India's Internet: A Guide To Investing In Its Potential

India's internet sector is an attractive prospect for investors. The country's internet ecosystem is evolving to meet the needs of its emerging demography, with the number of active internet users expected to increase by 45% in the next four years, reaching 900 million by 2025. This growth is supported by the Indian government's commitment to increasing internet connectivity, with projects such as BharatNet, Digital India, and Startup India. The country's internet speed has also improved, with 5G driving India's ranking up 72 places, ahead of many G20 countries.

The internet sector in India is also bolstered by the country's telecommunication industry, which is the world's second-largest, with a subscriber base of 1.17 billion as of September 2022. The introduction of 5G services in select cities in October 2022 is expected to further boost the telecommunication market, with a projected growth of 9.40% between 2023 and 2028.

India's internet sector offers diverse investment opportunities, with companies such as Info Edge, Indiamart Intermesh, and Justdial leading the way. The sector is also supported by the growth of e-commerce and digital marketing, with an increasing number of consumers making online purchases.

Overall, the internet sector in India presents a compelling investment opportunity, driven by increasing internet usage, government initiatives, and improving infrastructure.

Invest in early-stage tech startups

Overview

India's tech startup ecosystem is thriving, with an expected 10,500 startups by 2020, including over 50 potential unicorns. The Indian government actively supports this growth through initiatives like the National Infrastructure Pipeline (NIP) and the PM GatiShakti Master Plan, which aim to improve the country's logistics network and overall infrastructure.

Funding Stages and Sources

Early-stage tech startups in India typically go through several funding rounds, including seed, pre-seed, and Series A and B rounds. Funding sources vary depending on the stage of the startup:

• Bootstrapping/Self-financing: Many startups initially rely on their founders' funds or revenue to operate and expand.
• Business Plan/Pitching Events: Competitions or challenges that provide grants or financial benefits to startups with strong business plans.
• Incubators: Organisations that assist startups with resources and sometimes investments.
• Government Loan Schemes: Collateral-free debt options like the Startup India Seed Fund Scheme and SIDBI Fund of Funds.
• Angel Investors: Individuals who invest in high-potential startups for equity, such as Indian Angel Network or Mumbai Angels.
• Crowdfunding: Raising small amounts from a large number of people through online platforms.
• Venture Capital (VC) Funds: Professionally managed investment funds investing in high-growth startups, often providing mentorship.

Investor Considerations

When investing in early-stage tech startups, investors should consider:

• Revenue growth and market position: The startup's ability to generate revenue and its position in the market.
• Return on investment: The potential financial gains from the investment.
• Time to break even and profitability: How long it will take for the startup to become profitable.
• Uniqueness and competitive advantage: What sets the startup apart from its competitors and its strengths in the market.
• Entrepreneurs' vision and team capabilities: The passion, experience, and skills of the founders and their ability to drive the company forward.

Online Platforms

Online platforms like LetsVenture provide a gateway to India's private markets, connecting investors, family offices, LPs, and startups from early to growth stages. It offers curated deals, portfolio management tools, and resources to navigate the startup ecosystem.

Key Takeaways

• India's internet industry is projected to be worth $160 billion by 2025, creating numerous investment opportunities.
• Early-stage tech startups in India have various funding options, from self-financing to VCs, each with its own considerations.
• Investors should carefully assess startups' potential, considering revenue, market position, uniqueness, and the founders' capabilities.
• Online platforms like LetsVenture facilitate connections and provide resources for investors interested in early-stage tech startups in India.

Focus on companies with excellent technical and business fundamentals

When investing in India's internet sector, it is important to focus on companies with strong technical capabilities and robust business fundamentals. Here are some key considerations:

Financial Health and Performance

Analyse the financial health and performance of potential investment opportunities. Review financial statements, including income statements, balance sheets, and cash flow statements. Assess revenue growth, profitability, and competitive advantages within the industry. Look for companies with strong sales growth, market share, and a solid product pipeline, indicating their ability to increase future profits and shareholder value.

Leadership and Management

The effectiveness of a company's leadership team is crucial. A skilled and experienced management team can navigate challenges and seize growth opportunities, enhancing the company's value. Assess the track record, qualifications, and stability of the leadership team.

Competitive Advantage

Invest in companies with a clear competitive advantage. This could be in the form of brand recognition, proprietary technology, efficient supply chains, or a unique business model. A strong competitive advantage allows companies to maintain their market position and drive growth.

Industry and Sector Trends

Consider the industry and sector in which the company operates. Look for sectors with strong growth potential, such as e-commerce, artificial intelligence, fintech, and edtech. Understand the dynamics of the industry, including customer base, market share, industry-wide growth, competition, and regulatory environment.

Innovation and Adaptability

Seek out companies that demonstrate a commitment to innovation and adaptability. This includes investing in research and development, creating new products, and adapting to market changes and consumer demands.

Strong Fundamentals over Short-Term Price Fluctuations

Fundamental analysis involves a deep dive into a company's financial health, management effectiveness, brand awareness, and growth potential. It helps identify undervalued companies with solid fundamentals that may be overlooked by short-term price fluctuations.

