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India JANUARY 05, 2016
THEME
BSE-30: 25,623

Hyperlocal retail here to stay? With hyperlocal grocery delivery companies raising
~US$290 mn in funding in CY2015, we analyze their profit models. We reckon that at
the current scale, inventory-led models such as that of BigBasket would be better off
(less cash burn). However, with scale, inventory-less models such as that of Grofers
could become more profitable, though achieving that scale will be the real challenge
due to stiff competition, high churn rates and customer behavior.

Grocery is the largest component of retail, but possibly the least organized

Based on a bottoms-up analysis of NSSO consumption data, we estimate Indias grocery market
size at `19.9 tn, contributing ~48% to Indias total retail consumption. Despite the large size,
this market has remained predominantly unorganized due to ubiquitous local stores/vendors
and the late emergence of organized brick-and-mortar retailers. We peg the size of opportunity
for organized (including online) grocery retailers at `3.4 tn, based on the requirements in urban
metropolitan areas (cities having population of 1 mn+). Globally, China is the largest online
grocery market at US$41 bn, followed by UK at US$15 bn. US is a distant fourth at US$7 bn,
possibly due to the well-developed, existing organized retail network.
Inventory-led or inventory-less: the better model

Two main models have been adopted by hyperlocal grocery delivery start-ups: the inventory-led
model which maintains its own stocks and supply chain (such as BigBasket) and, inventory-less
or aggregator models which tie-up with existing shops and supply to the end-consumer
(Grofers). At the current scale (10,000-20,000 orders a day), the inventory-led model seems to
have a better margin profile; however, if scale rises 10x, the inventory-less model could yield
better margins as delivery costs (its major cost element) could reduce dramatically.

Ambitious scale-up targets could be tough to meet

Per media reports, BigBasket is targeting 50 cities with monthly revenue run-rate of US$1 bn in
2016, from eight cities and revenue run-rate of US$100 mn in August 2015. We believe this
10X increase in revenues within a year could be hard to achieve, primarily as customers in
smaller towns may not easily shift from their local retailer, and building localized offerings
(incorporating local tastes and preferences) may take time. Internationally, online grocers such
as Ocado (inventory-led model, UK-based, CY2014 revenues of US$1.4 bn) and Instacart
(aggregator model, US-based) have been scaling up their services, but Germany based, Rocket
Internet promoted grocery aggregator Shopwings shut shop in 2015 after it could not strike
relationships with local stores. We believe the Indian online grocery retailers will also need to
sort out these issues, particularly in view of the ubiquitous local stores who anyway provide free
home delivery and throw in extras like returns, credit etc.

Other trends: Funding pace stable, Amazon and Flipkart maintain their pole positions in website
and app rankings Kawaljeet Saluja
kawaljeet.saluja@kotak.com
Funding, in absolute terms, was higher in Nov15 versus Oct15, though the 3-month moving Mumbai: +91-22-4336-0860
average trended down. The bulk of US$164 mn raised in Nov15 went to Naaptol.com (US$52
Garima Mishra
mn, online/TV shopping) and Urbanclap (US$25 mn, services marketplace). Traffic data did not garima.mishra@kotak.com
throw up any major surprises: Amazon continues to be the most visited e-commerce website Mumbai: +91-22-4336-0862

(desktop) in India and Flipkart remains the topmost ranked app in Google Playstore (per Dec15
data). Infoedges Job Seek Index (representing job search activity on Naukri.com) increased 9%
yoy, led by the strength in telecom (+61% yoy), IT-software (+18% yoy) and IT-BPOs (+11%
yoy).

Kotak Institutional Equities Research

kotak.research@kotak.com
Mumbai: +91-22-4336-0000

For Private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES RATING SYSTEM AND OTHER DISCLOSURES, REFER TO THE END OF THIS MATERIAL.
India Internet

Grocery is the largest component of retail, but possibly the least organized
Grocery retail is the single largest component of retail in India, constituting ~48% of Indias
total retail consumption of `41 tn. We compute the size of Indias grocery retail market on a
bottoms-up basis, based on NSSO per-capita monthly average consumption data.

As shown below, urban grocery consumption is ~40% of overall consumption and is

expected to increase further as urban population rises, and purchasing power increases.
Despite urbanization trends and higher consumption seen for a few years now, organized
grocery retail is a mere 2% of the total. This implies that local grocery (kirana) stores still
control a whopping 98% of the grocery retail market.

Exhibit 1: Grocery is the largest constituent of the Indian retail market

Bottoms-up estimate of India's grocery market size
Parameter Comments
Urban population in 2011 (mn) 377
Rural population in 2011 (mn) 8 34

Average monthly per-capita urban spend on food (Rs) 1,121 Based on 2012 NSSO data
Average monthly per-capita rural spend on food (Rs) 756 Based on 2012 NSSO data

Total size of the grocery market in 2011 (Rs tn) 12.6

Similar to FY10-12 CAGR based on
12.0
Assumed consumption CAGR over 2011-15 (%) NSSO food consumption data
Estimated grocery market size in 2015 (Rs tn) 19.9
Size of the urban grocery market (Rs tn) 8 .0
Size of the rural grocery market (Rs tn) 11.9
Estimated Indian retail market size in 2015 (Rs tn) 41.2 Based on 2012 NSSO data and extrapolated for 2015
Grocery market as % of total retail market 48 .2

Source: NSSO, Census 2011 data, Kotak Institutional Equities

Exhibit 2: Organized grocery retail still a minuscule proportion of overall market

