TechWeiss

ECOSYSTEM ECONOMICS Of Apple, Xiaomi and Reliance Internet

Evolution of a new business model is underway in the mobile ecosystem space—we term it ‘the ecosystem business model’. Companies such as Apple and Xiaomi are at the forefront nurturing an ecosystem of value- added services around their core products for a richer customer experience.

Apple’s App Store, the pioneer of this model, is the pivot of its services business and now contributes 17% to its revenue and 29% to operating profit. Xiaomi has boldly pledged it would make miniscule profits on its hardware business with the intent to cross-sell highly profitable services to a large pool of customers. The crux is both Apple and Xiaomi are seeking to bolster ‘installed user base’ rather than ‘devices shipped’. In , RJIO is looking at the emulating this business model by creating a host of services ecosystem for the subscribers on its mobile platform. In this note, we take a close look at ecosystem economics and the aspects that make it work.

Apple: Pioneer of ecosystem business model

Apple has significantly increased the utility of iPhone for its user base, by creating a robust app ecosystem—the App Store provides customers access to a large number of third- party apps, besides an immaculate user experience which drives customer loyalty. In fact, the company’s services revenue – 23.8% CAGR since FY15 versus 0.1% CAGR in product business – has been the key driver of its top-line growth. With the services business’s gross profit contribution now at 29%, Apple is focusing on widening its active user base, evident from the drop in its newest entry-level iPhone price to USD699 from USD749.

Xiaomi: Taking it far

While Xiaomi has taken a leaf out of Apple’s book by developing a strong internet-based app and content ecosystem, it has had to sacrifice the bulk of its hardware profits to create a large-scale user base to monetise services. To build a strong ecosystem for costumers, Xiaomi continues to invest heavily in partnering companies to create content and an accessories ecosystem. At a 9.2% contribution to revenue, Xiaomi’s services

business contributes an eye-opening gross profit of 47.1%.

The ecosystem model: Attractive but tough to execute

The ecosystem business model creates a sticky user base as familiarity of the ecosystem and subscription to services creates multiple hooks for the customer. Besides,

monetisation of users over their lifecycle with a higher-margin services business can propel profitability. That’s easier said than done though. Creating an ecosystem is Pranav Kshatriya challenging as it exposes a company to multiple fault lines, which necessitates creation of +91 22 4040 7495 [email protected] multiple circles of competence. This entails involvement of third-party developers and investments in companies for content and app development to enrich the ecosystem. Sandip Agarwal +91 22 6623 3474 [email protected] RJIO’s big bet Nisha Jain In India, RJIO does have a much better content ecosystem than telecom peers, but faces +91 22 6623 7459 stiff competition from vertical-specific players. It is still early days of content adoption in [email protected] the country; RJIO can leverage its scale, reach and access tothird-party developers to

create a wider and more engaging ecosystem. Sustained user engagement with a superior experience is the key variable to monitor RJIO’s progress in this business model. October 16, 2019 EdelweissEdelweiss ResearchResearch isis alsoalso availableavailable onon www.edelresearch.com,www.edelresearch.com, EdelweissEdelweiss Securities Securities Limited Limited BloombergBloomberg EDELEDEL ,, ThomsonThomson FirstFirst Call,Call, ReutersReuters andand Factset.Factset.

Internet

Monetising services while subsidising access

The evolution of a new business model is underway in the mobile ecosystem space. We term it ‘the ecosystem business model’, wherein companies create or foster development of value-added services around core products and services for a richer customer experience. Apple, with its App Store, is a pioneer of the ecosystem business model. Its services business – pivoted on the App Store – is a key growth driver with a contribution of 17% to revenue and 29% to operating profit. Android smartphone major Xiaomi has boldly pledged it would make only miniscule profits on its hardware business with the intent to cross-sell highly profitable services to its large pool of customers. Both companies are seeking to bolster “installed user base” over “devices shipped”, a small but key difference. Indian telecom major Reliance Jio too is looking at emulating the ecosystem business model.

At RJIO’s launch, management had underscored its focus on selling high-value internet services to customers rather than being a mere voice and data services provider. This is essentially the aforementioned ecosystem business model, wherein the customer purchases not only core services, but also subscribes to a host of other high-margin and sticky value- added services. Multiple service offerings act as different customer hooks and the success of even one such ‘hook’ can lead to creating a stickier customer base and higher customer lifecycle value. In some cases, in order to onboard customers, an ecosystem provider may choose to provide access at a lower cost with an eye on higher profits from add-on services.

