India is not a very big market for Cisco (NASDAQ:CSCO), as it contributes just over 2% to its total revenue, but this hasn't deterred it from betting big in the country. The networking equipment provider crossed the $1 billion revenue mark in India in fiscal year 2016, and it now plans to triple its business from this market over the next three years.
In fact, Cisco is already growing at a tremendous pace in India, recording a 41% rise in revenue and a 340% jump in profit in fiscal year 2016, thanks to the country's aggressive move toward digitization and key telecom partnerships. Not surprisingly, the tech giant has decided to pour $1.8 billion a year into this market for research and development as it tries to take advantage of India's growing internet penetration.
Why India is important for Cisco
Mary Meeker's 2016 Internet Trends report points out that India's internet penetration grew at four times the global average in 2015. What's more, the country's internet users could rise to 730 million in 2020 from 350 million a couple of years ago as LTE adoption gains pace, forcing businesses to invest in telecom and networking equipment.
This will expand Cisco's addressable market as the number of 4G LTE towers in India will grow eightfold to 328,000 in 2020 from 2015 levels, accounting for 47% of total the market, according to Deloitte. More importantly, internet adoption will continue to remain strong even after 2020, thanks to a smartphone penetration rate of just 58%, which leaves a lot of room for infrastructure growth.
Cisco believes that smartphones, the Internet of Things, and smart devices could drive India's mobile data traffic sevenfold until 2021, creating demand for more data centers to absorb the boom in data traffic. As it turns out, data center investments in India could grow from $2.2 billion last year to $7 billion in 2020, making it the second-largest market in the Asia-Pacific region.
Not surprisingly, Cisco is moving fast to grab a larger slice of this potentially fertile ground by setting up manufacturing operations and rolling out mission-critical products.
Cisco's moves in India
Cisco wants to become the go-to platform for small and medium businesses (SMBs) in India, so it is aggressively targeting this market with its latest made-in-India router. In fact, the company's India-made router is one of its most popular switching products, indicating that it is serious about manufacturing its core products in the region.
The $1,500 router is aimed at SMBs that could create a $25.8 billion revenue opportunity for emerging technologies by 2020. Routers are the basic building blocks of a network, and small businesses and start-ups need this infrastructure to get off the ground. Cisco already gets a sizable chunk (35% to 40%) of its commercial revenue in India from SMBs, a sector that's growing 25% annually. It plans to triple down on this sector by increasing its SMB customer base to 90,000 in 2020 from 30,000 currently, using the Cisco Start platform.
Start is a set of solutions offered by Cisco in India at prices starting as low as $70 per user per year that will allow SMBs to gain access to digital infrastructure such as wireless solutions and security. The company has made it clear that it is targeting the country's booming e-commerce market with the Start suite of solutions by advertising their secure nature and low costs.
Additionally, Cisco has joined up with India's Reliance Jio, which has revolutionized the country's data landscape by offering free 4G data for a trial period lasting around seven months. Jio's marketing blitz and free data helped it add 100 million users in just 170 days, and it is now pushing for a 50% share of the Indian telecom space by 2021.
Now, Cisco has already built Jio's 5G-ready network, and stands to gain from the latter's ambitious targets as it will invest another $4.63 billion to improve network coverage and capacity.
The Foolish bottom line
Cisco can sustain its impressive growth in India, as the country is betting big on internet growth. The good news for investors is that the company has been investing in the right areas, with the right partners, setting the stage for a nice financial boost in the long run as it takes more of this market.