India Goes Digital - The Second Coming · most typical conversation starters with both entrepreneurs and investors recently. ... across the sector began facing the ever so important

India Goes Digital - The Second Coming

AVENDUSNovember 2016

Dear Reader,

How's the market? How long will it last? How sustainable are businesses?

We thought of posing these questions right upfront to you, as these phrases have been the

most typical conversation starters with both entrepreneurs and investors recently. The past

six months have been very unusual for the Indian Digital industry. Most trade pundits

predicted doomsday while optimists kept waiting for the next big believer to pump in those

billions, however neither of those expected situations has played out. The market remained

tense, reminding us of those long drawn test matches on sub-continent pitches.

After more than two years of hyper activity and funding, the industry faced its first round of

scepticism this year. The euphoria of international investors writing big cheques had

decreased, global majors had established themselves in the local markets and start-ups

across the sector began facing the ever so important question on pathways to profitability.

Tough markets always cause casualties and distinguish the strong from the weak. The

industry had attracted over USD 13 billion of capital in the last two fiscals, the momentum

from that helped sustain businesses and business models which would not have lasted

under normal market conditions. Investments fell off a cliff between October and December,

2015 formally declaring that “Winter had Come”. In the absence of freely available capital,

many shut shop. But the resilient use opportunities such as these to focus on the

fundamentals, drop overexuberance around growth, attract quality talent and buckle up for

the long haul ahead.

The focus has rapidly shifted to towards unit economics, sustainable growth, rationalized

valuation expectations and reducing cash burn. Strategic capital, especially from China, did

ease off some bit of pain. After three consecutive quarters of funding de-growth, the

markets seem to be making some recovery now, with almost USD 1 Billion of capital

flowing in the quarter ending September, 2016 -almost a 2.5x jump over previous quarter.

An important trend to note here is that this is sans block-buster Unicorn financings, and

mid-market companies are driving a bulk of this growth.

India is an open and discovered opportunity. The last two years had brought about a race

for financing and valuation that has worked against driving innovation and monetization.

Most companies targeted the same low-hanging consumer pool and used incentivization to

build traction instead of building compelling use-cases and driving engagement and loyalty.

The rules of the game have changed and local incumbents are up against hyper-

competitive and deep pocketed international players. They must out-innovate competition

by solving underlying industry level problems. After giving away initial market share, we are

now seeing local incumbents fiercely defend and in some cases, expand their share of the

consumer's wallet.

Emerging ventures are introspecting on what it will take to build businesses that are solving

real problems, have strong moats and can potentially make a strong economic case. With

331 million users online, estimated to more than double in the next 5 years, the Internet

economy in India is not demand constrained. In fact, what most Indian start-ups must solve

is the problem on the supply side. Traditional sectors of the Indian economy suffer from

significant supply gaps – India lacks adequate infrastructure in retail, healthcare,

transportation, education and financial services, amongst other crucial sectors.

Pankaj Naik [email protected]

Karan Sharma [email protected]

Radhica Kaushal [email protected]

Sanskruti Barot [email protected]

AVENDUSOctober 2016

Pankaj Naik [email protected]

Karan Sharma [email protected]

Radhica Kaushal [email protected]

Sanskruti Barot [email protected]

This report – “The Theory of Inevitability”, explores how technology is disrupting underlying

industries and bridging the demand-supply gap by unlocking capacity, adding incremental

supply, improving distribution, and facilitating discovery. We delve into how tech-enabled

business models across sectors can bring about efficiencies that reduce the capital

investment burden that India faces to meet its burgeoning demand. As this plays out,

leapfrog across industries is imminent.

With local start-ups leveraging technology to disrupt traditional sectors of the economy and

solving for supply constraints, we believe it is inevitable that Indian Internet companies will

win big in digital services.

AVENDUS

Acknowledgements

This report is the culmination of efforts of several people who contributed their views and

the team who worked diligently to compile secondary data and conduct interviews of

industry practitioners.

We are grateful to the entrepreneurs, investors and industry professionals who lent their

insights that helped enrich the perspectives we have been able to articulate in this report.

We would like to thank Shefali Raj for her significant contribution to this initiative and for

guiding the team while at Avendus. We also extend our gratitude to Monica Gangoly for her

work on designing the report.

Disclaimer

This report is not an advice/offer/solicitation for an offer to buy and/or sell any securities in

any jurisdiction. We are not soliciting any action based on this material. Recipients of this

report should conduct their own investigation and analysis including that of the information

provided. This report is intended to provide general information on a particular

subject or subjects and is not an exhaustive treatment of such subject(s). This report has

been prepared on the basis of information obtained from publicly available, accessible

resources. Company has not independently veri�ed all the information given in this report.

Accordingly, no representation or warranty, express, implied or statutory, is made as to

accuracy, completeness or fairness of the information and opinion contained in this report.

The information given in this report is as of the date of this report and there can be no

assurance that future results or events will be consistent with this information. Any decision

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for the contents or any errors or discrepancies herein or for any decisions or actions taken

in reliance on the report.

Acknowledgements and Disclaimer

1

AVENDUSThe Theory of Inevitability

The Theory of Inevitability

Technology rules today's world

2.6 billion smartphone users globally. 3.2 billion people online. 2.7 trillion hours spent 1online in 2015 .Technology's role in the global landscape cannot be overstated. From

smartphones to connected cars, from work to our homes, technology enhances our lives,

making the world a smaller place while simultaneously expanding opportunities beyond

geographical limitations. The rapid evolution of technology has revolutionized not just

developed countries but also emerging markets as diverse as Africa and Asia.

