While India presents a growth opportunity for Amazon (NASDAQ:AMZN), lack of foreign direct investment in retail and local consolidation could prove challenging. India's e-commerce giant Flipkart, which has crossed the $1 billion mark in annual gross merchandise volume, recently acquired the country's biggest online fashion retailer Myntra. There is clear indication that the move is motivated by Amazon's expansion in the country, and could help the local stalwart compete better going forward. Amazon has the financial muscle and expertise to create a formidable presence in the region, which is why we expect to see more consolidation going forward. Let's take a look at the country's potential for e-commerce growth and why it may not be a cakewalk for Amazon.
Our current price estimate for Amazon stands at $341, implying more than 10% premium to the market price.
India Has Strong Potential For E-Commerce Growth, But It's Still A Nascent Market
According to research conducted by PricewaterhouseCoopers (PwC) in 2012, the retail market in India stands at over $350 billion and is growing at a healthy compounded annual growth rate (CAGR) of 15-20%. Foreign retailers are showing interest due to a large market, growing number of aspirational buyers, increasing personal income and the lack of organized retail penetration. As far as the online retail market is concerned, it is still at a nascent stage but seems to have picked up significantly in the last couple of years. Consulting firm McKinsey expects India's e-commerce market to grow at a rapid pace for the next few years, amounting to $2 billion by 2015.  The firm also estimates that the country will have roughly 38 million active online shoppers by then.
eBay seems to be a lot more optimistic. Last month, the company's India managing director stated the Indian e-commerce market is growing at a rate of roughly 55% to 60% a year, and is expected to reach $3.2 billion by 2014.  He went on to peg the number of users visiting online shopping sites at around 89 million.
There is clear evidence that the explosive growth in India's online retail market is likely to continue and clearly Amazon wants to be a part of it. This fits in well with the retailer's broader strategy of focusing on cash profit growth rather than margins.
Local Consolidation And FDI Restrictions Will Pose Challenges
Rising tide lifts all boats. That has been true for India's e-commerce industry which was pioneered by Flipkart, but has since seen several local online retailers springing up. These include Snapdeal, Myntra, Jabong and Quikr. With Amazon's entry in India, local investors and players are getting wary with the understanding that the retail giant could set new standards for delivery and quality. This has prompted the recent acquisition of Myntra by Flipkart, with the deal being valued at more than $300 million.  This acquisition will give Flipkart a command over fashion retailing, which was a key category missing from its portfolio. Local consolidation is likely to continue going forward and could make Amazon's expansion a little difficult.
To its advantage, Amazon has a strong brand name that's recognized globally, including India. The company's quality control has been good since its foray in the country's e-commerce market. However, the absence of FDI (foreign direct investment) in retail in India will limit Amazon's control over logistics and give local competitors a fair chance to stand against the behemoth. There has been a significant political change in the country in the recent general elections, and while the new government is likely to be more industry-friendly, it is unlikely that they will allow FDI in retail. Amazon will continue to work as a marketplace for the foreseeable future.
Disclosure: No positions.