Estimated market share of organized grocery retailers (2015)
Company 2015 revenues (Rs bn) Comments
Non-apparel revenue (may include
Future group 84 personal care etc.)
Reliance Fresh 57 Only food/grocery revenue
Aditya Birla Retail 25 FY2014 revenue
Spencer's Retail 17 Food+other personal care products revenue
Hypercity Retail 11
Trent Hypermarket 8 Revenue only for Trent hypermarket
Total (for 6 retailers) 201
Revenue assumed for other organized retailers 201 Assumed equal to 6 retailers
Market-share of organized retailers (%) 2
Market-share of local grocers (%) 98

Source: Company reports, Capitaline, Kotak Institutional Equities

We believe the addressable market size for all organized grocery retailers (including online
players) is `3.4 tn, calculated as the market attributable to the urban population residing
in metropolitan cities (defined as cities with a population of 1 mn+).

Exhibit 3: Organized grocery retailers have a Rs3.4 tn market potential

Estimation of the opportunity size for organized grocery retailers
Parameter Comments
Size of the urban food market (Rs tn) 8 .0
Proportion of urban population residing in metropolitan cities (%) 42.6 Metropolitan cities have population > 1mn
Opportunity size for organized grocery retailers (Rs tn) 3.4

Source: Census 2011 data, Kotak Institutional Equities

Online grocery delivery: different business models currently operational

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Online grocery retailers in India have adopted varying business models, with the inventory-
led model competing directly with other formats (hypermarkets, local grocers), while the
inventory-less and the aggregator models tie-up with existing shops and supply to the end-
consumer.

Inventory-led model is one in which the company controls the supply chain (sourcing,
storing and delivering) fully. BigBasket, Reliance Fresh Direct currently follow this model.

Inventory-less model is one in which the online player sources products from local grocery
shops (and thus does not need to source/store items), but delivers it on its own to the end
consumer, much like a marketplace model. Grofers, PepperTap currently follow this
model.

Pure aggregator model is one in which the company simply connects the customer with
local grocery shops through their online platform and lets those shops deliver directly to
customers thereby earning a small commission on the order placed. Aaramshop currently
follows this model.

Exhibit 4: Comparison of funding and usage metrics of hyperlocal retailers with horizontal
marketplaces
Snapshot of funds raised and usage data of hyperlocal grocery retailers
Cumulative funding
raised No. of app downloads AppAnnie rank
US$ mn 21-Jun-15 21-Dec-15
Hyperlocal grocery retailers
Grofers 166 1-5 mn 28 9 234
BigBasket 108 1-5 mn na 28 4
Pepper Tap 47 1-5 mn na 422
Zopnow 12 50,000-100,000 na na
Greencart na 10,000-50,000 na na
Aaramshop na 5,000-10,000 na na
Horizontal marketplaces
Flipkart 3150 10-50 mn 8 10
Amazon India na 10-50 mn 11 12

Source: Google Play, AppAnnie, Venture Intelligence, Kotak Institutional Equities

To carry inventory or not: that is the question

We estimate below the broad financials of both inventory-led and inventory-less models
using some anecdotal data as well as data from a few media reports. Our numbers
attempt to calculate per-transaction margins and do not take into account fixed
operating costs such as employee costs, SG&A etc. Further, given the current scale of
existing players, these numbers are representative of operations within one city.

We assume the same product mix for both players (15% fruits and vegetables, 85%
other products), but assume margins for the inventory-less player to be lower than that of
inventory-led player for both categories. The inventory-led player bears an additional
storage/fulfillment cost (because it carries inventory), but inventory-less player does not
bear this cost. However, inventory-less player does bear a higher delivery cost as: (1) each
order of the customer may have to be broken down into sub-orders and may be sourced
from different stores, (2) initially, distances between stores and customers may be higher,
and hence several to-and-fro trips may have to be made by delivery boys, and (3) scooters
will usually not be able to ferry more than 2 orders at a time.

At the current scale (~0.5 mn customers, 10-20,000 deliveries per day), the inventory-led
model seems to be more profitable, largely because of lower delivery costs. While we still
calculate a loss per transaction for the inventory-led player, it is significantly lower than
that of the inventory-less player.

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Exhibit 5: Case I At current scale of operations, inventory-led model is more profitable

Estimation of profitability of inventory-less and inventory-led models at current scale of operations (in a city)
Inventory-less Inventory-led Comments
1. Assumptions on number of customers, orders, transaction size
Average transaction value (Rs) 600 1,500
Total number of customers, app + web (mn) 1.3
Percent of app downloaders who actually purchase 40
Number of buying customers (mn) 0.5 0.5
Number of orders per day 10,000 20,000

2. Delivery cost assumptions

Aggregators generally source products from different stores - so
Average deliveries per order 2.0 1.0
each order may be fulffilled by different stores/delivery boys
Average distance from shop/warehouse to end-customer (km) 10 15
Average distance between customers (km) 4 4
Average deliveries per delivery boy 15 20 Based on anecdotal data
Adjusted for the fact that inventory-less models may require more
Effective number of orders delivered per delivery boy 8 20
deliveries to deliver one order
Number of delivery boys required daily 1,333 1,000
Monthly salary to a delivery boy (Rs) 10,000 10,000
Number of vehicles required 1,333 1,000 Assuming single shift for simplicity
Inventory-less players user scooters while inventory-led players use
Number of orders carried by one vehicle 2 10
vans/tempos which can carry more orders
Distance traveled by vehicles (km) 156 106
Per km transportation cost 1 3

