Is India the Next Internet and Digitalization Frontier?

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by Franklin Templeton Emerging Markets Equity 

Digitalization in India has been advancing at a rapid pace since 2016, thanks to government initiatives, inexpensive mobile data and a significant step-up of venture capital and private equity funding.

Companies related to the internet and digital economy have also been gaining prominence on Indian stock exchanges, providing exciting investment opportunities and diversifying the overall market.

Key Drivers behind India’s Digitalization

In 2016, the government started its flagship “Digital India” initiative to transform the country into a digitally empowered society and knowledge economy. The campaign’s major pillars included the creation of Aadhar, a 12-digit unique identity number based on demographic and biometric data. It is now the world’s largest biometric identity system with over 1.3 billion holders.¹

Also key was India’s creation of a Unified Payment Interface (UPI). Backed by the banking system and regulated by the Reserve Bank of India, UPI enables instant fund transfers between bank accounts on a mobile platform. It processed 4.2 billion transactions in October 2021, a more than 100% increase from the same month last year.²

Telecoms company Reliance Jio’s launch of inexpensive mobile data plans around 2016, together with the availability of attractively priced smartphones, was another important development. Greater phone and data affordability for a large part of the Indian population has boosted the country’s internet penetration rate since.

In addition, Indian internet companies gained support from a sharp increase in venture capital and private equity funding from 2017 to 2020. Funding in that period reached US$10 billion a year on average, up from US$4.5 billion a year in the preceding three years.³

And as in most other countries around the world, COVID-19 accelerated the adoption of e-commerce and digital services in India in 2020 and 2021.

Interesting Trends We See  

India’s online classifieds market has developed swiftly across multiple areas. An example of an online classifieds company is Info Edge, which is behind India’s leading job site naukri.com, matrimony site jeevansathi.com, real estate portal 99acres.com and education portal shiksha.com. Info Edge is also invested in recently listed food delivery company Zomato and other internet-based ventures.

More traditional businesses have also embraced digitalization. In the banking industry, several players have raced to develop technologies that can improve their customer service through digital channels. ICICI Bank, for example, has a digital one-stop shop called InstaBIZ for its business banking customers. In our view, banks that adopt an open architecture framework and a collaborative culture appear better placed than others to partner with financial technology (fintech) firms.

Identifying Potential Investment Opportunities

Franklin Templeton is among the oldest and largest fully owned foreign investment fund managers in India, and it has one of the biggest equity investment teams among global managers there.  Our Emerging Markets Equity team has 15 investment professionals in India covering an investable universe of around 400 companies.

Being on the ground allows our analysts in India to identify opportunities early. Tapping their local knowledge and networks, they can process a wide array of information not easily accessible by foreign-based peers. This applies not just to listed companies, but also to unlisted ones.

Being part of a large global emerging markets team also helps our India-based analysts put investment opportunities into perspective. With over 80 investment professionals globally, our Emerging Markets Equity team is one of the largest in the industry. Sharing information and debating investment ideas are part of the day’s work. On topics related to the internet and digitalization, our analysts in India benefit from the views and experiences of their colleagues in markets with higher penetration rates, such as China.

India’s stock market remains dynamic as a whole, and not only in the internet and digital services industries. We are determined to continue discovering the best investment opportunities in the country.

What Are the Risks?

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1. Source: Unique Identification Authority of India (UIDAI), as of September 30, 2021.

2. Source: National Payments Corporation of India (NPCI), as of October 31, 2021.

3. Source: Morgan Stanley.