India’s booming online economy has attracted a lot of investments recently. US investment bank, Morgan Stanley, states that investors have put in $4.5 bn in the internet space in the last 13 months to February 2015. The bank estimates that the market capitalisation of Indian internet companies could move substantially higher from about $ 5 bn now to about $ 200 bn by 2020. Online marketplaces like Flipkart and Snapdeal have got almost 60% of the funding since 2007. However, as billions flow in some Private Equity (PE) investors feel that valuations are running away. And that entry at such high levels will make a profitable exit difficult. Most PE firms exit their investments via IPOs, i.e., new stock market listings. But the valuations on listing may not be high enough to produce a profit for late-entry PE investors. Flipkart, India’s biggest e-commerce company is valued at around $ 11 bn by some analysts. That equates to roughly three times gross merchandise value (GMV). Snap deal is estimated to be valued at $ 5 bn on GMV of $ 3 bn.

In sharp contrast, three of the leading bricks and mortar retailers in India – Pantaloon, Future Retail and Shoppers Stop – have only a combined valuation of around $1.4 bn. India’s growing middle class population, cheap internet costs and rapidly rising number of smart phone users has made the e-commerce sector a hot destination for global investors like Singapore’s Temasek and Softbank. The latter said about six months ago that it would invest $100 bn into India’s e-commerce sector. With a huge population in India this sector is expected to grow substantially.

David Fuller's view

Here is The India Report.

There has been a huge amount of investor interest in India since Narendra Modi won his election victory with a majority in May 2014, and the Sensex Index rose 50% within a year. 

 However, that obviously lifted valuations significantly and the nearly one-way upside traffic ended earlier this month, evidenced by the larger reaction.  India is currently oversold but this may remain predominantly a year of consolidation.  Nevertheless, a strong GDP growth rate estimated at over 7% should now cushion downside risk while also lowering valuations.  India’s long-term potential remains outstanding.

I often describe stock markets as individual candidates in an international beauty contest and the spotlight is now mainly on recipients of QE – Japan, plus the EU nations led by Germany.  Mainland China is also a clear recipient of accommodative monetary policy but is no longer cheap, so Hong Kong’s HSI and HSCEI are better value today.