3. Margin assumptions
Inventory-less player will make lower margin than its inventory-led
Margin on fruits vegetables 7 20
player across categories
Proportion of fruits/vegetables 15 15

Margin on other products 5 10

Proportion of other products 85 85

4. Estimated financials (Rs mn)

This is total turnover. Reported revenue will be different as
Gross turnover 2,190 10,950
inventory-less player will report only commissions as revenue
Average margin (%) 5 12
Operating income 116 1,259

Delivery cost
Delivery personnel (160) (120)
Transportation cost (8 5) (103)

Fulfilment cost (1,095)

Takes into account only variable operating costs (fixed employee,

Operating profit (loss) (129) (59)
SG&A costs will be additional)
Operating profit (loss) per order (Rs) (35) (8)
Operating profit (loss) as % of transaction value (%) (5.9) (0.5)

Delivery cost as % of turnover (%) 11.2 2.0

Fulfilment cost as % of turnover (%) 10.0

Source: Kotak Institutional Equities Estimates

The tables turn however when we assume operations of both players to scale up (5-10x
of current levels, ~100,000 orders per day). While we do not expect gross margins for
either of the players to inch up (given the competition from local stores, possibly other
online players), the inventory-less model benefits from higher scale as delivery costs as a
proportion of overall turnover (GMV) decline from 11.2% in Case I to 2.7% in case II, led
by delivery efficiencies (higher deliveries per person, lesser distance between shop and
customer and between customers). While both models have the potential to turn
profitable, it is the inventory-less model which can potentially achieve operating profits of
~2.6% (of transaction value) versus 1.0% for the inventory-led model.

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Exhibit 6: Case II Once orders scale up 5-10x of current levels, inventory-less model becomes more profitable
Estimation of profitability of inventory-less and inventory-led models once operations scale up (in a city)
Inventory-less Inventory-led Comments
1. Assumptions on number of customers, orders, transaction size
Average transaction value (Rs) 1,500 1,500
Total number of customers, app + web (mn) 5.2 5.2
Percent of app downloaders who actually purchase 100 100
Number of buying customers (mn) 5.2 5.2
Number of orders per day 100,000 100,000

2. Delivery cost assumptions

As more stores affiliate with the inventory-less player, number of
Average deliveries per order 1.5 1.0
deliveries required per order will reduce
Average distance from shop/warehouse to end-customer (km) 5 10
Average distance between customers (km) 2 2
Average deliveries per delivery boy 15 20 Assumed lower than Ocado's ~24 deliveries per day per van
Adjusted for the fact that inventory-less models may require more
Effective number of orders delivered per delivery boy 10 20
deliveries to deliver one order
Number of delivery boys required daily 10,000 5,000
Monthly salary to a delivery boy (Rs) 10,000 10,000
Number of vehicles required 10,000 5,000 Assuming single shift for simplicity
Inventory-less players user scooters while inventory-led players use
Number of orders carried by one vehicle 2 20
vans/tempos which can carry more orders
Distance traveled by vehicles (km) 66 48
Per km transportation cost 1 3

3. Margin assumptions
Inventory-less player will make lower margin than its inventory-led
Margin on fruits vegetables 7 20
player across categories
Proportion of fruits/vegetables 15 15

Margin on other products 5 10

Proportion of other products 85 85

4. Estimated financials (Rs mn)

This is total turnover. Reported revenue will be different as
Gross turnover 54,750 54,750
inventory-less player will report only commissions as revenue
Average margin (%) 5 12
Operating income 2,902 6,296

Delivery cost
Delivery personnel (1,200) (600)
Transportation cost (267) (233)

Fulfilment cost (4,928 )

Takes into account only variable operating costs (fixed employee,

Operating profit (loss) 1,435 535
SG&A costs will be additional)
Operating profit (loss) per order (Rs) 39 15
Operating profit (loss) as % of transaction value (%) 2.6 1.0

Delivery cost as % of turnover (%) 2.7 1.5

Fulfilment cost as % of turnover (%) 9.0

Source: Kotak Institutional Equities estimates

Average order size and delivery costs are key variables

Based on the above calculations, we reckon that average order size and delivery costs are
key variables for these companies, particularly for aggregators such as Grofers. Currently, we
estimate that these companies are unable to break-even at the operating level (even
excluding fixed operating costs) due to the small order size, large number of deliveries per
order (due to fewer stores in the network), as well as fewer deliveries per delivery boy
(teething issues, large distances between stores and customers). Larger scale can be the only
savior in the longer-term, and creating that scale may require sustained investments in the
near-term.

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Exhibit 7: Significantly higher average order size and higher number of deliveries per boy are
required for aggregators (such as Grofers) to become profitable on an operating basis
Sensitivity of operating profit (Rs/order) to order size (Rs) and number of orders delivered per boy per day

Number of orders delivered per delivery boy per day

(35) 4.5 6.0 7.5 9.0 10.5
300 (96) (68 ) (51) (40) (32)
400 (91) (63) (46) (35) (27)

Order size (Rs)

500 (8 5) (57) (41) (29) (21)
600 (8 0) (52) (35) (24) (16)

8 00 (69) (41) (25) (13) (6)

