June 12, 2015

Evolving technology promises to revolutionize the way a vast nation shops and communicates. Online merchants’ sales grow geometrically, as do their losses. Investment banks proclaim they have seen the future, and it works with eye-popping stock-market multiples. Tech investors may feel like they have seen this movie before, but the backdrop is new: India.

Rotten broadband networks and dodgy electricity have kept India, population 1.25 billion, as the world’s sleeping digital giant, despite its depth of engineering talent. A leap forward in cellular, with smartphones selling as cheap as $40 and 3G rates dropping steeply, is set to change all that. The value of goods sold online will double this year to $7 billion, and keep on multiplying to $220 billion by 2030, Goldman Sachs projected in a report last month.

The global private-equity elite is buying in to these expectations. Heavyweights such asBlackRock (ticker: BLK), Japan’s Softbank (9984.Japan) and Russia-based DST have put more than $7 billion into Indian start-ups over the past year, says Goldman. Flipkart, the top contender so far to be South Asia’s Amazon.com, is already worth $15 billion based on its last funding round. Amazon (AMZN) itself has invested $2 billion in India, says Tarun Davda, director of Mumbai VC firm Matrix Partners, but is playing catch-up to Flipkart and another home-grown rival, Snapdeal. Chinese giant Alibaba (BABA) spent $575 million in January to buy 25% of India’s version of Paypal, PayTM, adding a fourth well-financed horse to the e-tailing race.

There is one familiar problem: India’s online pioneers are bleeding cash as they get big fast, losing 35 paise, or 0.35 rupee, on every rupee (US$0.016) of sales and requiring $20 billion more to stay afloat until 2020, Goldman estimates.

There are other issues. India is by far the poorest of the major emerging markets, with per capita income less than half of China’s, points out Gautam Chhaochharia, head of research for UBS in Mumbai. Two-thirds of Indians do not have bank accounts.

But underdevelopment spells opportunity, too, venture capitalist Davda maintains. “More than 60% of online retail sales are coming from tier II and III cities [smaller, less developed centers] where there are no shopping malls to compete,” he reports.

Solid backing from big private-equity investors also means Mumbai’s e-trepreneurs don’t need to rush into Boo.com-esque public offerings before they at least approach profitability, observers say.

Meanwhile, UBS’ Chhaochharia suggests some indirect plays on the expected market explosion. Bharti Airtel (BHARTI.India), India’s top cellular provider, and its sister tower builder Bharti Infratel (BHIN.India), will provide backbone for the online awakening. Their shares have gained 25% and 75%, respectively, over the past year. South African media conglomerate Naspers (NPSNY) owns 17% of Flipkart, making it the closest traded proxy for the Indian market leader. Naspers’ U.S. shares have climbed 28% in the past 12 months.

In time—18 to 36 months by Goldman’s estimate—the burgeoning Indian e-tailers will come to market with IPOs of their own. None of them are likely to approach the record-breaking $25 billion raised last year by Alibaba, which controls some 80% of China’s online market. But investors will want to keep them on the radar.