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Sector report: India FinTech; Finnovation – The Rise of FinTech

India’s shift to the digital economy has set in motion the emergence of new set of technology companies in the FinTech space. Key drivers enabling the digital ecosystem are 1) Doubling of smartphone penetration (63%) and expanding 4G network, 2) Infrastructure (J-A-M) for digital delivery, and 3) adoption of e-commerce. We have seen technology-centric business models (in the US and China) expand the financial services addressable market, complemented by lower cost of delivery and added digital data on individuals and businesses. FinTech is a large addressable market that has attracted investments by venture capital (VC) funds both globally and India (total ~US$28bn in 2017). In our view, investors must look at business models that have the distribution edge, ability to platformise and can drive customer engagement. India’s FinTech industry being nascent, most players are unlisted. However, we like Niyogin’s SMB-centric platform business model in this space and initiate coverage on the stock with an Outperformer rating with a target price of Rs250.

FinTechs are scaling globally: FinTech players in the US (ex-Square, Kabbage, etc) and BigTech’s in China’s financial services space have been scaling, with penetration levels for payments touching 69% currently. Globally, business models that have access to customers (BigTechs) and/or are able to build unique channel advantage (Square) have been more successful than others. We also see the emergence of white-labelled tech lenders (Solaris Bank, Apollo Finvest) that allow all internet companies to offer credit as a service.

Data driving India’s FinTech shift: We think India is at the cusp of a hyper growth in FinTech, led by smartphone penetration (to double to 63% by 2022E), supported by affordable internet. Moreover, digital infrastructure initiatives by the government such as Goods and Service Tax Network (GSTN), IndiaStack (creating a unified software platform) and J-A-M (JanDhan, Aadhar and Mobile) should intensify the growth. India has already seen adoption in the e-commerce and payments space, which we believe will accelerate, as internet user base expands to 600m by 2023E.

India’s financial services - a significant white space: There exists a large white space in financial services, which is currently dominated by banks. For instance, SMB financing alone is a Rs20trn opportunity. Financing alone should be a US$1trn opportunity in India’s FinTech space over next 5 years, with prospects in payments estimated at another US$500bn, in our view. The e-wallet transaction market is expected to grow from US$22bn to US$120bn over next 5 years.

Niyogin - a unique listed play: We see financial services as a large opportunity and have subdivided it into 4 broad sub segments from a FinTech perspective 1) Payments, 2) Financing, 3) Savings/investments and 4) Others. While Payments within this space is an immediate opportunity, which is hotly contested in India (Paytm should emerge a key leader), Financing looks the most attractive. Financing could see multiple players succeeding in its large addressable market. Niyogin, in the listed space, is an SMB-focussed financial services platform player with an attractive business model and strong management team. We initiate coverage with an Outperformer on the stock. Key risks: Access to capital, competition and technology shifts.