1000 (59) (31) (14) (3) 5
1200 (48 ) (20) (3) 8 16
1500 (32) (4) 12 24 32

Source: Kotak Institutional Equities estimates

Achieving scale will be a challenge

Both models seem viable on achieving a certain amount of scale (0.1 mn orders per day), but
achieving this scale on a sustainable basis in one city/geography will be a challenge,
particularly outside metro cities. This is because Indian consumer still remains value
conscious and prefers to see, touch and feel products (particularly fruits and vegetables)
before buying. Further, there is still intense competition from local kirana stores, who
anyway offer services like home delivery, and sometimes have long-term relationships with
their consumers, even offering them credit. Hence, while online grocers intend to solve
problems such as ease of access and quality which plagued organized brick and mortar
retailers, they still have to get their act together on: (1) ease of transaction and fulfillment
(on-time delivery, delivery of exact products ordered), and (2) minimizing stock-outs, which
may impact customer retention. Aggregators such as Grofers also have to partner with local
stores, who may not always want to do so, given they anyway have a firm customer base
and may not see too much value in the form of additional transactions from such
aggregators.

China is the largest online grocery retail market, followed by the UK

Per data from the research firm IGD, Chinas online grocery retail market at US$41bn in
2015 is the largest in the world, followed by UK, Japan and the US. US is, surprisingly, less
than 20% of the Chinese market, primarily due to a well-developed brick-and-mortar retail
store network. Chinese market is expected to grow rapidly as: (1) internet penetration
increases further bringing more people into online shopping, (2) product assortment offered
by online retailers improves, and (3) demand for premium products rises in line with incomes,
driving higher value purchases, particularly of imported food items.

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Exhibit 8: China is the largest online grocery market globally, followed by UK

Estimated size of online grocery delivery market in key countries (US$ bn)

2015 2020 5-yr CAGR

China 41.0 178.0 34.1
UK 15.0 28.0 13.3
Japan 12.0 22.0 12.9
US 7.0 18.0 20.8
France 9.0 16.0 12.2
South Korea 7.0 13.0 13.2
Germany 3.0 6.0 14.9
Australia 2.0 5.0 20.1
Belgium 1.0 2.0 14.9
Netherlands 0.5 2.0 32.0

Source: IGD, Kotak Institutional Equities

Aggregator model may not always work: Instacart is expanding, but Shopwings
has shut
Instacart is a US based online grocery retailer, which sources groceries from local stores,
transports them with buyers/riders within its network, and supplies to customers in the
vicinity. Initially it earned revenues by charging a premium over store prices for products
from customers as well as charging separately for delivery, but it has now partnered with
local stores, who are sharing a portion of their margin with Instacart. Per media reports,
there are stores whose orders have gone up after partnering with Instacart, and intend to
continue their partnership with it. Instacart is a start-up which commenced operations in
2012. It has raised US$275 mn in funding, and was valued at US$2 bn after its last funding
round.

On the other hand, Shopwings, a Rocket Internet promoted online grocery supplier which
started operations in Germany in 2014, shut shop in 2015. It faced challenges in
establishing partnerships with local stores as well as regulatory hurdles in the form of
product listings (it had to mandatorily list each and every ingredient of 18,000 SKUs on offer)
as well as two-stage payment authentication for online payments. While it has shut its
European operations, it is expanding in Australia and South Asia.

Ocado: the UK example

We analyze below the financials and key operating metrics of Ocado, a prominent UK-
based online grocery and personal products retailer. We believe this company offers a
suitable comparison because: (1) it reported a net profit in 2014, 15 years after it
commenced operations, and (2) it operates only in the online segment, unlike other
retailers such as Tesco in the UK which have offline presence as well.

We note that as opposed to traditional retailers such as Tesco, M&S, Sainsbury which
faced stagnant revenues over the past five years, Ocado has managed to grow its
revenues at a CAGR of 16.5% over 2010-14, primarily by adding more customers.
Further, while UKs overall grocery retail market is expected to remain largely stable over
2015-2020, the online grocery market size is expected to grow at a CAGR of 15% over
the same period.

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Exhibit 9: While Ocado is much smaller than its brick-and-mortar peers, its growth trajectory has far
outpaced the peers
Revenue profile of key UK retailers, December calendar year-ends, 2010-14 ( mn)

mn 2010 2011 2012 2013 2014 2010-2014 CAGR (%)

Ocado 518 604 666 778 954 16.5
Sainsbury 21,176 22,370 23,267 23,985 23,770 2.9
Tesco 61,550 65,072 65,736 63,858 61,933 0.2
Marks & Spencer 9,781 9,955 10,010 10,327 10,314 1.3

Source: Bloomberg, Kotak Institutional Equities

Exhibit 10: UK online grocery retail market to show higher growth relative to offline retail
UK's overall and online grocery market size, December calendar year-ends, 2015-2020 ( bn)

bn Overall grocery market size Online grocery market size

250

200

150

100

50

0
2015 2020

Source: Company, Kotak Institutional Equities

Ocado is an inventory-led model, with the company sourcing products from different
vendors, stocking in its own warehouses, sorting and packaging them in its own
fulfillment centers and then finally delivering to customers in its own vans/carriers.

We note that Ocado currently has 0.45 mn active customers, who order ~1.5 times a
month. Weekly orders of ~23,900 compare with ~20,000 of BigBasket (per media reports)
and an estimated ~10,000 of Grofers. Ocados average order size at 112 (US$167),
however, is significantly higher than that of Indian players (US$9-23), which may be a
function of higher per capita consumption, higher absolute prices, lower proportion of
fruits and vegetables in the overall mix (estimated at 5% of overall billing for developed
economies versus 15% for India) and lesser frequency of purchase.

