India internet opportunity

| Copyright Kalaari Capital 2017

India Internet Opportunity

May 2017


2005 2010 2015 2020 2025

7

11

5

4

Ranking by size

of Economy

US

China

Japan

Germany

UK

France

India

US

China

Japan

Germany

India

US

China

Japan

India

Will be $5T Economy by 2025, 4th largest in the world

Source: OECD


171M consumption class households by 2025

Household Income

per Annum

Deprived - <$1,800

Seekers - $4,000-10,000

Globals - >$20,000

Strivers - $10,000-20,000

Aspirers - $1,800-4,000

10173 71

48

92

105 109

103

1156

6893

7

16558

23

2005 2015 2020E 2025E

Number of Households (Millions) by Income class

206M

244M

273M

322M

7%,

14M

34%,

93M

53%,

171M27%,

66M

Consumption class

2005 real prices

Source: NCAER, McKinsey


Rapid smartphone penetration driven by price disruption

200

160

130117

220

300

2013 2015 2016

• Smartphones getting increasingly cheaper,

driving rapid adoption

• 50+% smartphones sold in 2016 were

in sub $100 price range

• Chinese companies rapidly gaining market

share. 46% of market share as on Q416 as

compared to 14% in Q415.

• Xiaomi within 2 years has become the

2nd largest player as on Q4CY2016

• ~35% of smartphones are sold online. The

leading category for E-tailers with ~50% of

total sales coming from smartphones

Signed offRapid smartphone penetration driven by price disruption

Source: IDC, Cybermedia Research : India Mobile Handset Market, Counterpoint Research, Statista


Smartphone penetration + Affordable data = Massive digital video opportunity

500M3G/4G users120M

3G/4G users

10GBAvg. Data usage

per month

1GBAvg. data usage

per month

2016(Excluding Jio)

2020

4x growth in users

x

10x growth in avg. data usage

=

40x growth in total data

consumption

• Video to be key beneficiary of increased

data usage. Jio users exhibited ~18-20x

increase in mobile video consumption

compared to an average smartphone user

• Strong preference towards short form

video content. 62% of videos watched

on YouTube are <20 minutes

• With massive increase in digital media

consumption, Ad spend will also witness

significant shift. In 2016, ~12% of India’s

Ad spend is digital, compared to 50% in US

and 40% in China

• Digital Ad spend to be $4-5B by 2020 from

$1B in 2016. Opportunity for Indian content

creators to get a sizable share of pie.

Average data cost

$3 per GB per month

Average data cost

$1 per GB per monthSource: Quarterly reports of Indian telco (Airtel, Vodafone, Idea, Aircel), Reliance Jio Investor presentation

E&Y Future of Digital Content India, Jan 2016


Already the largest user base for global internet giants; Monetization nascent

CEOs of most major internet companies have

visited India in last one year, indicative of

India’s internet market potential

Key initiatives by global internet giants towards

India’s internet story

• Google to setup free wi-fi across 400

railway stations in India

• Facebook launched ambitious plans to

provide free internet access to rural India

under “Free basic”. Got shelved due to

regulatory hurdles

• Google launched ‘Internet Saathi’ program

to educate women about smartphone uses

200M 184M 180M

Monthly Active Users (MAU)


Users at different stages of digital adoption

• Despite having 300M smartphone users, India

has only 120M high speed mobile internet

(3G/4G) users

• Low-end 2G users on Whatsapp and Facebook,

but their data consumption is 1/5th of an

average 3G user

• Growth of power users critical for India’s

digital economy. The user base with 3G/4G

connectivity to reach 500M by 2020

• Opportunity for E-tailers to capture the share

of rapidly growing power internet user base

50MOnline Shoppers

200MSocial Media and Messaging

Users

460MInternet Connections

120MHigh speed internet users

(3G/4G)

300MSmartphone Users

Power Internet Users

Source: InternetLiveStats, Quarterly reports of Indian telco (Airtel, Vodafone, Idea, Aircel)


1. India E-tail


0

2

4

6

8

10

12

14

16

2009 2010 2011 2012 2013 2014 2015

Early Days

Market Creation

E-t

ail

Mark

et

Siz

e (

$B

)

Top 3 Offline Retailers Turnover

$10B

Top 3 Online Retailers Turnover

$12B

As on 2016

E-tail : 2012-15 was a phase of rapid growth and market creation

Source: Redseer Consulting - E-tailing Revolution in India


E-tail penetration nascent in Tier-II & beyond

• Organized retail economics unviable for

Tier-II & beyond. Organized only 5% of

retail consumption

• Smartphone penetration already high at

>30%. Majority of next 200M

smartphone users will be from Tier-II &

beyond

• With growing smartphone and internet

penetration, opportunity for E-tailers to

tap into this large consumption market

• Tier-III & IV contributes to 50% of E-tail

sales in China

E-tail , 0.6%

Organised, 5%

Unorganised, 94%

E-tail , 8%

Organised, 19%

Unorganised, 73%

80%

20%

Tier-II & beyond

Tier-I

Total Retail Consumption

($630B)