Fig. 1: Ecosystem business model Ecosystem business model - Monetisation of high value internet services, at higher margins

Hardware, i.e., mobile Engagement with third device, at relatively low party app developers, price, helps in on for content creation and boarding customers app accessories Source: Edelweiss research

Apple is the pioneer of this business model as its App Store generates revenue from customers, not only at the time of device purchase, but also over the entire customer lifecycle. One key difference, however, is that Apple makes handsome margins in its hardware business too as its customers are willing to pay a premium for the aspirational Apple brand. Consumers’ familiarity of the ecosystem, followed by subsequent investments on one hand, with smooth integration of the ecosystem with other Apple products, on the other hand, drive immense loyalty in the customer base.

2 Edelweiss Securities Limited TechWeiss

Apple is also realising that it can harness higher value from expanding its installed base, apparent from the drop in its newest entry-level iPhone to USD699 (a good markdown from its earlier entry-level variant at USD749). For investors as well, the company is directing focus on its installed base as a key metric, and has stopped providing shipment data.

Smartphone major Xiaomi’s business model too has evolved from the same fundamental idea – to monetise customers’ requirement of services over device lifecycle. The company has pledged to keep its net profit margin for the hardware business below 5% to drive down hardware cost and push device sales. An attractive hardware value proposition would help the company create a strong user base, which can be monetised by selling internet services to those customers.

The rationale for this shift to internet services over hardware is that hardware transactions, while high value, are inherently lower margin with very little scope of differentiation and high competition. On the other hand, internet services, while low value, are recurring and sticky, and generate attractive margins. The ecosystem business model, therefore, compromises upfront margins in the hardware business in anticipation of higher profits from a steady stream of internet services over the hardware’s life cycle.

RJIO too is focusing on developing an ecosystem business model with a view to drive higher engagement through its varied internet services. This would improve the overall customer experience and increase their stickiness, which can be monetised later via services. We had highlighted RJIO’s plans in our earlier note - Betting big on integrated play stratagem. We believe that successful implementation, translating into high traction in the company’s services business would be significantly value-accretive considering the customer stickiness and high-margin aspects of the business. In order to understand how this journey can pan out for RJIO, we take a look at how these models have evolved globally.

3 Edelweiss Securities Limited Internet

Apple: The innovator of ecosystem business model

Apple has pioneered the ecosystem business model. By creating a robust app ecosystem – App Store, which gives customers access to a large number of third-party apps and services, the company greatly increased the utility of iPhone and improved the overall customer experience. Apart from App Store, customers are gobbling up more content online through Apple ecosystem such as Apple Pay, Apple Music, Apple Books, etc. The services revenue – 23.8% CAGR since FY15 versus 0.1% CAGR in product business – has been the key top-line growth driver for Apple. With services business’s gross profit contribution now increasing to 29%, the company is increasingly focusing on widening its active user base, evident from the drop in its newest entry level iPhone price to USD699, from USD749, and replacing importance of device shipment data with installed base in KPIs for investors.

The iPhone’s instant success disrupted the telecom landscape and decimated many handset manufacturers such as BlackBerry. We view the App Store as one of the key reasons for iPhone’s success as it enabled customer access to multifarious third-party apps, which greatly increased iPhone’s utility. iPhone’s popularity attracted a large number of developers to the iOS platform, thereby spawning the number of apps available on the platform. This in turn further increased iPhone’s attractiveness, setting in motion the network effect with a bigger customer base attracting more apps on the App Store, and more apps attracting new customers.

Chart 1: iPhone shipments and YoY growth 250 231 80.0 212 217 218 210 60.0 169 170 150 40.0 139

125 (%)

130 20.0 (no. in million) in (no. 90 72 0.0

50 (20.0)

FY11 FY12 FY13 FY14 FY15 FY17 FY18 FY16 9MFY19 Iphone units sold YoY growth (RHS)

Source: IDC, Company

Apple is known for its focus on delivering a great customer experience by combining hardware and software prowess. Given its closed ecosystem, Apple designs its own chipsets, which not only optimises the performance of its phones but also profitability.

Apple has been upgrading iPhone hardware and software annually. And every upgrade has been driving up demand for iPhone. Early upgrades marked a significant improvement while the recent ones have been largely incremental. Consumers, hence, have not been upgrading their iPhones as fast as they did earlier. This prompted Apple to increase the average selling price (ASP), leading to a higher entry barrier to the Apple ecosystem. However, on realising

4 Edelweiss Securities Limited TechWeiss

the necessity to ensure higher active devices on its network, Apple has reduced the entry price of its newest basic iPhone to USD699, from USD749 earlier.