Compared to Indian online grocery retailers, we believe Ocados delivery costs at 11.8%
of revenues in 2014 are significantly higher than those of Indian players (in Case II),
primarily as driver/delivery-man costs in the UK are a whopping ~25x that of India.

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Exhibit 11: Key operating metrics of Ocado, December calendar year-ends, 2013-14

2013 2014
Active customers 384,877 453,000
Average orders per week 143,000 167,000
No. of orders per customer per month 1.5 1.5
Average order size () 113.53 112.25
Mature CFC efficiency (units per hour) 135 145
Average deliveries per van per week 160 163
Average product wastage (% of revenue) 1.0 0.8
Items delivered exactly as ordered (%) 99.0 99.3
Deliveries on time or early (%) 95.2 95.3

Source: Company, Kotak Institutional Equities

Exhibit 12: Ocado has consistently improved its deliveries per van per day metric
Deliveries per van per day for Ocado, December calendar year-ends, 2009-14

Deliveries per van per day

26

23

20

17

14
2009 2012 2013 2014

Source: Company, Kotak Institutional Equities

Ocado has turned around its operations primarily by boosting its private label sales as well
as optimizing utilization and efficiencies of its warehousing, fulfillment as well as delivery
assets. Further, Ocado has continuously improved upon other metrics such as on-time
delivery, delivery of items exactly as ordered, which has led to high repeat business from
existing customers.

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Exhibit 13: Key financials and margin profile of Ocado, December calendar year-ends, 2013-14 ( mn)

2013 2014
Revenue 784.0 904.0
COGS (544.1) (636.4)
Operating income 239.9 267.6
Expenses
Trunking and delivery (91) (107)
Fulfilment cost (69) (76)
Other operating costs (payment, call center costs) (9) (11)
Direct marketing costs (10) (10)
Total operating cost (178.7) (203.2)
Operating profit 61.2 64.4
G&A (42.1) (47.1)
EBITDA 19.1 17.3

Margin profile (%)

Gross margin 30.6 29.6
Operating margin 7.8 7.1
EBITDA margin 2.4 1.9
Expenses as % of revenue
COGS 69.4 70.4
Trunking and delivery 11.6 11.8
Fulfilment cost 8.8 8.4
Other operating costs (payment, call center costs) 1.2 1.2
Direct marketing costs 1.3 1.1
G&A 5.4 5.2

Source: Company, Kotak Institutional Equities

Funding and deal flow

Funding, in absolute terms, was higher in Nov15 versus Oct15, though the 3-month
moving average trended down. The bulk of the US$164 mn raised in Nov15 went to
Naaptol.com (US$52 mn, online/TV shopping) and Urbanclap (services marketplace).

Exhibit 14: Fund-raising showing some signs of a breather

3-month moving average of internet and e-commerce funding deals (US$ mn)

3-month moving average of internet and e-commerce funding deals (US$ mn)
1,000.0
900.0
800.0
700.0
600.0
500.0
400.0
300.0
200.0
100.0
-
Dec-12

Dec-13

Dec-14
Jun-12

Jun-13

Jun-14

Jun-15
Apr-12

Apr-13

Apr-14

Apr-15
Aug-12
Oct-12

Aug-13
Oct-13

Aug-14
Oct-14

Aug-15
Oct-15
Feb-13

Feb-14

Feb-15

Source: Venture Intelligence, Kotak Institutional Equities

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CEO-speak

Jeff Bezos, founder and CEO of Amazon sent out an email thanking customers of
Amazon.in for making it the most visited e-commerce website in India just two and a half
years after launch. He said Amazon would keep working hard for Indian customers and
sellers, and would keep growing its investments in India. His email also included a
snapshot of Comscore traffic data, which pegged Amazon.ins Oct15 unique visitors at
30 mn+, ahead of rivals such as Flipkart, Jabong and Snapdeal.

Amazon India head Amit Agarwal said that Amazon was a consumer company and not a
web/app company, and would be present in all online fronts used by its consumers. He
said that Amazon Indias business volume grew 300% YoY in 3Q2015. Referring to 30
mn+ active website users, he said, We have become the no.1 e-tail website in 2.5 years
after launch, and becoming the no. 1 in other categories (mobile/app) would only be a
matter of time.

Sahil Barua, co-founder of logistics firm Delhivery said that the company is adding three
new lines of business: creating technology solutions for merchants, helping them list on
online marketplaces and developing point-of-sale systems. These new lines of business
will help design optimal supply chains for clients across verticals using comprehensive
consumer, inventory and location data. Barua estimates that his company delivers about
204,000 shipments every day with about 75% orders receiving cash-on-delivery. The
company services more than 4,000 pin codes and has 18 fulfillment centers.

Flipkart cofounder and CEO Sachin Bansal said the company was a firm believer in a
mobile-only strategy. This was because the regulators, Government and everybody else is
looking at the mobile as a medium for future development. Further, ~100 million
smartphones are being sold every year in India, even as desktop/laptop sales are declining.

Myntra CEO Ananth Narayanan said that the company was targeting a GMV of US$1 bn
by 2016 from US$500 mn currently. He also said that the company is expecting to
become profitable by 2016-end. He mentioned that the app-only strategy for Myntra has
worked, as metrics such as customer retention, customer life-cycle etc. have improved.
Further, Myntra currently has 7.6mn monthly active users, with 80% repeat customers,
the highest repeat rate in the industry.

