India's e-commerce sector likely to touch $28 billion by FY20

India's e-commerce sector is expected to touch $28 billion (nearly Rs 1.9 lakh crore) by fiscal year 2019-20 on account of an increase in number of buyers and stable annual spends per consumer, according to a report.

"A gradual increase in shopper base, coupled with steady increase in online spends can help the Indian e-tailers reach gross merchandise value of $28 billion (nearly Rs 1.9 lakh crore) by fiscal year 2019-20 (FY20). We assume buyer penetration to improve to 18% by FY20 from 12% in FY16, with annual average online spend to increase by 10-15% year-on-year over the forecast period," a Kotak Institutional Equities report said.

It observed that the e-commerce will continue to find more takers, particularly as organised retail penetration remains limited in tier-II and tier-III cities.

It noted that the growth in the e-commerce industry, which it estimates to be a compounded annual growth rate of 45% over FY2017-20, will be in line with the gradual improvements in household incomes and infrastructure development.

"We believe Indian growth in e-commerce will be more gradual, in line with gradual improvements in household incomes and infrastructure development. Further, in order to be more profitable, e-commerce companies may still need to change buyer behaviour as far as high proportion of cash-on-delivery and product returns are concerned," it said.

The report also urged the e-commerce players to diversify away from sales of mobile phones and electronics, where margins are thin and opportunities for product differentiation versus competitors are minimal, unless the e-tailer manages to get exclusive products to sell.

"By and large, price will remain a big draw for consumers, who may not hesitate in buying similar products from various portals as well as neighbourhood shops. Hence, customer loyalty would need to be cultivated on large and varied product assortment, quick delivery and after sales support (particularly for higher ticket items), and liberal returns and exchange policy, coupled with flexibility for the consumer to pay in cash," according to the report.

The report pointed out that Indian e-tailers will need to cater to two distinct categories of customers--higher-end, early adopters of online shopping, who will demand premium products and services; new users, who may typically be in tier-II and tier-III cities, and may need take more time to become loyal online shoppers.

"Assuming only urban households are currently served by e-tailers, we believe e-tailers are already serving 20-40% of urban households. This is already a decent level of penetration for these companies; future growth in users, thus, will come from new urban population (migrants and new adopters), and rural customers may still take time to come under the fold of e-tailers," it said.

The report noted that the smartphone shipments to India increased steadily over 2011-14, before flattening out in 2015.

"Most of the increase in shipments was driven by utility phones, with the absolute number of shipments of basic and premium phones remaining constant over 2011-15," it said.

By 2025, Indians will spend less on apparel, household goods, personal products because spends on other essential or semi-essential expenses such as transport, communication, healthcare would increase faster.

"This may result in a slower increase in retail, and hence e-tail, spends in India," it said.