45 years ago, global stock markets were ruled by Auto and Oil majors like General Motors

and Exxon Mobil; 25 years ago technology and telecom giants like IBM and Verizon first

began to make their presence felt. In the last 5 years, tech has grown to account for over a

fifth of the total value of the S&P 500. As the impact of technology spreads across the

global economy, it is aggressively becoming the biggest value creator.

INCREASING SHARE OF TECH IN GLOBAL MARKET CAP

A study by Accenture and Oxford Economics estimated that “digital” technologies could

add close to USD 1.36 trillion to the global output by 2020, contributing close to 4% of total 2global GDP . That's equivalent to the size of the entire economy of South Korea.

That technology will power global value creation and claim a larger share of the global

economic output is not even under question anymore. There is an air of inevitability to

technology's march.

1990 2000 2005 2010 2015

SNP 500 Market Cap (USD Bn) Top 20 Tech market cap (USD Bn)

1,820

11,64511,534

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182

1 http://www.bbc.com/news/technology-32884867 - United Nations 2 http://www.businesswire.com/news/home/20150310005258/en/Increased-Digital-Technologies-Add-1.36-Trillion-World%E2%80%99s

http://www.bbc.com/news/technology-32884867

http://www.businesswire.com/news/home/20150310005258/en/Increased-Digital-Technologies-Add-1.36-Trillion-World%E2%80%99s

2

AVENDUS

The nature of tech is changing to consumer-tech

At the same time, the flavour of technology itself is changing - a change that is evident in

the composition of top tech companies. In 1990, the biggest tech company by market cap

was IBM. From 2010 onwards that position has been usurped by Apple. Services and

hardware contributed over 65% to total tech m-cap in 1990. In 2015, Internet and

consumer tech contributed 38% while the share of services was down to 3% and hardware

and mobile to 16%.

In the last 5 years the share of Internet and consumer tech has more than doubled. In fact,

the share of Internet and consumer tech has been increasing at an accelerating pace, with

a growth of over 5x in just 3 years from 2012-15.

INCREASING SHARE OF INTERNET AND CONSUMER TECH IN THE S&P 500

MARKET CAP

Asia's climb in consumer tech

Along with the accelerating growth of consumer tech, another meaningful trend has been

its expanding global footprint. Until a few years ago, it seemed inevitable that US based

tech giants would dominate all markets – both developed and emerging. Now, with

companies like Alibaba, Tencent and Baidu giving Amazon, Google and Facebook stiff

competition, that theory is unequivocally challenged.

The Theory of Inevitability

1990 2000 2005 2010 2011 2012 2013 2014 2015

Telecom Software

Semiconductors Internet and Consumer Tech

Services Hardware and Mobile

Share of hardware

and services

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3

AVENDUSThe ‘Leapfrog’ Effect

ASIA’S CLIMB IN CONSUMER TECH

Source: CB Insights Deal data – Q1 2009 to Q1 2016

The Chinese e-commerce market is the largest in the world today, having grown 7.5x

(659%) from 2010 to over USD 600 billion in 2015. Many factors have led to e-commerce

becoming the default means of consumption in China.

The high level of Internet and mobile penetration

were obvious growth drivers. China's “pan-post-

90s” generation (i.e., those born between 1985 and

1999) now accounts for over 50% of the country's

Internet population and have a far greater

propensity to spend online. Indigenous companies

gained an unsurpassable foothold in the market,

benefiting from the gated nature of the economy,

and invested heavily in creating seamless purchase,

payment and delivery experience.

Source: China Iresearch, CNNIC

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China Internet Usage


457 513 564 618 649 671

Internet penetration

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China Online Shopping (Mn)


146 200 243 303 357 409

Online shopping penetration

4


5 IMF estimates

While China's overall economy appears to be slowing, the online economy hints at a

different growth story. China's growing tech-savvy middle class is expected to continue to

propel retail demand forward for at least another decade.

The stupendous rise of ecommerce in China has been inspirational for many countries

including India. However, India is possibly a more challenging market than China, with a

poorer population, lower digital penetration and literacy, and weaker infrastructure. At the

same time, the opportunity to cater to a market of 1.3 billion people is undeniably

attractive. Especially at a time when global economic growth is steadily slowing down, the 5Indian economy is an outlier growing at 7.5% per annum. Even as local consumer-tech

companies such as Flipkart and Snapdeal compete for the consumer, the market is also

attractive for foreign companies like Amazon and Alibaba, given the long-term growth

potential.

'What', about India makes it such an attractive market? The answer lies in a combination of

factors – micro and macro, socio-economic and demographic, that are coming together to

give the economy the special ability to leapfrog to the next stage of development.

The 'Leapfrog' Effect

As tech continues its march globally, it is also beginning to play a greater role in the Indian

economy. India's growth story has long been embedded in the strides taken by its service

sector, particularly Information Technology Services. The strong foundation of the IT sector

has provided a great launch pad for tech to grow and flourish over the last seven years.

6SERVICES AND IT CONTRIBUTION TO INDIAN ECONOMY

The expansion of the Internet economy from IT to consumer tech and e-commerce has

been on the back of strong Internet and mobile infrastructure and adoption. A young India,

with greater than a third of its population in the age group of 15 to 34, enabled with digital

infrastructure (estimated 330 million+ Internet users) and supported by rising disposable

income of an expanding middle class, is arguably the most attractive market in the world.