Chart 2: iPhone: Average selling price trend over the years 900 20.0 787 800 757 15.0 671

700 652 10.0 636 629 645 607

603 (%) (USD) 600 5.0

500 0.0

400 (5.0)

FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 9MFY19 Average Selling Price YoY growth (RHS)

Source: Company, Edelweiss research

The App Store is immensely popular with iPhone customers. With Apple charging a hefty 30% commission on all apps/services sold on its platform, the contribution of its services revenue steadily increased to 17.1% in Q3FY19, up from 8.5% in Q4FY15. Consequently, the company’s services revenue has expanded at a staggering 23.8% CAGR since FY15 versus a meagre 0.1% CAGR for the products revenue.

Chart 3: Services business outgrowing aggregate revenue by a wide margin 40.0 20.0

30.0 18.0

20.0 16.0

10.0 14.0 (YoY growth %) growth (YoY

0.0 12.0 revenue)total of (%

(10.0) 10.0

Q2FY17 Q3FY17 Q4FY17 Q1FY18 Q2FY18 Q4FY18 Q1FY19 Q2FY19 Q3FY19 Q1FY17 Q3FY18 Products Services Total Services contribution (RHS)

Source: Company, Edelweiss research

What makes Apple ecosystem successful? Apple’s unwavering focus on keeping ‘customer experience’ above everything else is the cornerstone of its success. Despite hosting as much as 2mn apps on its platform, Apple manages to ensure immaculate user experience across the board.

5 Edelweiss Securities Limited Internet

In software too, Apple controls its App Store with equal rigour; it has strict guidelines on user data privacy, design, business model and performance. In hardware, Apple manufactures its own chipsets, and imposes tight quality control norms over components suppliers. The combination of hardware and software rigour along with a wide choice of apps makes the Apple ecosystem valuable to customer.

We believe that engagement of third-party app developers has been a key driver in fostering growth of the Apple app ecosystem. Consumers’ confidence in the ecosystem has helped third-party developers monetise apps. Apple had announced in June 2018 that it has paid over USD100bn to its developers since the launch of the App Store in 2009. A symbiotic relationship between app developers and Apple has helped create value for all stakeholders.

Apple is now developing more products to enrich its ecosystem. Apple Watch, which works exclusively with iPhone, has been extremely successful, further entrenching customers in the iPhone ecosystem. Apple has also launched Apple TV+, expanding its ecosystem from music streaming to video streaming. A wide variety of applications coupled with a secure and seamless experience is the value proposition driving Apple customers’ loyalty.

6 Edelweiss Securities Limited TechWeiss

Xiaomi: Doubling down

Xiaomi has taken a leaf out of Apple’s book by developing a strong internet-based app and content ecosystem. To this end, it has let go of the bulk of its hardware profits to create a large-scale user base to monetise services. The company has proclaimed it would keep net profit margin in its hardware business below 5%. Consequently, the oompany continues to invest heavily in partnering companies to create a content and accessories ecosystem. Compared with products’ 9.2% contribution to revenue, Xiaomi’s services business contributes an eye-opening 47.1% to gross profit.

Xiaomi proclaimed during its IPO that I would cap the hardware business’s overall net profit margin at 5% per year; in case the margin exceeds, then it would return the excess to its users. The company wants users to adopt its high-margin internet services, which keeps profit flowing in through the customer lifecycle. In contrast, profits, if any, on hardware sale are upfront but miniscule. Xiaomi has invested heavily in partnering companies to create a content and accessories ecosystem for its customers. The company is also building a slew of Internet of Things (IoT) products, which would create a cohesive ecosystem driving consumer loyalty.

So far, Xiaomi has kept its word on net profit margin in the hardware business, having generated a meagre 1% in 2018. However, It has been able to grow the internet services revenue at a fast clip by monetising its active customer base. Importantly, the company makes a staggering gross profit margin on its internet services of 66.2% compared with 7.5% on the hardware business. To put this in bigger perspective, the internet services business now contributes 47% to overall gross profit. No wonder, the company is focusing on expanding the portfolio of its sticky and high-margin internet-based services business.

Chart 4: Xiaomi TTM revenue composition Chart 5: Xiaomi TTM gross profit composition Services 9%

Services 47% Products and Others 53%

Products and Others 91%

Source: Company, Edelweiss research

Xiaomi tracks the monthly active users (MAU) on MIUI, a proprietary operating system built on the Android kernel, which serves as an open platform to deliver a wide range of internet services, such as content, entertainment, financial services and productivity tools. At end- June, Xiaomi had 206.9mn MAU (up 34.7% YoY), contributing 9.2% to revenue. Its internet

7 Edelweiss Securities Limited Internet

services revenue primarily consists of advertisements, gaming and other value-added services.