Source: McKinsey iConsumer China 2016 Survey, IBEF, Knight Frank – Think Retail 2016


Tier-II & beyond – Regional language important to drive adoption

• Regional language offering (reviews, search, navigation, product

content) important to drive engagement and conversion

• E-tailers don’t control most content. Product content uploaded

by sellers and reviews by users

• Translation from current tools too literal. Not suitable for most

Indians that use mixed language (e.g. Hinglish)

• Growing market opportunity calls for E-tailers to make

concerted efforts to serve the regional language users

460MInternet

Connections

125MEnglish Speaking

Users Peter England Blue Formal Regular Fit Shirt

पीटर इंग्लैंड ब्लू औपचाररक नियमित फ़िट शटट

Example

from Google

translate

Most internet users from Tier-II and

beyond are Non-English speaking

Source: IAMAI


• Until E-commerce players can

build a frequent usage behavior,

app retention will be challenging

• Mobile web strategy important

to capture this segment

• Opportunity for unified

interface solutions to access

multiple online services (e.g.

WeChat in China)

50%+ of smartphones sold in India are in sub $100 price range with typical

internal storage capacity of 8GB

OS, 3.5

Whatsapp, 1.2

Media, 2

Apps, 1.3

Typical allocation of

8GB capacity

3rd party apps on

smartphones due to

space constraint

80%

Average 90 days

uninstall rate

6-8

Tier-II & beyond – Low app retention, mobile web strategy important

Source: CNBC, Frost & Sullivan, Kalaari Estimates


Category mix skewed towards electronics

E-tail Market and Category mix by Country

65%

25%

2%

16%

31%

4%

17%

19%

8%

3% 7% 7%

India

($15B)

China

($610B)

US

($393B)

Apparel &

Accessories

Home

Furniture &

Decor

Grocery

Consumer

Electronics

Source: Statista, Digitalcommerce360, China Internet Watch, Kalaari Estimates


Higher online penetration in non-electronics important to drive growth

396

Total Spend ($B)

Apparel & Accessories

Home Furniture & Decor

Grocery

Consumer Electronics

• While electronics has high online

penetration (~27%), it is ~6% of

consumers’ spend

• As market matures, other categories

with sizable share of consumer spend

will also witness higher online

penetration

• Fashion

• Home & Décor

• Grocery

• Jewelry

• These are complex categories and will

require business model innovations

(e.g. Omni-channel, Internet brands)

Jewelry

Beauty & Personal care

56

36

35

18

12

0.5

3.8

9.8

0.05

0.3

0.1

0.13%

6.8%

27%

0.14%

1.7%

0.8%

x =

Online Share (%) Online Spend ($B)

Category-wise Total Spend vs Online Spend

Source: Kalaari Estimate, CII-BCG Study - “Retail transformation: Changing Your Performance Trajectory”


2. Digital Payments


India is a cash heavy Economy

4.5%500M3G/4G users

Of India’s consumption spend

through digital payments

70%

E-tail orders are CoD

• Cash in circulation in India is 18% of

the country’s GDP. The figure is 3.5%

to 8% for developed countries such as

the US and the UK

• Cash economy drives the shadow

economy, which is 26% of GDP in

India compared to 14% China and 7%

in USA

• For e-tail’s next phase of growth, CoD

dependency needs to be reduced.

Currently, for every successful CoD

order, 1.24 delivery attempts are made

Source: RBI, Red seer consulting E-commerce Report 2016


Merchant network highly underpenetrated

500M3G/4G users

0.3

POS transactions per

debit card per month

884M

500M3G/4G users2.5MPOS Machines

14M

Merchant Outlets

Source: RBI

• ATM withdrawals account for 88% of

the total volume and around 94% of

the total value of debit card

transactions.

