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The booming Indian E-commerce market is likely to witness more intensified competition between the two biggies – Flipkart and Amazon (AMZN - Free Report) – with Flipkart getting a mammoth round of funding recently.

After months of rumors, India’s largest online retailer recently confirmed receiving a total of $1.4 billion from eBay Inc. (EBAY - Free Report) , Microsoft Corp. (MSFT - Free Report) and China’s Tencent Holdings Ltd. The new funding values Flipkart at about $11.6 billion and adds existing investors, including Tiger Global Management, Naspers Group, Accel Partners and DST Global. Per Crunchbase, Flipkart has raised about $4.65 billion from the aforementioned investors since its inception in 2007.

The most interesting part of the recent funding is eBay’s commercial strategic agreement with Flipkart, under which the former will sell its Indian operation, eBay.in, to the latter and also make cash investment for an exchange of equity stake in Flipkart. Although, eBay.in will continue to operate independently, the transaction will offer customers of both sites to access a wide array of Indian as well as global inventory. This, in turn, will provide Flipkart an opportunity to expand globally.

Flipkart is currently the largest online retailer in India. It sells products across multiple categories, including appliances, home and furniture, and electronics and apparel. However, it is facing stiff competition from Amazon, which has been expanding rapidly in the South-Asian country's fast-growing retail market in order to gain customers. In fact, Amazon’s CEO announced in Jun 2016 that it plans to spend another $3 billion in India.

India – The Land of Opportunity

With robust growth in smartphone users and Internet penetration over the last few years, the Indian E-commerce industry is witnessing tremendous growth. Per a research report of Morgan Stanley, the Indian E-commerce market touched approximately $16 billion in 2016 and the firm estimates that this market has the potential to expand over seven times in the long run.

Apart from this, various other research firms have predicted that the country’s e-retail market will likely touch the $120 billion mark by 2020. That’s 650% growth over the next four years!

Another research firm – Worldpay – projects that India will replace the U.S. and become the world’s second largest E-commerce market by 2034.

India, with a population of approximately 1.3 billion, has encouraging demographics, and the economy is also improving as a result of the investment-friendly approach of the current government.

The election of Narendra Modi as the Prime Minister has attracted global business leaders toward India. Top leaders from Facebook’s Mark Zuckerberg to Alphabet’s Sundar Pichai to Microsoft’s Satya Nadella visited the country in the last two years. In fact, this growth potential has attracted a string of investments from global technology and E-commerce giants, such as Baidu Inc. (BIDU - Free Report) and China's Alibaba Group Holding Ltd. (BABA - Free Report) .

Modi’s ambitious “Make in India” and “Digital India” programs are creating more opportunities in the E-commerce space. Furthermore, the demonetization of Rs 500 and Rs 1000 currency notes has been playing a vital role for growth of digital payments in rural India, which, we believe, may drive rural population to shop online.

According to the ASSOCHAM-Resurgent India study, the number of people shopping online will soar from an estimated 69 million in 2016 to 100 million in 2017, driven by increasing number of digital natives (including people in their early teens and from tier two and tier three cities), better logistics, broadband and Internet-enabled devices. Mobile commerce will be 45–50% of total retail sales this year compared to 30–35% in 2016.

Bottom Line

Amazon, which carries a Zacks Rank #3 (Hold), is Flipkart’s main competitor in India. Looking at Amazon’s rapidly growing foothold and aggressive investment strategy in the country, Flipkart does not want to be left behind in the run/race, and therefore intends to invest more to expand/fortify its foothold.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The recent round of fund raising from strategic investors is believed to bring technology and market expertise for Flipkart, which will help it in competing against the world’s largest online retailer in India.

In addition, there are rumors that Flipkart is in talks with SoftBank Group Corp., Kalaari Capital and Nexus Venture Partners to buy their stakes in Snapdeal. The deal, if concluded, is believed to expand Flipkart’s logistics network and distribution centers. It is believed that the deal, if concluded, will likely expand Flipkart’s logistics network and distribution centers.

Looking at Flipkart’s investment plans, we will not be surprised if Amazon comes with an even more aggressive expansion strategy. We believe that the Indian E-commerce market is going to see more intensified competition between the two biggies.

It is really very difficult to judge which company will gain what over the long term, but in our opinion, customers will surely benefit in the form of huge discounts.

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