Intangible Assets

While challenging to quantify, intangible assets like patents, trademarks, brand reputation, and human capital are crucial in today's economy. Consider companies with strong intangible assets that may not be fully reflected in financial statements but could provide a competitive edge.

Risk Management and Data Security

As the internet sector evolves, data security and privacy become increasingly important. Assess companies' ability to manage risks, invest in robust security measures, and maintain user trust.

Social Responsibility and Corporate Governance

Consider companies with strong corporate governance practices that align with shareholder interests and promote transparency, diversity, equity, and social responsibility.

Example of Strong Fundamentals: ABC Inc.

ABC Inc. is a hypothetical example of a company with strong fundamentals. With healthy profitability ratios, strong liquidity, and manageable debt levels, ABC Inc. demonstrates financial stability and potential for growth. It also possesses qualitative strengths, such as brand recognition, proprietary technology, an efficient supply chain, and an experienced management team.

In summary, when investing in India's internet sector, focus on companies with robust technical capabilities, strong financial health, effective leadership, competitive advantages, and positive industry trends. By considering these factors, you can identify companies with excellent technical and business fundamentals, positioning yourself for long-term investment success.

Look for companies with minimal debt

India has witnessed a surge in internet usage in recent years, reflecting its rapid digital transformation. This has led to a rise in the number of internet-based startups and tech companies.

When considering investing in such companies, it is advisable to look for those with minimal debt. Here's why:

Financial Stability and Autonomy

Companies with minimal debt have greater financial stability and autonomy. They are not burdened by regular interest payments, which can eat into their profits. This financial stability is particularly important during economic downturns or recessions.

Flexibility and Resilience

Businesses with minimal debt often have more flexibility to invest in new opportunities. They can quickly seize emerging opportunities without the need to consult creditors or shareholders, giving them a competitive edge. Additionally, they are generally better equipped to weather economic downturns or recessions as they don't have the added pressure of debt repayments.

Avoiding Insolvency Risks

Debt can fuel growth, but it also carries risks. Companies that borrow extensively may face financial strain and even potential insolvency if they are unable to generate enough revenue to cover their debt obligations.

Attractiveness to Investors

High levels of debt can make a company less appealing to investors, who may perceive it as too risky. A company with minimal debt, on the other hand, may attract a broader range of investors, including those seeking lower-risk opportunities.

Efficient Capital Structure

While debt can provide tax advantages, companies with minimal debt may have a more efficient capital structure. They may be better at optimising their cash reserves and deploying them for growth and innovation.

Bargaining Power in M&A

Zero-debt companies often have stronger bargaining power in mergers and acquisitions (M&A) negotiations. They can be attractive acquisition targets for larger companies looking to diversify their portfolios with less risky assets.

Examples of Companies with Minimal Debt

A few examples of companies known for carrying minimal debt include Monster Beverage Corp., SEI Investments, and Paychex.

In summary, when considering investing in India's internet sector, look for companies with minimal debt to maximise your potential returns and minimise risks. These companies often have greater financial stability, flexibility, and resilience, making them attractive investment opportunities.

Invest in companies with a strong India angle

India has witnessed a remarkable surge in internet usage in recent years, reflecting the nation's rapid digital transformation. This has led to a compound annual growth rate (CAGR) of 54% and a tele-density of 85.7%. The average revenue realisation per subscriber per gigabyte (GB) of wireless data ranges from ₹8.7 to ₹10.4, making India one of the most affordable markets globally. The proliferation of smartphones has also significantly boosted internet access, with a current count of 660 million smartphone users in India.

The demand for digital services has skyrocketed, with activities like streaming, gaming, and social media driving data consumption. This has led to a substantial increase in data usage and a shift towards a data-centric revenue model for telecom companies. The introduction of OTT platforms has also played a significant role in driving internet usage.

The surge in internet usage and the need for robust infrastructure to support high-speed internet has resulted in substantial capital expenditure in the telecom sector. Telecom companies are investing heavily in network expansion and upgrades to keep up with the growing demand for internet services.

With the internet playing an increasingly significant role in India, investing in companies with a strong India angle can be a promising opportunity. Here are some key considerations and examples to help you get started:

• Identify companies with a strong presence in India's telecom sector: Companies like Reliance Jio, Bharti Airtel Ltd., and Vodafone Idea Ltd. are leading telecom providers in India. Investing in these companies can provide exposure to the growing internet and telecommunication market in the country.
• Consider companies facilitating digital transformation: Organisations that enable and benefit from India's digital transformation are worth considering. This includes companies in the smartphone, e-commerce, and digital services sectors. Examples include smartphone manufacturers like Apple Inc. and multinational corporations like Amazon, which has announced plans to invest in Indian MSMEs and traders.
• Look for companies leveraging new technologies: With India's focus on digitalisation and technological advancements, investing in companies that leverage new technologies like artificial intelligence (AI) and cloud computing can be lucrative. For instance, Google has invested in India's space-tech sector, and AWS (Amazon's cloud computing unit) plans to invest in cloud infrastructure in the country.
• Invest in companies with a strong presence in India's growing sectors: Identify sectors that are expected to grow in India and look for companies with a strong presence in those sectors. For instance, the food processing sector in India is expected to grow, and companies like Britannia Industries Ltd. and Hindustan Unilever Ltd. could be worth considering.
• Explore startups with a strong India angle: Investing in early-stage startups can be risky but rewarding. Look for startups with innovative business models and strong growth potential in the Indian market. The India Internet Group, for instance, has invested in tech startups across various industries, including music/entertainment, location-based products, travel, and tech support.
• Diversify your portfolio: Investing in a range of companies across different sectors can help minimise risk. Consider investing in a mix of established companies and startups, or in multiple sectors like automotive, healthcare, and information technology.