Consumers desire greater variety in everything from apparel to real estate and even means

of payment.

5


6 7 Bloomberg data Census 2011

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6


INDIA IS HOME TO THE SECOND LARGEST INTERNET COMMUNITY IN THE WORLD

(INTERNET USERS IN Mn - 2015)

China India

1

671 331

2

300

3

USA

Source: TRAI, Euromonitor, Internet stats Live

DIGITAL INDIA IS RAPIDLY EXPANDING TO INCLUDE ALMOST HALF THE

POPULATION BY 2020 (INTERNET USERS IN Mn)

331

2015

723

2020

Source: TRAI, Avendus estimates

YOUNG INDIAN CONSUMERS ARE

INCREASINGLY ADOPTING

SMART PHONES (Mn USERS)

: Source KPCB Internet Trends Report 2015 - india-leads-the-world-in-mobile-usage-for-e-commerce-kpcbs-mary-meeker

India

41%

China

33%

USA

15%

... AND ALSO TO PURCHASE GOODS AND SERVICES ONLINE (MOBILE AS % OF

TOTAL E-COM SALES IN 2015)

TO BROWSE SOCIAL MEDIA...

Source: Company Management, comScore, publicly available information.Source: TRAI, Avendus estimates

2015

158

470

2020E 148 Mn 100 Mn 30 Mn

The Perfect Storm: Rising demand meets constrained supply

Even as demand accelerates, the jury is out on the ability of the supply side to deliver to

higher consumer expectations. India suffers from visible supply constraints in numerous

sectors – health, education, retail, power, manufacturing, connectivity and other

infrastructure. These challenges are old, but this is the time for new solutions.

A recent estimate put India's spending goal on roads, ports, power and other infrastructure 8between 2012 and 2017 at USD 1 trillion . It further estimated that this investment would

9require a debt of USD 750 billion . To put things in perspective, the debt required in itself is

double the size of the Singapore economy and five times the existing advances of bank

loans to infrastructure projects.

There are no easy alternatives to large parts of this investment in critical infrastructure.

However, the added burden of developing important sectors like education, healthcare, and

communication amongst others may well prove to be too much and will constrain growth in

these sectors.

INDIA LAGS BEHIND GLOBAL COUNTERPARTS ON VARIOUS INFRASTRUCTURE

RELATED METRICS

Source: Avendus estimates, PwC Future of India – The Winning Leap 2014, Unesco Institute of Statistics – Global

Teacher Shortage, World Bank Financial Inclusion index, World bank data, AT Kearney report – China hospitality, CIA

Factbook

7


Hospital Beds per 1000 persons

2.93.8

0.7

US China India

Student Teacher Ratio

14 17

32

US China India

$364 Bn Investment required in Hospital Infrastructure

$267 Bn Investment required in Education Infrastructure

% with Account at a Financial Institution

94% 79%53%

US China India

Hotel Rooms per 1000 persons

20

4 0.001

US China India

$108 Bn Investment required in banking and payment infrastructure

8 http://www.bloomberg.com/news/articles/2015-05-13/a-750-billion-gap-in-india-s-push-for-top-infrastructure9 http://www.bloomberg.com/news/articles/2015-05-13/a-750-billion-gap-in-india-s-push-for-top-infrastructure

8


Can technology plug the gaps in infrastructure and reduce the

burden of required capital?

It is simply inevitable that India will have to rely on technology to play a crucial

supplementary role in plugging the gaps by increasing access, improving efficiencies and

lowering costs.

The world is abuzz with news on the potential impact of some recent technological

advancements – in construction, drones are expected to be used to survey land for building

sites, measure building progress, facilitate comparison with plans, produce 3D renderings

of sites etc. In urban transportation, self-driving cars are expected to transform commuting,

optimise under-utilized car capacity, free up driving time and even cause a drop in car

ownership. In the tourism and hotel industry, aggregation of alternative accommodation

and home stays, which can now be booked easily on one's smartphones, has exponentially

increased available capacity.

As a result, the world of tomorrow might witness quicker turnarounds on infrastructure

projects, reduced pressure on urban traffic and reduced need to develop public-transport

facilities like trains, subways, etc.; and reduced investment in building hotels to cater to

booming tourism. What is common in each of these cases is how technology creates

this impact – it is through better utilization of available resources, greater efficiencies,

the ability to increase scale manifold at much lower than traditional costs.

Closer to home as well, many examples of tech enablement leading to increased

efficiencies are playing out. One very visible illustration of this is how online cab

aggregators are changing the commute landscape in the country.

Online Cab Aggregation: Changing the way India commutes

For most regular commuters in urban cities in India, intra-city travel habits have undergone

a drastic change in the last two years, with online cab aggregators having completely

changed the way cabs are booked. What started as a market for 'frequent airport travellers'

catered to by radio taxi operators like Meru, has transformed into an app-only, on-demand

cab booking industry led by Ola and Uber.

The rise of online cab-aggregators has been meteoric. Ola Cabs has an estimated fleet of 10400,000 cabs , catering to over 1 million+ booking requests a day. Less than a year and a

half ago, the company employed only 18,000 cabs. Uber, while present in lesser 11geographies in India (27 cities vs Ola's 130+) claims to have a network of 250,000 cabs . In

the race to win market share, cab aggregators have offered consumers a wide variety of

offerings in services, pricing and payment methods, ensuring that Indians are increasingly

“app-addicted” when it comes to hailing cabs.

