DARK clouds are hovering over the e-commerce sector in India, which has been galloping at a frenzied pace over the past few months. With very little prospects of e-commerce majors seen turning in profits over the next few years, the sky-high valuations that were prevalent earlier are being punctured.

Worse, several state governments in India — some apparently at the behest of powerful retail industry and grocery store owners lobby — are imposing barriers to curb the growth of the sector.

The phenomenal expansion of the e-commerce sector has been fuelled by the remarkable growth in the number of smartphones in the country. According to a recent report by Counterpoint, a leading international technology market research outfit, there are more than 220m smartphone users in India, making it the second-largest market in the world after China. India has more than 1bn mobile phone users.

The e-commerce segment in India is dominated by international giant Amazon, and homegrown majors such as Flipkart and Snapdeal. Interestingly, Amazon’s global rival Alibaba of China is positioning itself as a key player in the Indian e-commerce segment, taking stakes in many companies including Snapdeal (about 5pc) and Paytm (40pc), a digital wallet player, which is also emerging as a major e-tailer.

Japan’s SoftBank Corp, which was one of the early investors in Alibaba, also has a 30pc stake in Snapdeal. Interestingly, Flipkart — which like most other e-commerce players has been burning cash for months — is in talks with Alibaba to raise a billion dollars.

Amazon is already committed to invest another $2bn in India. While Flipkart is the largest e-commerce player, Amazon is quietly narrowing the gap between the two. All three e-commerce giants — Amazon, Flipkart and Snapdeal — have been offering hefty discounts to consumers, even impacting the brick-and-mortar stores, many of whom have complained to manufacturers about the pricing.

Indian consumers have been grabbing the reckless offers being made by the e-commerce leaders, who take full-page and cover wrap ads in leading dailies on a regular basis. The price wars have resulted in most of the players bleeding heavily, but since they are backed by deep-pocketed investors, they do not feel the pinch at present.

At least that was the belief till recently. However, last week reports emerged that Flipkart had been engaged in exploratory talks with its rival Amazon a few months ago for a possible sale. Reports claimed that Amazon had made a preliminary offer of $8bn to acquire Flipkart, nearly half its earlier valuation of $15.2bn.

Flipkart has vehemently denied that it was in talks with Amazon for a sale. “The report is pure fiction and seems to have been constructed based on invisible ‘sources’ that have highly imaginative minds and given to improbable flights of fancy,” was the colourful statement from the company. “There have been no talks or discussions for potential sale. Flipkart continues to be the market leader in India and we are in this business for the long haul.”

SET UP in 2007 by Sachin Bansal and Binny Bansal, two techies who had also worked with Amazon, Flipkart had raised $210m from DST Global, Tiger Global Management and other international investors and in 2014, it was valued at $15bn.

But last month, Morgan Stanley Institutional Fund Trust delivered a jolt when it marked down 27pc of its stake in Flipkart, reducing it from $80.6m to $58.9m for the December quarter, in a filing with the US Securities and Exchange Commission.

This resulted in a sharp decline in the valuation of Flipkart to $11bn. The move has come in handy for Alibaba, which will now be in a better position to bargain with the Flipkart founders.

The Chinese giant, which has taken on both Amazon and American cab-hailing app provider Uber, is determined to ensure that it remains a leader in India in both e-tailing and taxi services. Alibaba has invested in Lyft, also based out of San Francisco, like Uber, and a key rival. The Chinese e-commerce major has also invested in Didi Kuaidi, a Chinese cab-hailing service. Interestingly, last year Didi Kuaidi invested in Ola, Uber’s formidable rival in India. Softbank also has a significant stake in Ola.

Analysts expect Alibaba to now invest in Flipkart, the troubled Indian e-commerce giant and possibly merge it with Paytm and Snapdeal to set up a formidable rival to Amazon.

India’s online retail market is expected to grow from under $25bn at present to almost $70bn by 2020, according to Goldman Sachs. Softbank has pledged to invest another $10bn in the sector.

Online sales account for just 1pc of India’s retail sales at present, but analysts expect this to climb to nearly 5pc in the near future.

Indian e-commerce firms, which have in the past raised funds from venture capital firms and angel investors, are now looking at tapping the capital markets. Next week, Infibeam, another leading player, is entering the initial public offering (IPO) market with a relatively small issue that aims to raise Rs4.5bn.

Started by another ex-Amazon employee, Infibeam’s valuations could touch about Rs2.25bn if investors — both institutional and retail — subscribe to it. But investors are wary of e-commerce firms and their ridiculous valuations.

Infibeam, for instance, reported a consolidated loss of Rs9.79bn on revenues of a mere Rs2.95bn for the financial year ending March 2015. However, the promoters claim it has turned profitable in the first-half of the current fiscal.

Other e-commerce firms including Flipkart and Snapdeal were also toying with the idea of tapping the capital markets. However, it all depends on the future moves of Alibaba and Amazon and the amount of money they are willing to splurge in the Indian e-commerce sector.

Published in Dawn, Business & Finance weekly, March 21st, 2016