Remember to conduct thorough research before making any investment decisions and always consider your financial goals, risk tolerance, and investment horizon.

Consider investing in India's top internet stocks

India's internet ecosystem is evolving to meet the needs of its emerging demography, with internet usage across the country increasing rapidly. The number of active internet users in India is expected to increase by 45% in the next four years, reaching 900 million by 2025. This surge in internet usage is being driven by affordable data plans and smartphone proliferation, with the average monthly data consumption per user reaching 20.27GB as of March 2024, up from 0.27GB in 2014-15. This has had a profound impact on the telecom sector, driving substantial growth and transformation.

The following are some of India's top internet stocks to consider investing in:

Info Edge

Info Edge is India's leading online classifieds firm and one of the oldest internet companies in the country. It owns several internet properties, including Naukri.com, an online recruiting platform, 99acres.com, an online real estate platform, Jeevansathi.com, an online marriage platform, and Shiksha.com, an online education service. It also has stakes in other internet businesses, such as Zomato, Policybazaar India, and Meritnation. Info Edge became a public limited company in 2006 and received a massive response to its public offer, with the offer price fixed at INR 320 and the IPO subscribed 54.76 times. On 24th April 2015, the Info Edge stock closed at INR 821.75 on the BSE and INR 821.30 on the NSE. The company has been performing well, giving a return of 91% to its shareholders in the last year.

Indiamart Intermesh

Indiamart Intermesh is an India-based online marketplace that connects buyers with suppliers, focusing on providing a platform for small and medium enterprises (SMEs), large enterprises, and individuals. The company has a diversified marketplace, with 71 million products from 56 different industries listed on its website. Indiamart Intermesh made a stellar debut in 2019, with its shares soaring 799% since then. This has led to significant profits for investors, with those who bought one lot of Indiamart Intermesh shares at the issue price of INR 14,595 making a profit of over INR 1.3 lakh.

Indian Railway Catering and Tourism Corporation (IRCTC)

IRCTC is a central public sector enterprise under the Ministry of Railways, Government of India. It enjoys a monopoly in the travel support services sector, being the only entity authorised by the Indian Railways to provide catering services, online railway tickets, and packaged drinking water at railway stations and trains in India. It has a dominant position in online rail bookings and packaged drinking water, with around 73% and 45% market share, respectively. IRCTC has been on a roll since its market debut, with its shares turning into a multibagger stock from its IPO issue price of INR 320 per share.

Justdial

Justdial is the market leader in the local search engine segment in India, providing local search-related services to users across the country through multiple platforms, such as the internet, mobile internet, telephone, and SMS. The company has also launched several new products, including JD Omni, an end-to-end business management solution for SMEs, JD Pay for quick digital payments, and JD Social, a social sharing platform. In July 2021, Reliance Retail Ventures acquired a 15.63% stake in Just Dial, becoming its promoter. In the last year, the company's shares have surged over 129%.

CarTrade Tech

CarTrade Tech is a multi-channel auto platform provider with coverage and presence across vehicle types and value-added services. The company operates various brands, including CarWale, CarTrade, Shriram Automall, BikeWale, and AutoBiz, connecting new and used automobile customers, vehicle dealers, OEMs, and other businesses. The majority of its revenue is generated from transaction charges, with other key revenue streams including media listings, subscriptions, and ad revenues, software services, auto finance, and insurance. CarTrade Tech successfully raised INR 30 billion through its initial public offering (IPO) and made its debut on 20 August 2021. Since listing, the company has lost nearly 15% against its issue price of INR 1,618 per share, with shares currently trading at INR 1,374 on the BSE.

MakeMyTrip

MakeMyTrip is an Indian online travel company, providing online travel services including flight tickets, domestic and international holiday packages, hotel reservations, and rail and bus tickets. The company was listed on the Nasdaq in August 2010, with its shares shooting up by 88.9% over the IPO price of $14 per piece on its debut trade. MakeMyTrip raised $70 million through its maiden initial public offering of 5 million shares in the US market, ending its first day at $26.45 per share. On 24th April 2015, the MakeMyTrip stock closed at $23.45.

Things to consider before investing in internet stocks

When investing in internet stocks, it is important to remember that numbers aren't everything. Internet stocks are unique in their ability to grow quickly and turn a money-losing operation into a massive cash cow once they reach critical mass. Look out for companies that are focused on expanding their businesses in India and overseas, with excellent technical and business fundamentals, minimal debt, and attractive valuations.

Frequently asked questions