This change initiated by online cab aggregators can have a massive impact on traditional

transportation requirements and investment needed in public transport. In estimating the

market size for online taxi aggregation, we concluded that each cab employed by online

10 11 Company information Market understanding

9


12 Economic Times - http://economictimes.indiatimes.com/wealth/spend/dont-buy-a-car-just-share-an-ola-or-uber-cab-it-makes-more-sense/articleshow/52054849.cms

aggregators delivers around 200 rides per month, more than double the number that they

did in 2014. In doing so, they have absorbed commuters that were using public transport

including trains, buses and autos/cabs and those who were planning to buy their first /

second car till just a couple of years ago. The affordability of services ensured by market

leaders has helped attract a very large customer base.

On the demand side, the cab aggregation industry will continue to see its customer base

expand exponentially in the coming years, due to generation of network effects within the

ecosystem. These network effects are already in motion, and will continue to compound

over the next few years –

Ÿ Pick-up time: As the market expands and more commuters book cabs online,

supplemented by more cabs being employed to cater to expanding demand, pick-up

times will fall. Shorter pick up times mean more reliability and more potential use-cases.

The more people use cabs, the better their service is likely to be

Ÿ Coverage density: As the number of cabs deployed per city grows to cater to

burgeoning demand, the density of coverage increases, once again leading to better

reliability and hence better service, which should in turn lead to even more demand

Ÿ Utilization: As demand increases, it betters capacity utilization for cab drivers, as they

find more rides easily. This will increase the number of paid rides per hour for drivers.

Increased utilization should allow greater revenue for drivers, even if cab aggregators

lower or stick to current prices. This ensures better availability of cabs for customers at

low rates – leading to greater demand

Many informal studies are already providing evidence that it may be cheaper to commute

by Ola/Uber than to own a personal car today. Add this to increasing parking woes,

pollution control restrictions on driving and increasing traffic, a new segment of customers

who currently commute using personal vehicles may also get added to the aggregators’

market. Further, by allowing ride-sharing, aggregators provide even greater cost-savings to

commuters. A back-of-the-envelope estimate shows that for those commuting to work 5 12times a week, travelling by Ola/Uber shared cabs could save up to INR 13,000 per annum .

Our conversations with cab aggregators have indicated that a key limiting factor they

identify to the growth of the sector is the supply of drivers. They have invested in providing

drivers with stable streams of income and higher earnings per month than most

comparable jobs, making driving for taxi aggregators an increasingly attractive profession.

In addition, this job gives the opportunity of asset creation, since most drivers get

ownership of cars post three to five years. We also think that as more and more educated

youth enter the job market and stigma towards social status of being a driver diminishes

(case in point is UBER's latest ad campaigns), the quality of supply is likely to improve

ensuring a better and better service leading to a virtuous cycle of expansion of the market.

10


DRIVING FOR TAXI AGGREGATORS PRESENTS AN ATTRACTIVE OPPORTUNITY

AGAINST COMPARABLE JOBS

In a country where the government is estimating an annual capital outlay in excess of USD

18 billion towards road transport, this change being brought about by taxi aggregators can

have a signi�cant impact. While it is dif�cult to estimate what percentage of public

transport ridership can move to cabs, supply constraints eased by online cab aggregators

cannot be doubted.

Yet another story of tech-enabled efficiencies is visible in the hotel/accommodation

sector

INDIA CURRENTLY FACES CHRONIC UNDER-SUPPLY OF TRAVEL-

ACCOMMODATION INFRASTRUCTURE COMPARED TO GLOBAL PEERS ….

Source: Euromonitor, India Tourism Statistics 2014 - Incredible India Report

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No. of Hotel rooms ‘000 No. of Hotels (branded)

11


13Contributing USD 136 billion to the Indian GDP , the tourism industry is a key growth driver 14of the economy. Receiving 5.5 million foreign tourists in the period of Jan to Aug 2016 and

15an estimated 2.2 billion overnight stays per annum from domestic travellers , the sector is

witnessing burgeoning demand. At the same time, India severely lags behind comparable

economies on hotel room inventory. Business models like Airbnb globally and Oyo Rooms,

Fabhotels, Treebo and Stayzilla in India have attempted to solve supply constraints in the

sector innovatively, by unlocking unbranded and alternative home stay options. By solving

the problem of lack of room/service standardisation and quality assurance, these

companies are shifting unbranded rooms to structured category.

Is this phenomenon of leapfrogging restricted to a few sectors

only?

We are of the opinion that it is not. In fact, we believe that similar principles can be applied

to other sectors.

A good example is consumer retail. At only 8% organised retail, India stands far behind

China (20%), Thailand (40%) and UK (46%). The industry, heavily dominated by groceries,

thrives on a vast and chaotic network of small stores or unstructured Mom and Pop/kirana

markets. While many reasons have contributed to retail growing in this haphazard manner

in India, an important one is the severe lack of modern retail space. Per capita retail space

in India is just 2 sq. feet as compared with 23 sq. feet for UK and 47 for US. As a result, of

14 million shops in India, less than four percent are larger than 500 sq feet. In most

metropolitan centres this scarce retail space is predictably expensive. Consequently, the

introduction of online marketplaces that aggregate micro-sellers providing scale to

suppliers and access to consumers has been a revolutionary success.

