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Indian e-commerce not a bubble; tipped to grow to $50 bn by 2020: UBS

A recent report by brokerage firm UBS titled “Is India in an e-commerce bubble?” suggests that investor concerns about e-commerce being a bubble in India seem to be misplaced and suggests stocks listed in India and abroad that it thinks will be key beneficiaries of this growth.

UBS recently said that the ‘e-tail’ market in the country is well placed for growth and could be worth $ 50 billion by 2020, reports the Economic Times.

A recent report by brokerage firm UBS titled “Is India in an e-commerce bubble?” suggests that investor concerns about e-commerce being a bubble in India seem to be misplaced and suggests stocks listed in India and abroad that it thinks will be key beneficiaries of this growth.

UBS recently said that the ‘e-tail’ market in the country is well placed for growth and could be worth $ 50 billion by 2020, reports the Economic Times.

“We believe the Indian e-commerce sector is well placed for significant growth, driven by India’s favourable demographics, multi-fold rise in internet penetration and scarce organised retail,” UBS said in a report.

Initial issues like consumer acceptance, lack of credit and debit card penetration and challenge of last-mile delivery are being overcome as industry has responded with solutions like cash-on-delivery and specialised e-logistics companies, it added.

“Our analysis of the supply-chain for offline retail by category implies adequate margins for e-tail in future. Inherent operating leverage in the business model and 700bp (as a percentage of gross merchandise value) lower discounting should lead to operating profit for the industry by 2020. Grocery is a much bigger part of retail in India than in other markets. Success in this segment would imply upside to our valuation estimates,” the report says.

According to the UBS report, outside of private equity investment or listed global companies, equity investors can gain exposure to this space through online classifieds and travel; and among the India-listed stocks, maintain a ‘buy’ rating for Nasdaq-listed Makemytrip, Info Edge and a ‘sell’ rating for Just Dial.

Among telecom companies, it maintains a buy rating on Bharti Airtel and Idea Cellular. “Hindustan Unilever (HUL), Colgate, and Titan should benefit from the expanding reach of their premium products. Page Industries and TTK Prestige are vulnerable, in our view. Logistics companies are direct beneficiaries of etail growth.

We believe logistics companies with pan-India coverage and robust last-mile delivery will benefit most,” says the report.

According to the report, the following stocks are likely to benefit of the e-commerce boom in India:

Google (Buy; Target price: US$670): Google is a key source for diverting traffic to e-commerce sites in India. We believe Google to capture significant marketing budget of e-commerce/internet companies as they progress to capture the market share. We expect Google to make most dents in the Indian market through its Android One program.

Facebook (Buy; Target price: US$92): Facebook is the second-most visited website in India. We believe Facebook can play an active role in e-commerce space with emergence of e-shops and through the sale of ad space. We expect retailers to increasingly invest in Facebook advertising to drive traffic to their own sites, particularly as more sophisticated advertising tools are adopted.

Twitter (Buy, Target price: $58): Twitter’s acquisition of Zipdial (mobile marketing firm unique to emerging markets) to make Twitter content more accessible in markets such as India and over time, increase the number of marketing opportunities for Twitter’s advertising customers. We expect it to gain with the emergence of target advertising.

Amazon (Neutral, Target price: $355): Amazon is one of the significant e-tailers in India and operates through market-place model.While India’s current contribution to Amazon’s total revenue is low, we expect substantial gains from Indian e-commerce and expect the company to remain a top two or three player in future. Amazon is the largest foreign and listed company in Indian e-tail and has an added advantage of its multiple geographical experience, global best practice and technology accessibility.

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