce firm. Its IPO was the largest in US history at US$ 21.8 bn. At the close of trade on Friday in the US markets, Alibaba was valued at a staggering US$ 230 bn. That is more than the combined market cap of Amazon and eBay!

This has sparked renewed interest in Indian e-commerce firms. Much has been said about the rapid growth of Indian online retailers like Flipkart and Snapdeal. After China, India is considered to be the most promising e-commerce market. Investors have already poured in over US$ 2 bn into Indian e-commerce firms this year. Online retail contributes only about 0.3% of the total retail market in India. In the US, the same is 6%. This low base along with the rapid growth of the industry has got investors excited. Also, Alibaba gained 38% when it opened for trade on the day of its listing. This might lead some people to believe that similar gains could be expected in case Indian e-retailers were to list. However, we must not get carried away by promise of this business trend. There are very good reasons to be cautious when it comes to the Indian context.

In China, the number of active internet users is over three times the number in India. This has certainly helped a company like Alibaba, grow rapidly. It will be some time before Indians start shopping online in the same volumes that we see in China or in the US. Then, there is the business model of these firms that must be understood. India does not allow FDI in online retail. Therefore, these firms operate as an online marketplace rather than a direct retailer. Alibaba too operates as a marketplace but it is in a league of its own with sales of US$ 9 bn and a net profit margin of 50%. By contrast, the Indian firms are much smaller and are yet to generate profits. Alibaba runs a payment gateway as well as a logistics business too. This has helped the Chinese firm keep its costs down, as it scaled up without operating any warehouses. None of the Indian e-commerce firms have made a serious attempt to try out an integrated model like this.

The business models aside, we would like to caution investors regarding the valuations given to such firms. On the expectations of high growth, Alibaba has been valued at over 50 times earnings! Such multiples are just not sustainable we believe. Its growth and margins are bound to reduce once it expands outside China where it holds a dominant 80% market share. This is what Indian investors must keep in mind. The valuations being given to Indian e-commerce firms are just too optimistic. What's more, they aren't even making profits right now. But make no mistake. These firms have the Indian stock markets firmly in their sights. They will come out with IPOs at the first opportunity. At that time, investors will do well to not expect an Alibaba like listing.

Do you believe that Indian e-commerce firms can replicate Alibaba's success? Let us know your comments or share your views in the Equitymaster Club.

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02:40  Chart of the day
2014 has been such a great year for stocks that it is hard to imagine it go down in history books as the worst in any respect. However, there's one particular area where it is threatening to do so. We are referring to the initial public offerings (IPOs). If a leading daily is to be believed, the year 2014 looks set to go down as the worst for IPOs. What has given this impression is a very small list of companies whose offer documents are sitting with SEBI for IPO approval. All is not lost though. There are still few months to go before the year ends. And if the secondary market sentiments are anything to go by, there could well be a flurry of applications before the year actually draws to a close. The overwhelming response received by couple of recent issues would definitely be playing on the minds of promoters looking to make their companies public. As a result, the year might still end on a decent note. Having said that, it will help if investors do not get carried away too much by this numbers game. And instead focus on quality and the underlying valuations and not on quantity alone.

Will 2014 be the worst year for IPOs?

This sector has had a huge following amongst investors looking to capture India's growth story over the last few years. After all, higher income levels and willingness to spend disposable income tends to have a direct and positive impact on this sector. An article in Economic Times lists down few statistics as to why the Indian retailing story is so enamoring to manufacturers and investors alike...

Now, consider the facts first. The total apparel retail market is valued at Rs 3.2 trillion and is growing at around 21%. It is expected to be worth Rs 5.6 trillion by 2017. Therefore needless to say, the opportunity is very big! Modern retail is estimated at 43.1% of this total market and is expected to grow by much higher growth rate. The total fashion accessories retail market alone is worth Rs 155 bn and that too is expected to grow by around 23% per annum! Moreover, the total food service retail market is worth Rs 2 trillion, growing at around 24% per annum and is expected to touch Rs 3.8 trillion by 2017. Thus, even if investors look at the best players operating in niche segments of the retailing industry, there could be a lot of choice. However, most of the players are yet to be listed. And amongst those that are already listed, very few sport the operating metrics that would make them luring to investors. So while the sector is certainly one to watch out for, investors must be very selective in their investments.

In an article written in the Business Standard, Mr. Gokarn the former deputy governor Reserve Bank of India believes three factors point towards a stable future external environment. First is the impact of lower oil prices on India's deficit levels, which were major concern areas for the country not so long ago. As per him, expansion of shale gas production is likely to keep the crude prices lower. Second is the spillover effect that the 'unquestionable' economic recovery in the US will have on rest of the world. And third is that of portfolio rebalancing; as the world becomes less risk averse given that access to cheap liquidity would eventually fade.

According to us, it remains to be seen whether the US economy will be able to sustain without access to cheap liquidity. Further, valuations in the US do not seem to be in sync with the ground realities of its economy - quite an opposing view to that of Mr. Gokarn's. As we had written in a recent edition of the 5-Minute Wrap Up, the revised GDP in the US for 1Q 2014 stood at -2.9%; such growth levels are termed as 'recessions'.

Time and again we have said how loose monetary policies followed by central banks across the world are anemic to stock markets. It's not that only we are blessed with knowledge economics. Even central bankers across the world are aware about it. But the desire to keep the stock markets humming has led them to follow such a delirious policy. However, G20 has warned that such a strategy could increase the potential of financial market risk. A rise in stock price due to artificial liquidity has made investors complacent. And also ignorant to the risks that accompany such policies.

We reckon that instead of injecting money into the system and trying to revive markets, policymakers should focus on ways to restore growth. Improving employment and reducing deficit is one way to go. Making available cheap money can provide temporary relief but it is not a long term solution. For that the developed world needs to swallow the bitter pill of austerity and put their budgets in order. If not, even low to zero interest rates shall not help. Instead they shall create asset bubble elsewhere.

Indian stock markets pared early losses and were trading positive in the post noon trading session. At the time of writing, the BSE-Sensex was trading up by 22 points (0.1%). Majority of the sectoral indices were trading in the red led by metal and pharma stocks. Consumer durable and auto stocks were the biggest gainers. Most of the Asian markets were trading weak with China and Taiwan being the major losers. European markets have also opened the day in the red.

04:55  Today's investing mantra
"Most people get interested in stocks when everyone else is. The time to get interested is when no one else is. You can't buy what is popular and do well" - Warren Buffett
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3 Responses to "Should you look for an Indian Alibaba?"


Sep 23, 2014

All your articles make very informative and interesting read. Thanks and look forward to the mega trend master series



Sep 22, 2014

Indian sites like could easily become India's Alibaba type valued company.



Sep 22, 2014

Regarding Alibaba IPO, you may wish to add following facts for readers' to get a more realistic picture..
..we must remember that this is a chinese company where corporate governanace, transparency etc. are all questionable.....the ownership of Alibaba itself is shrouded and opaque...It’s a set of independent websites providing e@commerce coupled with payment system ownership, geographies and status of these websites nor the payment system is belongs to Alibaba. Investors also should not forget Jack Maa's rift with Yahoo in 2009. All in all, you should clearly indicate that its better to avoid the Alibaba's

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