SUPPLY CONSTRAINTS IN INDIAN RETAIL

48%40%

20% 8%

India has one of the lowest Retail Space

per capita (sq ft)

46.6

23

13

6.52 1.5

US UK Canada Australia India Mexio

And low penetration of organised retail

UK Thailand China India

Retail Space Investment needed in India

India’s unorganised

retail market

Sq. ft. space needed to convert

unorganised market into modern trade

Cost of renting of

commercial property

$540 Bn 30 Bn sq. ft. $115 Bn

13 IBEF -Tourism and Hospitality Industry in India estimate for FY16, http://www.ibef.org/industry/tourism-hospitality-india.aspx14 Ministry of tourism estimates, August 2016, http://timesofindia.indiatimes.com/india/11-8-growth-in-foreign-tourist-arrivals-in-August-2016/articleshow/54426112.cms15 Avendus estimates – December 2015

http://www.ibef.org/industry/tourism-hospitality-india.aspx

http://timesofindia.indiatimes.com/india/11-8-growth-in-foreign-tourist-arrivals-in-August-2016/articleshow/54426112.cms

12


16 FICCI higher education report 2013

E-commerce has enabled leapfrogging in retail to meet massive consumer demand. With

annual gross sales of USD 4.5 billion in 2015, Flipkart's GMV was 2.7 times that of Big

Bazaar's 280 stores combined.

Something similar is likely to happen in all sectors that are supply constrained and fraught

with severe supply side inefficiencies. In education, we estimate that India needs 6 million

extra seats and 9,000 new colleges by 2020 to provide seats for increasing enrolments in

higher education. Almost 50% of graduates are not considered employable in any sector 16according to industry standards of employability . In this case, a shift towards online

delivery of content can lead to decreased costs and revolutionized teaching techniques,

through which education can be made universally available at a fraction of the cost of

delivery through traditional means.

Yet another great example where the efficiency brought about by digital has already

started to show is in delivery of financial services. India has lagged behind most

countries on banking access, usage and penetration metrics, with almost half of the

population having had no access to basic bank accounts until very recently. Indian

customers have traditionally mistrusted electronic transactions, and while the tally stands at

646 million debit and 24 million credit cards, a large part of these are inactive or dormant in

usage.

However, change is underway; the Indian

formal financial services sector has

expanded to include 240 million previously

unbanked individuals in the last two years,

and is on the cusp of including an equal

number in the next few, as a part of the

Pradhan Mantri Jan Dhan Yojna. What has

been interesting to note, is the stress on

use of digital in distribution of financial

services both, by the government and the

Reserve Bank. Whether it is in the

mandatory distribution of Rupay cards (190

million cards have been distributed since

the inception of the scheme in August

2015) or in the licensing of the soon-to-launch Payments Banks (banks to serve payments

and savings needs of households and small businesses by leveraging digital infrastructure),

the focus on proliferation of digital banking and payments is evident.

The momentum is building with the issuing-side challenges being slowly taken care of by

banks and mobile wallet players. The growth of electronic payments has simultaneously

been spurred by the meteoric rise in use of smart phones, and growing trust in electronic

payments.

India lags behind China and USA

in access to basic banking services

USAChinaIndia

53%

79%

94%

4% 16%

60%

22%

49%

76%

Accounting at a �nancial institution

Credit card penetration % Debit card penetration %

Source: World Bank Global Findex 2014

13


One of the bigger challenges has been lack

of payment acceptance infrastructure,

with only 1.3 million POS terminals, which

cover less than 4% of organised

merchants. In this regard too, the launch of

a United Payments Interface can change

the game by allowing any smartphone to

become a payments accepting terminal. We

believe that with these solutions, pieces of

the puzzle are coming together to bring

payments in India to an inflection point, and

propelling it towards the next phase of

explosive growth.

Source: RBI DBIE

In healthcare, India needs an estimated USD 364 billion investment in hospital and other

medical infrastructure. Tech start-ups engaged in aggregation of healthcare professionals,

home health services or e-pharmacies have begun to bring efficiency and convenience to

consumers, democratising high-standard healthcare services and improving access,

bettering efficiency of doctors, reducing visits and decreasing costs. Technology will

continue to bring significant upsides through tele-medicine, virtual healthcare services, and

computer based diagnostics systems.

It is true that digital holds no magical solutions, and there is no denying that India requires

investment in better physical infrastructure. However, we believe that an investment in

digital infrastructure is the only antidote to bridging the gap that exists between the

burgeoning consumer demand and severely constrained supply constraints that exist

today.

South Korea is the perfect role model for Digital India

Experts have often predicted that India can aspire towards a revolution similar to the

Chinese consumer tech boom. Another Asian rising power, South Korea is a text-book

example of a country that leveraged digital to leapfrog. Having been a third world country

until not so long ago (South Korea's per capita GDP was less than Ghana's in 1965), the

government of South Korea invested heavily in building Internet broadband infrastructure in

the early 90s. So great was their ambition to globalise the Korean brand, and their belief

that Internet was the only means to spread the Korean culture worldwide, the government

228 278 331 394

553 658

Number of Debit Cards (Mn)

Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Feb-16

18 18 20 19 21 24

Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Feb-16

Number of Credit Cards (Mn)

660,920

854,290

1,065,984 1,126,735

1,363,344

Number of POS terminals

Mar-12 Mar-13 Mar-14 Mar-15 Feb-16

Source: RBI DBIE

14


subsidised Internet for the poor, elderly and disabled. In addition to building Internet

infrastructure, South Korea's government also poured large amounts of money into local

start-ups. Complimenting this came the growth the private companies like Samsung and

Hyundai, leading to an overall boom in the economy. It is significant to note that South

Korea's Internet economy contributes 8% to GDP, behind only the UK.

