Warren Buffett’s Berkshire Hathaway is expected to pick up a small stake in One97 Communications Ltd, the parent company of payment gateway Paytm, says a news report, quoting people aware of the development. The news comes at a time when the bigger players in the global e-commerce space are clambering over each other for a foothold in the Indian market space.
So is this the coming of age moment for the Indian digital economy?
Let’s take the case of Paytm first and look at what might have drawn Buffett to the company.
Paytm’s business model is indeed the sort that would get someone like Buffett interested. Paytm’s core business is that of a payment gateway through which incoming and outgoing transactions pass, something like the toll bridge business that fascinated Buffett in his childhood.
The other factor is that Paytm gets to enjoy the ‘float’ of money residing in its wallet when the customer is not using it to transact. Next is the growing acceptance and trust of Paytm as a transaction gateway. Paytm has achieved an annual run rate of 5 billion transactions and registered $50 billion gross transaction value (GTV) in a year. GTV is the total transaction value through the platform.
It has been reported that Paytm has processed over 400 million BHIM UPI transactions in last six months achieving 500 percent growth in money transfer transactions in the June 2018 quarter.
Thus you have the key ingredient in place to attract Buffett. Details of valuations are not available, but if Buffett is interested it clearly meets his ‘growth-at-reasonable-price’ criterion.
The story for India is not in the growth numbers of Paytm but from where the numbers have come. Paytm has witnessed the tremendous growth in adoption of digital payments in tier II and tier III cities that constitute 50 percent of its total user base. Surat, Durgapur, Rajkot, Meerut, Imphal, Rohtak, Panipat, Mangalore, Ranchi, Puducherry, Rajamundri, Warangal, Jodhpur, Thrissur, Karnal, Madurai, and Jamnagar are among the fastest adopters and are leading the wave of digital payment adoption.
That is the big India story.
The Indian e-commerce market is expected to grow from $38.5 billion in 2017 to $200 billion by 2026. According to a study by The Boston Consulting Group and Google, internet users in India are expected to grow from 390 million to 650 million users in 2020. This number is more than the total number of users in G7 countries.
From 2008-13, China went through a period of rapid internet penetration, doubling in five years. The same story is expected in India. More than half of India’s internet growth is expected to come from rural India, taking the share of rural internet users from 33 percent to 50 percent in 2020.
Rural penetration has posed a challenge to e-tailers. Nearly 50 million online shoppers dropped out in the last 12 months. A nine-month long research conducted by Google, consultants Bain & Company, and philanthropic venture fund Omidyar Network found that 54 million users stopped online transactions after their first purchase in the last year. Those dropping out were mostly first-time internet users from lower income groups who were more comfortable with vernacular languages than English.
Paytm seems to have broken the code of attracting customers. Its 500-percent growth is primarily on account of its multilingual app. Around 25 percent of its users prefer using the app in their regional languages. Hindi is the most used language after English, followed by Gujarati, Telugu, Marathi, Bengali, Tamil, and Kannada among others.
Presently only 14 percent of India’s internet users shop online, compared with almost 64 percent in China. This is the potential of the Indian market that is attracting some of the biggest players in the world.
Now e-commerce is a big boys’ game. The smaller players are either swept under or are bought out by the giants. Flipkart, which was bought out by US retail giant Walmart for $16 billion had gobbled a number of smaller companies, most of which were funded by the same private equity players who had funded it.
China’s Alibaba is scouting for partners while Amazon is ready to increase its investment in India. Indian markets are now the new battlefield for global giants. Even if we exclude the huge Walmart deal, the e-commerce industry in India witnessed 21 private equity and venture capital deals worth $ 2.1 billion in 2017 and six deals worth $ 226 million in January-April 2018.
The only thing missing in the India story is a robust and transparent policy. The draft policy on e-commerce was criticized by most players in the industry. The government will have to balance foreign interests and growth opportunities in the space.
Too much control on the sector will scare away the investors -- remember, Buffett ran away from his intrest in the insurance company Bajaj Allianz in India because of excessive regulation.