Online grocery retailer BigBaskets co-founder Abhinay Choudhari said that the company
has aggressive expansion plans, and targets 30 cities and revenues of US$2 bn by 2017-
18. The company also seeks to break even by then. He added that nearly 35% of sales
were accounted for by private labels in commodities such as vegetables, pulses and
provisions.

Other news-flows

The Ministry of Communications and Information Technology has proposed tax

exemptions on stock options given to employees by startups, on capital gains that are
invested in new ventures and those made from investing in new firms. The moves could
have a positive effect on such companies when the measures are adopted. The proposals
have been sent to the finance ministry as part of suggestions for the next year's Budget
and are aimed at promoting the startup ecosystem, in line with the initiative that Prime
Minister Narendra Modi announced in his Independence Day speech.

Myntra is banking on its private labels to increase sales. Its top-selling label Roadster has
reported sales of `3.2 bn YTD, and is expected to become a `6.5 bn brand in 2016. All of
Myntras private labels currently contribute ~`7 bn to its overall GMV. From 3-4 private
brands currently, Myntra aims to expand its brand portfolio to 12 in the near-term.

KOTAK INSTITUTIONAL EQUITIES RESEARCH 11

India Internet

Separately, Myntra is also planning to roll out offline experience zones to provide
customers a touch and feel experience.

Online wholesale suppliers have come up to cater to firms selling grocery to stationery
and unbranded products, addressing the increasing demand from small traders to
institutional players who seek procurement efficiency and convenience, cost savings and
financial hygiene. In return, these business-to-business wholesalers, such as WholesaleBox,
GrocNation and Zoffio, get assured revenue. Customer acquisition cost is low for them
and customer loyalty high, which might not be the case with business-to-consumer
players.

Flipkart, in a shopping survey, has revealed that 69% of shoppers on its platform are
male. Most online customers are in the 25-34 years bracket, and more than half of them
are office-goers, closely followed by students. Top items sold online were electronic
accessories, mobiles, lifestyle accessories & womens apparel across all regions. Among
cities, Delhi-NCR contributed to most sales, though regionally, Southern India dominated.

Both Quikr and Snapdeal have launched vernacular platforms to enable users to browse
in their native language. Quikr now allows consumers to choose from seven different
languages, to browse and post ads. Snapdeal, already available in three languages, will
be available in another nine by Jan16. Per Quikr, 88% of Indian population is non-
English speaking, and multilingual platforms would enable such users to consume and
create content, thus making the platform more inclusive.

Hiring at e-commerce companies remains aggressive, particularly for top

positions

Exhibit 15: Significant hiring seen at management level positions across firms in the last 3-4 months
Key hires at management positions in e-commerce firms
Company Person Designation Previous
Freecharge Anshul Kheterpal CFO CFO, Airtel Money
Flipkart Samardeep Subandh Chief Marketing Officer Chief Sales officer, Marico
Paytm Vikas Purohit VP Head (Fashion and Lifestyle), Amazon India
Director (buyer-seller platform and data analytics),
Shuttl Amit Kumar Gupta Head of Engineering Snapdeal

Source: Media reports

Infoedge Job Speak Index: Strong yoy growth, on a low base

Infoedge, which owns Indias leading recruitment portal Naukri.com comes out with a
monthly Job Speak index, which is a composite index based on job postings and hiring
trends by Infoedges customers.

July 2008 index is taken at 1,000, and subsequent months are indexed to it. The Job
Speak Index is based on the total job movement on Naukris websites. Job movement
is defined as the sum of: (1) new jobs added to Naukris websites as well as job listings
acquired by the tele-sales teams, and (2) jobs refreshed which pertains to any job which
was posted earlier, but was refreshed during the month-under-review indicating an open
position. Total job movement signifies recruitment activity and is taken to be the
recruitment index.

November 2015 index at 1,599 was up 9% YoY, sharply lower than 26% in October.
However, this decline was largely expected due to the impact of the festive season in
Nov15 (which was not there in Nov14).

Broadly, 3QFY16s trends for Infoedge seem to be stronger than in 1HFY16. Delhi-NCR
has seen the maximum hiring pick-up on a YoY basis, followed by Mumbai. Industries
which saw hiring improvement in Nov15 include IT-software (+18% YoY), BPO and ITeS

12 KOTAK INSTITUTIONAL EQUITIES RESEARCH

Internet India

(+11% YoY), and Telecom (+61% YoY). Oil and gas (-34% YoY), Construction (-10%
YoY) and Capital goods (-15% YoY) saw a decline in hiring.

Exhibit 16: Job Speak Index corrects in Nov'15 due to festive season but underlying trend remains
strong
Yoy growth in Naukri's Job Speak Index, Jan 2014- Nov 2015 (%)

30 (%)
26

25 23
22
20
20 18 18

15
14 13 14 14 13
15 13
11 11
10 9
9 9 9
10

5
1
0 -2
-3

Dec-14
Mar-14

Mar-15
May-14
Jun-14

Jun-15
May-15
Apr-14

Sep-14

Apr-15

Sep-15
Jul-15
Jul-14

Nov-14

Nov-15
Jan-14

Jan-15
Feb-14

Feb-15
Oct-14
Aug-14

Aug-15

Oct-15
-5
Notes:
(a) Oct-15 yoy growth data is based on average for Oct-14 and Nov-14.