We believe the same opportunity exists for India as its chalks its development path going

forward.

15

AVENDUSHow Large is the Internet Opportunity?

17 Start Up India – Momentous Rise of the Indian Startup Ecosystem, NASSCOM, October 2015

How Large is the Internet Opportunity?

In less than a decade since its commencement, the Internet economy in India has

witnessed dramatic changes. What started as a revolution in online travel followed by e-

commerce between 2005 and 2012, is now throbbing with new buzzwords – hyperlocal,

shared–economy, on-demand and bots. There is no doubt India is in the most exciting

phase of its online revolution. Capital worth USD 7.6 billion was invested in Indian start-ups

the period between 1st April 2015 to 31st March 2016 (FY16), represented 45% of the

cumulative funding that has gone into the sector in the last 6 years. 2015 also saw the 17launch of 1,200 new start-ups .

$17 Bn OF FUNDING HAS GONE INTO THE INDIA INTERNET SECTOR IN LAST 6

YEARS

Source: CB Insights, VCCEdge, Venture Intelligence, Avendus estimates

The recent downturn in funding activity has caught the attention of the world, with many

wondering whether it implies the end of the good days for Indian consumer tech. We view

this dip in investing as a necessary shift in focus from 'growth at any cost' to 'building

strong fundamentals and efficient unit economics'. The capital is directed towards players

who have established leadership, are capital efficient and have strong unit economics and

growth.

933 677

1,375

5,253

7,653

2,210

5,379

1,270

FY12 FY13 FY14 FY15 FY16 FY17

Total VC/ PE funding in Digital Sectors (USD Mn)

143%-76%

In FY-H1 Total in FY

16


NO LARGE DEALS CLOSING, BUT RECOVERY AROUND THE CORNER IN THE $50-

200 Mn DEAL RANGE

With 331 million users currently online, estimated to more than double in the next 5 years,

the Internet economy in India is not demand constrained – in fact it is likely to bene�t not

only from increased frequency of purchasing by existing consumers, but also from

additional users with entirely new demographic traits and behaviour patterns for whom new

brands and habits can be created.

The growth of the Internet sector is sensitive to some external developments; in particular,

access to cheap and high quality telecom connectivity across the country. Telecom

connectivity in India has scaled rapidly in terms of the number of wireless connections,

spreading to remote corners of the country. While the reach of telecom in itself is

commendable, it is fair to say that the quality of connectivity is, at best, patchy, even in

large metropolitan centres. This inconsistency in quality of data is a deterrent to transacting

online, since it makes the online shopping experience time-taking, inconvenient and prone

to transaction drops.

Source: Cisco Visual Networking Index

22.2

8.2

19.4

4.6

8.3

1.44.0

0.63.3

0.3

Broadband Speed and Consumer Internet Traffic

United States China Brazil India Indonesia

Average Fixed Broadband Speed (Mbps) 2014 Consumer Internet Traf�c (Exabytes Per Month) 2014

• 175 Mn by Hike

• 82 Mn by BMS

• 62 Mn by Oyo

• 60 Mm by PayTM

• 56 Mn by Byjus

• 180 Mn by MakeMyTrip

• 150 Mn by ShopClues

• 145 Mn by CarTrade

• 100 Mn by BigBasket

• 50 Mn by Snapdeal

• 45 Mn by Byju’s

638

1,576

1,933

1,110

2,874

1,204 1,070

FY 16FY 15

2,513

20-5010-2002-10 50-200 200+

Q2 Q3 Q4Q1 Q2 Q3 Q4Q1 Q1 Q2

413

941

FY 17

• 60 Mn by LensKart

• 42 Mn by Swiggy

However, much is being done by the government as well as the private sector to improve

the current situation. On one hand, the ambitious Digital India scheme promises to provide 18WiFi connectivity to 2,500 cities and towns across the country by 2018 . Additionally,

private telecom companies like Reliance Jio investing more than USD 23 billion+ to provide 19access to mobile internet services to 90% of India's population by March 2017 . Similarly,

Vodafone plans to invest USD 7 billion to buy more spectrum, expand infrastructure and 20improve service quality in India .

Source: GSMA 2013 Source: Economist - 2013

If these investments bear fruit in a time-bound manner, India will see signi�cant

improvement in data quality at rates that are lower than most economies. We believe that

this improvement has the potential to not only cause massive increase in data usage but

also to improve the user experience signi�cantly, which will drive the growth of the sector.

What does this mean for the market? We believe that the market opportunity is greatly

diversifying.

So far, e-tail has been the highest recipient of funding and generator of Gross Merchandise

Value (GMV). In the next �ve years we believe that the impact of tech, in the form of

disruption from business models such as digital aggregation, transactions, or listings, will

be felt across sectors – new and traditional. This disruption is already beginning to be seen

in sectors such as Financial Services and Logistics that are crucial growth drivers of the

economy, and is emerging in other signi�cant sectors such as Education and Healthcare.

No. of 3G and 4G Mobile Connections in India (Mn)

No. of 2G Mobile Connections in India (Mn)

85

40.633.3

24.113.8 12.8 12.7 12.4 8.8 8.1

..At lowest mobile broadband prices (USD - PPP adjusted)

347524

741 855 798 812 811 791 776 750

1

1139 67 107 171

252 327 409

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

Increasing 2G-3G-4G connections in India (Mn)..

