Alibaba Group Holding Ltd (BABA) Will Try to Dominate India

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While China’s e-commerce market is still growing, Alibaba Group Holding Ltd (NYSE:BABA) and its affiliate Ant Financial are already looking south to India. Last year, Morgan Stanley predicted that the Indian e-commerce market would grow the fastest globally, to $119 billion by 2020. And Alibaba stock is poised to benefit.

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What’s driving e-commerce and fintech in India? India passed the U.S. as the world’s No. 2 smartphone market last year, with 220 million users. The number of smartphone users in India is expected to balloon to 810 million by 2021 and India’s 3G and 4G networks could cover 300 million subscribers by March 2018.

India’s young and growing population is increasingly tech-savvy, especially millennials.

India’s government also supports a cashless economy, seeing this as a way to reduce corruption and tax evasion. The Indian government also removed the largest banknotes, 500 rupee and 1000 rupee notes, from the economy. This led to an explosion in the use of mobile wallets in India, adding as many as 1 million users added per day

Last year, the National Payments Corporation of India announced the Unified Payment Interface, making it convenient for Indians to access their bank accounts on their phones and pay.

And all these moving parts flow into the bull case for Alibaba stock.

Taking Ant’s Strategy to India

Alibaba and Ant (formerly Alipay) invested in One97 Communications, the parent company of Indian e-commerce player Paytm. They are expected to increase their stake to 50% from 42%. Paytm last year spun off its payments business to comply with regulations. One97 holds a 49% stake in Paytm Payments Bank and Paytm founder Vijay Shekhar Sharma owns 51%.

Paytm boasted 177 million users at the end of the year and CFO Madhur Deora has set a medium-term target of 500 million users. That growth would be a boost for Alibaba stock and Ant Financial which seeks 2 billion users worldwide over the next decade.

Paytm is clearly taking a page out of Alibaba and Ant Financial’s playbook. Like BABA’s MyBank — the bank “for the little guy” — Paytm’s bank promises to be a vehicle for financial inclusion, bringing services to India’s unbanked.

Like Ant, Paytm also wants to offer loans and asset management services to those who can’t access them now. Ant Fortune, a wealth management app, debuted in 2015. Its users can put money in Yuebao, a money market fund, and invest in Zhao Cai Bao, where they can loan money directly to businesses.

Paytm’s Threat to Banks

Banks in both countries are threatened by this disruption. Ant’s Yuebao offers depositors higher interest rates than banks and instant withdrawals. Technology companies don’t have to maintain as many employees at branches as banks do, and can link borrowers and savers directly. Their asset-light model is simply more efficient than that of existing banks, which have to use their own capital, and are burdened by legacy systems and regulation.

Banks earn a profit on the spread, the difference between the rate at which they lend and the rates they offer depositors. Platforms that connect borrowers and lenders and cut out the middleman can exert pressure on this. And because Paytm and Ant Financial are branchless, they have lower overhead costs, and can offer lower fees than banks.

Paytm will be both a friend and a potential enemy to banks. It will help them drum up business by cross-selling their services to its users. But Paytm will probably be the front-end in customer interactions and relegate the banks to the back end.

Banks risk becoming “dumb pipes.” As I mentioned in my article last year, the front-end generally gives banks a higher return on equity than the back. A McKinsey & Company study found that banks earn a 22% return on equity from sales and origination, but only 6% from the extension of credit. 

Protectionism Risks

All of this doesn’t mean that the success of Alibaba, Ant and Paytm is guaranteed. Some risks still stand in the way.

First, protectionist sentiment is rising in India as Amazon.com, Inc. (NASDAQ:AMZN) and Uber clobber their Indian rivals. Indian startups such as Flipkart, Snapdeal (in which BABA is an investor), and Ola have had their valuations repeatedly marked down over the past year. Now some are asking for protection against supposedly unfair foreign competition. Indian venture capitalist Vani Kola of Kalaari Capital called for such measures, followed by similar sentiment from the founders of e-commerce player Flipkart and Ola, viewed as India’s home-grown Uber).

Since Paytm is an Indian company, why would this be a concern? While Paytm is Indian, its largest shareholders are Chinese, Alibaba and Ant. Would India want such a company controlling something as critical as its payments infrastructure? Experts have raised concerns over Paytm user data ending up in servers outside of India.

Pointing to Paytm’s Chinese ties, the chief minister of West Bengal, Mamata Banerjee accused the prime minister of compromising national security. The Sino-Indian relationship is contentious; the two countries went to war as recently as 1962 over a border dispute.

For Paytm to work, users must see it as secure and reliable. Without trust, Paytm cannot succeed. However, in December the Paytm server was down for an hour, leaving users unable to make payments.

Paytm’s customer service also is a weak spot, with many rating it as bad. Also, the recent user increase may be temporary. After March 13, Paytm may lose as much as 30% of its offline customers once cash withdrawal limits end.

Bottom Line on Alibaba Stock

Even if Paytm and BABA succeed, however, buying Alibaba stock is not without risks.

Alibaba is a variable interest entity, which means American shareholders own shares in a Cayman Islands-based entity. Chinese law forbids foreign ownership in Chinese internet companies like Alibaba, so this structure is a way around it.

But the Chinese government’s position isn’t clear, and it could always change its mind, at the expense of BABA stock holders.

As of writing, Lucas Hahn did not hold a position in any of the aforementioned securities. 


Article printed from InvestorPlace Media, https://investorplace.com/2017/02/alibaba-group-holding-ltd-baba-will-try-to-dominate-india/.

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