• India at one of the lowest POS per

1000 debit cards ratio at 2.4

• US - 13, China – 14, Australia –

33, Brasil - 15

• Limited internet connectivity adds to

the friction in the digital payment

infrastructure. Coupled with 2% take

rate, merchants disincentivised to

accept plastic money

Debit Cards

500M3G/4G users

3.230M

Credit Cards

POS transactions per

credit card per month


Mobile wallet payments gaining traction

5,7746,227 6,070 6,374

6,7886,174

7,982

9,036

13,720

12,571

9,890

10,554

342 363414 412

459 476 505 493

1112

1247

10631125

Card POS - Transacted Amount ($M) Mobile Wallet - Transacted Amount ($M)

Source: RBI

845M Debit + Credit Cards

2.2M POS Machines

80-85M Active M-wallet users

1.5M Merchants acquired

Mobile wallets gaining rapid merchant adoption owing no hardware requirements

Demonetization

catalyzed the growth

Source: RBI


Mobile wallet payments gaining traction

5 7 16

109

261

293

368

Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17

UPI - Transacted Amount ($M)

Source: RBI


Government laying strong foundation for the digital payments revolutionUPI + Aadhaar + BharatQR + Jan Dhan Yojna + BHIM

Initiative to have bank account for

every Indian

250M accounts opened under the

scheme in 3 years. Accounts for

~50% of total 500M bank accounts

as on 2016

Bharat QR

Universal QR code for merchant

payments

Target to cross 10M merchants in 12-

18 months of launch

Jan Dhan Yojna

Government App for making UPI

based payment

Crossed 17M downloads within 2

months of launch

BHIM

Instant transfer of money between

back accounts with mobile numbers

$600M+ amount transacted in 3

months (Dec’16, Jan’17, Feb’17)

UPI

UPI

Jan Dhan

Yojna

BHIM

Bharat

QR

Aadhaar

Unprecedented pace of execution by the government

Source: RBI

Strong Foundation = 300M Smartphones + 1 Billion Aadhar Cards + 500M Bank accounts


Conclusion

Sizable consumption class in 2016 (27% households). By 2025, 50% of Indian households will be part of consumption class

Price disruption driving rapid smartphone and mobile internet adoption across income classes

Opportunity for e-tailers to tap into this growing smartphone and internet savvy consumer segment

Large scale adoption beyond Tier-I will require innovative solutions to specific challenges – Language, App retention

Business model innovation will be key to drive higher online penetration of non-electronics categories (e.g. Fashion, Home

& Décor)

Significant focus and efforts from government to accelerate adoption of digital payments

| Copyright Kalaari Capital 2017 Page 22

Authored by Vani Kola and Darshit Vora

Supported by Naman Narain and Vinod Shankar

© May 2017 Kalaari Capital Advisors. All rights reserved.

The Report has been complied for information purpose only. The Report is based on current public

information that we consider reliable, but we do not represent it as accurate or complete. The information,

opinions, estimates and forecasts contained herein are as of the date hereof and are subject to change.

https://www.linkedin.com/in/vanikola/

https://www.linkedin.com/in/darshit-vora-92a3606/

https://www.linkedin.com/in/namannarain/

https://www.linkedin.com/in/vinodshankar1/


APPENDIX


Urban population distribution in India

Category City Population (2011)

Tier I Mumbai 12.4M

Tier I Delhi 11M

Tier I Bengaluru 8.4M

Tier I Hyderabad 6.7M

Tier I Ahmedabad 5.5M

Tier I Chennai 4.6M

Tier I Kolkata 4.4M

Category No. of CitiesTotal Population

(2011)

% of Total

Population

Tier 1 7 53M* 4.5%

Tier II & Beyond 461 320M 26.7%

Tier I: Cities with more than

4 million persons

Tier II & Beyond: Cities

with less than 4 million

persons but more than 1 lac

persons

Classification Criteria

Urban population (377M) is

31% of total population

Overview

*2015 estimate for Tier-1 population is 93M


India Population Distribution by Spoken Language

41%

10%8%

7%

7%

6%

5%

4%

3%

9%

Distribution of Indian Population by Spoken Language

Hindi English

Bengali Telugu

Marathi Tamil

Urdu Gujarati

Punjabi Others


Smartphone shipments by vendor CYQ117

26%

13% 12%10%

8%

2%

29%

Samsung Xiaomi Oppo Vivo Lenovo Apple Others

Smartphone Market share CYQ117

Source: Canalyst Estimates

Total Shipments : 29m


Rapid smartphone penetration driven by price disruption

Signed offIndia Internet – On way to become a basic right

18

27

35

21

52

31

233

354

462

0

50

100

150

200

250

300

350

400

450

500

0

10

20

30

40

50

60

2014 2015 2016

Penetration as % of total population % Growth (YOY) Internet users (M)

• Internet users Divide : 70% Urban, 30%

Rural

• Among Urban : 62 % Male, 38 %

Female

• Among Rural: 88% Male, 12 %

Female

• Kerala becomes the 1st Indian state to

declare internet as a basic right for every

citizen. A model for all of India to follow

• NOFN - National Optic Fiber Network

implementation speeded up with an aim

to connect every Gram panchayat

India internet opportunity

Technology

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