Source: Company, Kotak Institutional Equities

Exhibit 17: Telecom shows a sharp pick-up; IT stable; Oil&Gas Exhibit 18: Hiring in Hyderabad spikes up, stable growth in
and Capital goods decline other cities
Industry-wise yoy growth in Naukri's Job Speak index in Nov'15 (%) City-wise yoy growth in Naukri's Job Speak index in Nov'15 (%)

50 (%) (%)

30
18 40
11
7
10 2

24
(10)
(6) (6)
(10) 20
(15)
(30)
Insurance
BPO and ITeS

Construction and

Oil and Gas

Capital Goods
IT- Software

Banking and Financial

Telecom

Pharma & Biotech

Auto and ancillary

7 6 7
5
Engineering

1
services

Services

0
Hyderabad

Pune

Kolkata
Delhi-NCR

Bangalore
Mumbai

Chennai

Source: Company, KIE Source: Company, KIE

KOTAK INSTITUTIONAL EQUITIES RESEARCH 13

India Internet

Website Traffic Data: Trends in website usage and app downloads

Amazon India remains the highest ranked e-commerce website in India, Flipkart
gains further in app rankings

Data retrieved from Alexa shows that Amazon India continues to be a leading desktop
website, and is the only e-commerce website in the Top-5 Indian websites. We
acknowledge that this rank is only based on desktop metrics which may not reveal the
correct traffic picture given ~80% of traffic on most websites is from mobile devices
(through the mobile website/app).

App ranking data from App Annie shows that Flipkart is the top-most e-commerce app in
India (based on Google Playstore download data), followed by Amazon India, and
Snapdeal. Flipkart moved up a couple of notches in December 2015, and is now ranked
No.6 by Google Playstore.

We note that getting a comprehensive traffic-based rank of websites remains a challenge

due to growing difficulties in monitoring mobile website traffic. Broadly, Alexa captures
only desktop data by the sampling method. Website rankings and other engagement
metrics such as bounce rate, daily page views etc. are also based on desktop traffic only.
App Annie is a mobile-app analytics provider, and its app rankings are based on Google
Playstore rankings. Playstore rankings are based on downloads and other attributes such
as app quality (users who keep the app after installing it), frequency of interaction with
the app, number and quality of ratings, number of backlinks, number of uninstalls etc.

14 KOTAK INSTITUTIONAL EQUITIES RESEARCH

Internet India

Exhibit 19: Amazon the leading e-tail website, 99acres the dominant real estate classifieds website
Category-wise key website metrics (desktop-only) as retrieved on 29th December 2015

E-tailers Amazon India Flipkart Snapdeal Paytm Ebay India

Website rank in India 5 7 13 19 18
Bounce rate (%) 21.2 18.3 24.7 24.6 27.1
Daily page-views per visitor 12.3 8.5 6.9 5.4 8.1
Daily time on site (minutes) 9.2 8.3 7.3 7.2 7.3
Website load time (seconds) 2.2 3.0 2.9 3.7 2.9

Local search-Classifieds Quikr Olx Just Dial Askmebazaar Zomato

Website rank in India 32 43 49 82 86
Bounce rate (%) 24.0 16.8 39.3 35.6 31.0
Daily page-views per visitor 12.3 11.8 4.6 4.6 11.2
Daily time on site (minutes) 13.3 10.2 5.2 4.6 7.4
Website load time (seconds) 1.9 2.0 2.9 4.2 1.4

Recruitment Linkedin.com* Naukri Shine.com TimesJobs.com Monster India

Website rank in India 10 37 155 174 247
Bounce rate (%) 30.3 19.8 32.1 30.1 24.9
Daily page-views per visitor 5.6 9.7 4.8 4.5 6.7
Daily time on site (minutes) 7.2 9.5 5.3 4.4 8.1
Website load time (seconds) 1.9 2.5 2.3 4.2 3.3

Top-5 websites Google.co.in Google.com Facebook.com Youtube.com Amazon India

Website rank in India 1 2 3 4 5
Bounce rate (%) 18.2 20.2 28.3 33.3 21.2
Daily page-views per visitor 16.7 20.1 12.2 9.6 12.3
Daily time on site (minutes) 12.5 18.4 21.1 19.2 9.2
Website load time (seconds) 1.4 1.9 2.8 2.4 2.2

Real estate Classifieds 99acres.com MagicBricks.com Commonfloor.com Housing.com IndiaProperty.com

Website rank in India 131 179 207 451 586
Bounce rate (%) 31.1 37.5 25.2 20.4 28.0
Daily page-views per visitor 5.3 4.0 7.2 7.5 15.6
Daily time on site (minutes) 7.4 5.6 15.4 8.0 23.6
Website load time (seconds) 3.0 4.0 2.6 2.9 1.5

Notes:
(a) LinkedIn is not strictly a recruitment website; metrics represent global metrics

Source: Alexa (data retrieved on 29th December 2015), Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 15

India Internet

Exhibit 20: Flipkart gains further in app rankings; Wynk, a music provider, sees maximum MoM gain
in ranking
India app rankings (based on Google Playstore rankings)