US

A

Sp

ain

Bra

zil

Chi

na

Fran

ce

Aus

tral

ia

Italy

Ger

man

y

Brit

ain

Ind

ia

17


18 http://www.firstpost.com/business/modis-big-bang-digital-india-plan-2500-cities-to-get-free-4g-level-wifi-2060449.html19 Chairman's speech 39th General AGM – Reliance Industries Limited, September 2016, http://rtn.asia/wp-content/uploads/2016/09/AGM-SPEECH-Full-0109.pdf20 Vodafone responds to Reliance Jio with $7 billion push, Live Mint September 2016

18


E-TAILING WAS THE MOST POPULAR FUNDING DESTINATION, HOWEVER FINTECH

AND TRANSPORT IS ATTRACTING SIGNIFICANT INTEREST

Source: CB Insights, VCCEdge, Venture Intelligence, Avendus estimates

In the appendix to this prologue we have attempted to estimate the contribution and

growth of some of the larger sub-sectors of the Consumer Internet industry, by sizing

market opportunity today and over the next �ve years.

We will attempt to conduct an in-depth analysis of each of these sectors – and we are

beginning this series with studying the Logistics industry – one of the highest

contributors to India's GDP. Logistics has seen dramatic tech-led innovations in recent

years in India, having been the fundamental building block for growth of e-commerce. Our

analysis of the emerging logistics-tech industry can be found in our Report:

“Logistics-tech – Re-architecting the nervous system of the economy”.

Total Capital Raised by Sector since FY12

50%

12%

7%

7%

7%

5%

4%

3%

2%2% 1

E-tail

EducationHealthFood

L-Services

Content

Enablers

Software

Classi�ed

Fintech

Travel and Transport

Total VC/ PE funding in Digital Sectors (100% Stack)

FY12 FY13 FY14 FY15 FY16 FY17 YTD

E-tail

Food

Enablers

Fintech

Education

Local Services

Software

Travel and Transport

Health

Content

Classi�ed

E-Commerce has received 50% of the funding so far,

T&T remains 2nd largest due to cabs becoming important vs.

1st phase of T&T that focussed on OTAs

But others like Fintech and Digital Content are seeing

more interest

AVENDUS

70

AVENDUSAppendix - Market Size

E-TAIL

45

259723

Unique Internet Users (Mn)

CY15 CY20

331

Unique Online Shoppers (Mn)

CY15 CY20

2.2x5.8x

Market Size - CY15

Market Size - CY20

=

=

x

x

45 Mn

259 Mn

$12 Bn

$95 Bn

$270

$300

$202 Mn

$17.5 Bn

+

+

Online spend Online grocery marketShoppers

0.05% online penetration

0.3% online penetration

* Bus industry traditional growth at 10-12%

x x40

Volume of tickets sold (Mn)Daily Bus Services

Average seats

per bus

Average

occupancy28,000

CY15 CY20

49,346

CY15 CY20

327

576

1.8x1.8x

80%

ONLINE TRAVEL – BUS MARKET

Market Size - CY15

Market Size - CY20

=

=

x

x

327 Mn

576 Mn

$294 Mn

$2,829 Mn

$10

$14

9%

35%

x

x

Average seat fare Online penetrationTickets

71

AVENDUS

TAX I

Appendix - Market Size

ONLINE TAXI AGGREGATION MARKET

Online Market Size - CY15


=

=

$540 Mn

$15.4 Bn

Average Earnings per TripAddressable Cabs for Aggregators (Mn) # of Trips per Cab per Month

103

CY15 CY20

1,305

CY15 CY20 CY15 CY20

3.5213

125

4.612x1.7x

10%

50%

Unique Smartphone Users Online Penetration

TRAVEL - ACCOMMODATION

Gross Booking Value (USD Bn)Room Nights Occupied (Mn) Average Room Rate (USD)

586

CY15 CY20

974

CY15 CY20 CY15 CY20

15

3426 32

1.6x 1.3x

2x

= $830 Mn

= $7 Bn

Market Size - CY15 x15 Bn 5.5%

GBV Online penetration

Market Size - CY20 x32 Bn 21.5%

72

AVENDUS`


* Blended APRU for advertising and subscription revenue

Music Streaming MAUs (Mn)Unique Smartphone Users (Mn) Unique 3G Users (Mn)

168

CY15 CY20

654

CY15 CY20 CY15 CY20

27

597

120

273

4x 5x

15x

CONTENT – ONLINE MUSIC

= $6 Mn

= $514 Mn

Market Size - CY15 x27 Mn $0.2

MAUs ARPU*

Market Size - CY20 x273 Mn $2

Addressable SMEs (Mn)Total Micro SMEs (Mn)

=

24.8

CY15 CY20 % self /

un�nanced

CY15 CY20

10.9

72%60%

13.831.7

% requiring

ST Debt

=x

FINTECH – SHORT TERM LENDING UNDERLYING MARKET SIZE

= $83 Bn

= $136 Bn

Market Size - CY15 x10.9 Mn $7.7 K

Micro Ent.s Average Loan Size

Market Size - CY20 x10.9 Mn $13.8 K

73

AVENDUS

0000 0000 0000 0000

`


Payment Opportunity (USD Mn)Total Payments (USD Bn) Online Payments (USD Bn)

45

CY15 CY20

185

CY15 CY20 CY15 CY20

352

4.1x111

17

6.5x

1,286

3.6x2.1%

1.2%

38%

60%

FINTECH – PAYMENTS

Note: Online payments include e-tail, e-travel, cab agg, online gaming, local services, recharges

