“We consider the India internet sector to be at an inflection point to witness hyper-growth in the coming years as we see tech companies steadily disrupting the traditional services by eliminating ‘middle men’, delivering faster, cheaper and more convenient products & services,” the brokerage said.
The brokerage firm credits the rollout of 4G telecom services by billionaire Mukesh Ambani’s Reliance Industries in 2017 for the mass adoption of the Internet in India, and believes COVID-19 has accelerated the path towards profitability.
A supportive government, tech-savvy young population given more than 60 per cent of Indians are aged below 35 years, ongoing digitisation of small businesses and a well-funded private equity ecosystem, suggest that the stars are aligned to create investor value in the coming decade, the brokerage said.
BofA Securities is of the view that Reliance Industries remains the best play on the Internet ecosystem as it will garner over 500 million users over the next 3-5 years, offer broadband services to 20-25 million households and cater to 12-15 million small businesses.
“RIL’s approach of owning the “pipe” as well as the “services” offered on the pipe should help it earn incremental digital revenues,” the brokerage noted.
The brokerage house believes that start-ups in India are moving beyond the top 100 million consumers, and focusing on the next 100-250 million consumers to gain traction. BofA Securities said that as the country’s GDP per capita improves, a large part of this “India 2” market will move into the top tier of consumers.
“We find India ecosystem led by smart entrepreneurs to be maturing well and expect the focus to move from ‘traction to monetization’ in the coming years,” the brokerage said.
Here are the five themes it is keeping an eye out for the next 1-2 years:
Digital revenues at RIL picking up
Over the next two years, BofA expects digital revenues from online, advertising, shopping and subscriptions to pick up. The app-in-app integration of JioMart inside WhatsApp should help in uptake of online sales of grocery, electronic and apparel for RIL.
Online consumption to pick-up from tier 3-4 cities
Improving digital payment options, logistics and online offerings are enticing consumers from tier 3 and tier 4 cities to transact online. Companies like Flipkart and Amazon are taking a different approach towards these cities.
Fintech to be more combative vs collaborative
After a relatively ‘collaborative’ approach in the past five years, BofA now expects Indian financial technology companies to take a more combative approach in the next 3-5 years. “Despite Indian banks being relatively better than their global peers, we find the banks playing catch-up,” the brokerage said.
Consolidation to pick up coming out of Covid
Bigger technology companies would look to acquire companies having complementary offerings. BofA also sees struggling companies shutting down as focus starts moving towards unit economics.
IPO road-map: This time it’s real
Most of the technology start-ups have maintained a stance of saying “we will IPO in next 2 years” for the last 4-5 years. Improving unit economics, reducing losses and the recent strong performance by IPOs in the US should encourage Indian companies to consider potential IPOs, the brokerage said.
