Why India will be Amazon's biggest growth driver

Amazon has become a major player in the world’s fastest growing major economy.

E-commerce is growing exponentially in India due to rapid mobile Internet penetration and increasing customer spend.

India should be Amazon’s biggest growth driver in the coming years.

Growth, Growth, Growth.

Amazon Inc. (NASDAQ:AMZN) has seen tremendous success in its Indian business. Amazon launched its Indian arm in June 2013 and has seen tremendous growth since then. India has become Amazon's biggest source of new customers after the US. The Indian e-commerce market size is expected to reach ~$100 billion by 2020 and Amazon has successfully carved a leading position in the Indian marketplace. Its excellent customer service provides a strong reason for customers to prefer Amazon over other competitors (Snapdeal and Flipkart). India is set to be a major growth driver for the company, even as the US and UK markets mature for the company's e-commerce segment. During fourth quarter 2015, Amazon sold more than it did during full year 2014. Amazon does not have a strong presence in other markets such as China and Japan. These countries are relatively antagonistic to foreign companies and prefer domestic ones. I think Amazon is set to become the No.1 e-commerce player in the Indian market because of the following reasons.

"We are very pleased with the growth momentum we are witnessing in India. At the end of Q3-2015, we saw an approx. 500 percent YoY growth in volume, and in Q4-2015 we sold more than we did in all of 2014. As per comScore, Amazon.in is the Most Visited e-commerce site in the country and we also had the fastest growing shopping app among all e-commerce companies in 2015," the company added.

Business Standard

Why is Amazon bullish on India?

1) The average Indian spend is increasing - With the advent of smartphones in India, an average Indian is spending more online. According to a study, the average spend by an Indian shopper will rise 67% reaching Rs.10000 in 2015. It is expected there will be 40 million online shoppers in India by 2016, which will be double from what it was in 2013. India's Diwali festival is somewhat like Christmas in the west when customers splurge on shopping. In India during the festive season, e-commerce firms in India like Amazon, Flipkart and Snapdeal roll out exciting offers to attract shoppers to the online medium. It is expected that about one-fourth of their revenue comes during this period.

2) Amazon is doing things differently - With a number of e-commerce sellers in the online marketplace, Amazon has been doing things differently to stand out. While most online sellers are using pricing and discounting as their main differentiators, Amazon is bringing in its global expertise and experience to climb to the top. Amazon started next-morning delivery for late-night orders. Amazon's customer service and its website navigation also is much better than the main Indian competitors such as Flipkart and Snapdeal. Though Amazon is not doing anything radically different, but it's doing things differently which may help it win the race. The company also is looking at exporting some of its innovations that it has developed in India to other geographies as well.

3) Amazon.in is growing exponentially - Amazon.in has over 30 million products listed in India, adding an average of over 40,000 products a day in 2015. The number of sellers on the Amazon.in platform has increased more than 250% in the last year. While Flipkart had plans to end 2015 with 100,000, Amazon already has crossed that number. The company got requests to register over 24,000 sellers in September 2015 alone. Amazon.in has nearly tripled its fulfilment capacity with over 90% of Indian sellers using Amazon's logistics and warehousing services.

4) Amazon will likely emerge as the leader - Amazon has an excellent logistics network, international experience and backing of Amazon.com which gives it an edge over local Indian firms like Flipkart and Snapdeal. Its return policy also is excellent making the overall consumer experience very pleasant. The company has massive financial backing compared to other competitors which primarily depend on private equity money to support their cash burn. Note almost all India e-commerce players are losing money now as they invest heavily to support the huge growth being seen in the industry. Indians have taken to the online medium in huge numbers leading to massive growth. The Amazon website and its app were the most visited among other e-commerce companies in India in 2015.

5) Amazon is increasing investment in India - Amazon expects India to be its largest overseas market overtaking UK, Japan and Germany. The firm is planning to increase investment to $5 billion in the country. Amazon had announced an investment of $2 billion to expand its operations in India last year and received a large fund of INR 19.8 billion in February 2016. The company also is increasing its warehousing capacity in India with more sellers choosing Amazon as their warehousing partner. Currently Amazon has 21 warehouses in India so far, three of which were set up during 2015.

6) Beating Competition - The early leaders in the Indian e-commerce business like eBay (NASDAQ:EBAY), Alibaba (NYSE:BABA) and Rediff are now trying to survive. Foreign e-commerce players have struggled in the Indian marketplace due to unique Indian issues. Indians mostly prefer to pay cash on delivery ("COD") rather than through credit cards. Logistics also is a major challenge due the country's under developed infrastructure. Amazon has been the only foreign company to adapt successfully to the Indian conditions, apart from Flipkart and Snapdeal. Even I have found Amazon to be much more reliable and trustworthy in delivering products, compared to other online players.

7) Good Results - Amazon numbers also are looking quite good with its cloud business and other segments also performing quite well. Amazon has been expanding frantically in India as can be seen from the last year's numbers. The total revenues from Amazon India jumped to INR 10.22 billion, with losses amounting to INR 17.24 billion. The company has been spending heavily on marketing and logistics. FY 2014's corresponding sales and losses amounted to INR 1.69 billion and INR 3.21 billion, respectively. This shows the scale at which the firm has expanded in India.

Risks

Market Dislocation and High Valuation - Amazon has always commanded a high valuation despite the company following a very different strategy of pursuing growth at all costs. This has meant that the company's profitability has not been high as the company has invested in a diverse set of business segments. While some have proved to be a failure (smartphones), others such as its cloud business has proven to be a spectacular success. Amazon has been similar to Google (NASDAQ:GOOG) (NASDAQ:GOOG) in pursuing risky opportunities but with massive potential. Investors have rewarded Amazon's unconventional strategy. The stock trades with a P/B of ~19x with a P/E of ~52x. With the Fed increasing its interest rates, high P/E stocks such as Amazon could be more vulnerable in a risk averse situation.

Stock performance has been pretty stunning over the last year

The stock has returned 46% in the last year. AMZN stock is currently trading at $552, which is just 21% below its 52-week high price. It's world's most valuable retailer, with a market capitalization value of $257 billion.

Conclusion

Amazon has performed excellently to become the only foreign e-commerce retailer to carve out a leading position in India's hyper growth e-commerce industry. It has been amazing how quickly the company has emerged as a leader in the Indian subcontinent. By sales, India has become Amazon's fastest growing geography and is the second largest market for Amazon after the US. The company has been slowly outpacing competition and I think will soon emerge as a winner in the Indian e-commerce space. Though its sky high valuation is a concern, I would look to buy the stock on dips given its leadership position in major countries.

Source: techgig.com