Online Penetration

Digital Market Size (USD Mn)Credit Cards Sold (USD Mn) Total Market Size (USD Mn)

2.4

CY15 CY20

4.8

CY15 CY20 CY15 CY20

4

2x

14974

2x11130x5%

75%Revenue per CC sold: INR 2,000 (constant)

FINTECH – DIGITAL DISTRIBUTION OF CREDIT CARDS

Online Penetration

Revenue Opportunity

Digital Market Size (USD Mn)Total Loan Market Size (USD Bn) Commission Market Size (USD Mn)

67

CY15 CY20

135

CY15 CY20 CY15 CY20

953

1,917

20

684

2%

36%

2x 2x

34x

Commission rate assumed at 1.4% (constant)

FINTECH – DIGITAL DISTRIBUTION OF LOANS (home, auto, educational, personal)

Online Penetration

1,808

290

983

535 535

1,125

507

2,167

1,851

780

816

255 296

1,108

1,555

2,959

Volume of tickets sold (Mn)

CY15 CY20

Ticket Sales (USD Mn)

CY15 CY20



Penetration of

Online Ticketing Players

Online Ticketing

Market Size

Movie Ticketing

Market Size

= $300 Mnx$1.9 Bn 16%

= $2 Bnx$3 Bn 70%

Unbranded single screen Branded single screen Multiplex

1.6x

ENTERTAINMENT – ONLINE MOVIE TICKETING

74

AVENDUS

Digital Market Size (USD Mn)B2C Insurance Commission (USD Bn) Online B2C Penetration

14

CY15 CY20

18

CY15 CY20 CY15

15

CY20

56540

0.4%

3%

FINTECH – DIGITAL DISTRIBUTION OF B2C INSURANCE


FINTECH – DIGITAL DISTRIBUTION OF MUTUAL FUNDS

Digital market Size (USD Mn)AUM (USD Bn) Commission Market Size (USD Mn)

185

CY15 CY20

276

CY15 CY20 CY15

15

CY20

1,4771,791

0.8% 0.7%

commission rate

448

148

10% 25%

online penetration

3x

9.6%

ONLINE FOOD DELIVERY MARKET

Organised Unorganised Delivery/Takeout Dine in Share of Organised

Number of registered restaurants (Mn) India Restaurant / Food Service Market (USD Bn)

=

1.4

CY15 CY20

1.7

44

20

82

69

CY15 CY20

31%

46%

CY15

15

5

50

19

CY20

20

69

=Market Size - CY15

Market Size - CY20

x$5 Bn

Total Delivery Value

(Organised)

Penetration of

Online Delivery

Online Delivery

Value

Total Take Rate Commission / Revenue Pool

x =

=x x =$19 Bn

5%

28%

$230 Mn

$5.4 Bn

16%

25%

$37 Mn

$1.4 Bn

75

AVENDUSAppendix - Market Size

CLASSIFIEDS – REAL ESTATE

Advertising Revenues (USD Mn)

CY15 CY20

Brokerage Revenues (USD Mn)

CY15 CY20

Online Market Overall market

38168

286

504

12 89

1,143

1,680

Online Market Size - CY15 =+$38 Mn $12 Mn $50 Mn

Online Market Size - CY20 =+$168 Mn $89 Mn $257 Mn

Advertising Brokerage

Share of Delivery (USD Bn)

AVENDUSAvendus Capital Pvt. Ltd.

Avendus Capital Pvt. Ltd.

Our offices

The Avendus Group (Avendus) is a leading provider of financial services with an emphasis

on customized solutions in the areas of financial advisory, wealth management, structured

credit solutions and alternative asset management. Avendus relies on its extensive

experience, in-depth domain understanding and knowledge of the regulatory environment,

to offer customized solutions that enable clients to meet their strategic aspirations.

Avendus Capital has been consistently ranked among the leading financial advisors by

overall number of deals. In CY2015, the firm was amongst the top three financial advisors

by overall number of deals in India (as per Mergermarket). It has a strong track record of

cross-border transactions and has helped multiple clients benefit from opportunities across

geographies. Avendus's wide range of clients is testimony to its ability to serve its

corporate clients throughout their life cycle – from growth stage funding to complex, large

sized transactions later in the cycle. Avendus Wealth Management Pvt. Ltd. caters to

investment advisory and portfolio management needs of Family offices, Large Corporates

and Ultra High Net Worth Individuals spanning all asset classes. Avendus Capital Inc. and

Avendus Capital (UK) Pvt. Ltd. located in New York and London respectively are wholly

owned subsidiaries offering M&A and Private Equity syndication services to clients in the

respective regions.

For more information, please visit

Avendus Capital Pvt Ltd

IL&FS Financial Centre, B-Quadrant T: +91 22 6648 0050

5th Floor, Bandra-Kurla Complex

Bandra (East), Mumbai 400 051

Suite 22A/B, The Aman Resort T: +91 11 45357500

Lodhi Road, New Delhi - 110003

The Millenia Tower, A-10th Floor T: +91 80 6648 3600

No. 1 & 2 Murphy Road, Ulsoor

Bangalore 560 008

Avendus Capital, Inc (Subsidiary)

100 Park Avenue, 16th Floor, New York 10017 T: +1 212 351 5066

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4.01, 33 St. James's Square, London SW1Y 4JS T: +44 203 159 4353

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Avendus Capital, Inc and Avendus Capital (UK) Private Limited are authorized and regulated by the FINRA and FSA

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