Amazon’s CEO Believes In India’s Growth Story

Amazon‘s (NASDAQ:AMZN) CEO Jeff Bezos was in headlines due to his recent visit to India, and the decision to move ahead with $2 billion of investment in Amazon’s operations in the country. THis prompts us to wonder:  Was this a significant visit?  And can India become integral to Amazon’s future growth? One thing is certain:  Amazon’s management is showing a strong belief in India’s growth story. The country’s GDP growth could get back on track this year and recent developments suggest that there is a lot of interest from investors in e-commerce companies.

To put things in perspective, Amazon’s 2013 revenues stood at little under $75 billion and the company enabled $1 billion of gross merchandise volume in India where it operates a marketplaces model. Therefore, actual revenues from India would have stood below $100 million assuming a take rate similar to that of eBay (NASDAQ:EBAY). Thus, we estimate that India accounts for less than 1% of Amazon’s business, even if we assume that its marketplaces model in India has much higher margins that its inventory-based model in the U.S. and other countries. However, we believe that Indian e-commerce market will grow multi-fold over the course of next five years and, at some point, the Indian government will allow FDI (foreign direct investment) in the country, thus allowing Amazon to stock-in inventories and sell them directly. Over time, we believe that India can be integral part of Amazon’s business.

Our price estimate for Amazon stands for $348, implying a slight premium to the market price.

See our complete analysis for Amazon

Amazon Believes In India’s Growth Story

The decision to invest $2 billion is not a small one, and in part stems from the fact that Amazon’s India operations have reached $1 billion in gross merchandise volume within just one year of their initiation. Jeff Bezos specifically stated that India team has surpassed management’s highest expectations and it makes sense to invest now to fuel further growth and expand operations. If we look at the country’s recent political changes, GDP growth and the sheer potential of its economy, there is little doubt that e-commerce industry will see an explosive growth going forward.

India’s newly elected government has a strong mandate and has shown willingness to bring necessary reforms and remove ‘red tape’ to stimulate economic growth. Infrastructure lending will be kept out of SLR (statutory liquidity ratio), CRR (cash reserve ratio) and priority lending. Less regulatory requirements will encourage banks to lend more to infrastructure related projects. This, in turn, will encourage India’s business community to invest more and set up new production and manufacturing units.

India’s GDP growth saw an encouraging rebound in the first quarter of the new fiscal year, growing by almost 6%. ^[1] According to data compiled by BNP Paribas, first quarter earnings came out better than expected, with sectors such as outsourcing and automotive standing out. Indian equity markets have seen a strong run up in recent months, suggesting an inflow of capital and positive investor sentiment. The International Monetary Fund (IMF) expects India’s GDP to pick up to 5.5% in the current fiscal year, and 6.3% in the next. Additionally, it expects the figure to reach almost 7% in the medium to long term. ^[2]

All this will get funneled into growth in consumption which, in turn, will be one of the important drivers of e-commerce market in India. The Indian retail market is fragmented and large e-retailers can take advantage of this. According to Nomura India, the country’s online retail sales are expected to jump from $10 billion this year to more than $43 billion by 2019. ^[3] Online travel still accounts for bulk of e-commerce sales but that’s going to change in the coming years.

Competitive Landscape Is Evolving, It Is Now Or Never

Competition is intensifying in India as e-commerce market is picking up. Flipkart, which is the largest e-retailer in the country, raised $1 billion in funding earlier this year which pegs the company’s valuation at $7 billion. Another company, Snapdeal, received some fresh funds from eBay and other investors in early 2014. One of the biggest conglomerates in India, Tata Group, also plans to enter e-commerce market through marketplaces model. These are all significant players with sufficient funding to strengthen their foothold in India’s growing online retail industry. Amazon knows this, and is investing at an opportune time. It is now, or never.

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1. India optimism fuelled by earnings and GDP growth, Financial Times, Sep 2 2014 [↩]
2. IMF bullish on India’s growth story, Economic Times, Apr 17 2014 [↩]
3. India’s ecommerce poised at $43 bn in 5 years: Meet the key growth leaders, Economic Times, Aug 21 2014 [↩]