Rank Application (Google Playstore) MoM change in rankings

1 WhatsApp MessengerW hatsApp Inc. 0
2 SHARE it - File TransferSHAREit T echnologies Co.Ltd 1
3 FacebookFacebook -1
4 MessengerFacebook 0
5 UC Browser - Fast DownloadUCW eb Inc. 0
6 FlipkartFlipkart 2
7 Truecaller - Caller ID & BlockT rue Software Scandinavia AB 4
8 hike messengerhike limited -2
9 imo free video calls and chatimo.im -2
10 Xender: File Transfer, SharingXender T eam 2
11 MX PlayerJ2 Interactive -2
12 Clean Master (Boost & AppLock)Cheetah Mobile -2
13 Amazon India ShoppingAmazon Mobile LLC 1
14 Wynk Music: Hindi & Eng songsairtel 28
15 360 Security - Antivirus Boost360 Mobile Security Limited -2
16 CM Security Antivirus AppLockCheetah Mobile (AppLock & AntiVirus) 17
17 UC Browser Mini - Save DataUCW eb Inc. -2
18 Opera Mini web browserOpera 11
19 Wish - Shopping Made FunW ish Inc. New
20 Facebook LiteFacebook 1
21 Snapdeal Online Shopping IndiaSnapdeal.com 3
22 Ola cabs - Book taxi in Indiaolacabs 0
23 AppLockDoMobile Lab 0
24 360 Security Lite Speed Boost360 Mobile Security Limited 12
25 Chhota Bheem Himalayan GameMech Mocha New
26 Temple Run 2Imangi Studios 13
27 Myntra - Online Shopping AppMyntra 10
28 Candy Crush SagaKing -9
29 InstagramInstagram 2
30 Jabong-Online Fashion ShoppingJabong.com 17
31 Subway SurfersKiloo -6
32 OLX Local ClassifiedsOLX BV -2
33 Recharge, Shop and WalletPaytm - One97 Communications Ltd. -6
34 mCentmCent 6
35 MyVodafone (India)Vodafone India Limited New
36 Hotstar TV Movies Live CricketNovi Digital Entertainment Pvt Ltd -16
37 Gods of RomeGameloft New
38 UberUber T echnologies, Inc. New
39 Super-Bright LED FlashlightSurpax Inc. New
40 PicsArt Photo StudioPicsArt New
41 Earn TalktimeRationalHeads T echnologies New
42 Google PhotosGoogle Inc. -4
43 DU Battery Saver&Phone ChargerDU APPS ST UDIO 3
44 LEO Privacy Guard - Lock&BoostLeomaster -26
45 VLC for AndroidVideolabs New
46 Cut the Rope: MagicNazara Games New
47 BookMyShowMovie Tickets,PlaysBigtree Entertainment Pvt. Ltd. New
48 EasyTouch ClassicSHEREW ORKSHOP New
49 Hola LauncherHolaverse New
50 My Talking TomOutfit7 New

Source: AppAnnie (data retrieved on 29th December 2015), Kotak Institutional Equities

16 KOTAK INSTITUTIONAL EQUITIES RESEARCH

Disclosures

"I, Kawaljeet Saluja, hereby certify that all of the views expressed in this report accurately reflect my personal views about
the subject company or companies and its or their securities. I also certify that no part of my compensation was, is or will be,
directly or indirectly, related to the specific recommendations or views expressed in this report."

Kotak Institutional Equities Research coverage universe

Distribution of ratings/investment banking relationships
Percentage of companies covered by Kotak Institutional
70%
Equities, within the specified category.

60%
Percentage of companies within each category for
which Kotak Institutional Equities and or its affiliates has
50%
provided investment banking services within the
previous 12 months.
40% 35.9% * The above categories are defined as follows: Buy = We
30.6% expect this stock to deliver more than 15% returns over
30% the next 12 months; Add = We expect this stock to
deliver 5-15% returns over the next 12 months; Reduce
= We expect this stock to deliver -5-+5% returns over
20% 17.6%
15.9% the next 12 months; Sell = We expect this stock to deliver
less than -5% returns over the next 12 months. O ur
10% target prices are also on a 12-month horizon basis.
4.7%
These ratings are used illustratively to comply with
0.6% 1.2% 0.0% applicable regulations. As of 30/09/2015 Kotak
0%
Institutional Equities Investment Research had
BUY ADD REDUCE SELL
investment ratings on 170 equity securities.

Source: Kotak Institutional Equities As of September 30, 2015

Ratings and other definitions/identifiers

Definitions of rating

BUY. We expect this stock to deliver more than 15% returns over the next 12 months.

ADD. We expect this stock to deliver 5-15% returns over the next 12 months.

REDUCE. We expect this stock to deliver -5-+5% returns over the next 12 months.

SELL. We expect this stock to deliver <-5% returns over the next 12 months.

Our target prices are also on a 12-month horizon basis.

Other definitions

Coverage view. The coverage view represents each analysts overall fundamental outlook on the Sector. The coverage view will consist of one of the following
designations: Attractive, Neutral, Cautious.

Other ratings/identifiers

NR = Not Rated. The investment rating and target price, if any, have been suspended temporarily. Such suspension is in compliance with applicable regulation(s)
and/or Kotak Securities policies in circumstances when Kotak Securities or its affiliates is acting in an advisory capacity in a merger or strategic transaction
involving this company and in certain other circumstances.

CS = Coverage Suspended. Kotak Securities has suspended coverage of this company.

NC = Not Covered. Kotak Securities does not cover this company.

RS = Rating Suspended. Kotak Securities Research has suspended the investment rating and price target, if any, for this stock, because there is not a sufficient
fundamental basis for determining an investment rating or target. The previous investment rating and price target, if any, are no longer in effect for this stock
and should not be relied upon.

NA = Not Available or Not Applicable. The information is not available for display or is not applicable.

NM = Not Meaningful. The information is not meaningful and is therefore excluded.

KOTAK INSTITUTIONAL EQUITIES RESEARCH 17

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