Advertisement: Xiaomi’s advertising revenue mainly comes from mobile apps and smart TVs. It offers display- and performance-based advertising to customers. Display-based advertisements are charged according to the length of time displayed. Performance-based advertisements are charged based on the number of clicks, displays or downloads. Other ad income comes from pre-installation of apps. Xiaomi sells advertisements directly to customers or through agencies.

Fig. 2: Advertisements over Xiaomi’s MIU Interface

Source: Company, Edelweiss research

Gaming: Xiaomi provides content sales, distribution and operation for game developers. The Mi Game Center featured over 30,000 games as on 31 March, 2018. Games are mostly free- to-play, and Xiaomi charges through purchases of virtual items and via revenue-sharing with game developers.

Value-added services (VAS): Other VAS consist of content subscription (videos, music, e- books, etc), live streaming and internet financial services. The company operates Mi App Store, Mi Browser, Mi Security, Mi Music, etc. on a freemium business model, wherein basic services and access are free, but customers pay for premium/additional services. The company also operates the Youpin e-commerce platform, which sells not only Xiaomi and its investee company products, but also high-quality third-party products. Xiaomi’s current fintech business focuses on consumer loans and supply chain financing, and the company is actively exploring other fintech business opportunities.

Xiaomi’s business model: Salient points Xiaomi journey was heralded as the "Apple of the East", partially because of its Apple- inspired sleek designs and the way it presented its products to the market. However, the company’s business model is quite different from Apple—Apple pursues a very focused and

8 Edelweiss Securities Limited TechWeiss

largely premium product strategy, whereas Xiaomi product strategy is value-for-money while dabbling in related businesses. The company aspires to reach as many people as possible and capture the value of services over customer lifecycle; the initial sale is just acquisition of a customer for its lifecycle value.

Xiaomi has always regarded innovation as a core contributor to its development, and has proactively made investments in technological innovation. In 2018, its R&D investment was RMB5.8bn and the number of applications for self-developed patents in mainland China and overseas exceeded 3,000. The company places great importance on building a strong IP portfolio and in raising Xiaomi’s scientific and technical expertise by acquiring high-quality patents.

By 2018, Xiaomi had acquired approximately 3,000 domestic and overseas patents. In addition, it inked licensing or cross-licensing agreements with a number of well-known companies such as Qualcomm, Microsoft, Nokia, and NTT DoCoMo.

Active investments in companies that create related content and devices enable it to provide a wider product bouquet to customers. Xiaomi has invested in many companies to build a wider IoT platform with investments in companies like scooter-maker Ninebot (which acquired the Segway brand in 2015), wearable technology company Huami, etc. According to media reports, Xiaomi has invested over USD4bn-plus in over 300 companies to date and has set aside USD1bn for investing in 100 companies in India, out of which it has already invested USD500mn year to date.

9 Edelweiss Securities Limited Internet

Business model: Attractive but tough to execute

The ecosystem business model creates a sticky user base as familiarity of the ecosystem and subscription to varied services create multiple user touch points. Besides, life-cycle monetisation of users in the higher-margin services business can propel profitability. But creating an ecosystem is challenging as it exposes a company to multiple fault lines (given varied service offerings), which necessitates creation of multiple circles of competence. Companies can engage third-party developers and invest in third-party content and app development to enrich the ecosystem.

RJIO has been investing in acquisitions and tying up with third-party developers to engender a superior ecosystem experience with the sole intent of attracting and retaining customers. The company does have a better content ecosystem than its telecom peers, but vertical-specific players may provide stiff competition. The company’s scale and reach can help it leverage third-party developers to create a wider and more engaging ecosystem. Sustained user engagement with a superior experience would be the key variable to monitor RJIO’s progress in this business model.

Ecosystem-based business models create sticky customer bases that translate into repeat purchases and enable monetisation over the entire customer lifecycle. However, creating an ecosystem exposes a company to multiple fault lines, making execution and management of multiple services extremely difficult. Besides, a company needs to have more than one circle of competence to ensure that its ecosystem provides diverse user experience vis-à-vis other standalone players (like Apple is trying to roll out streaming services), it has to be as good as other players in the industry such as , Hulu and Disney+. In our view, this is the main hurdle in executing the ecosystem business model.

In such a situation, a strong network of dependable third-party developers is crucial. Allowing third-party developers access to customers reduces the need to develop required content in-house by RJIO. At the same time, third-party developers get access to millions of users they can monetise by charging them directly or through advertisements. A large number of third-party developers can target different segments and make content/applications suited to specific segments.

RJIO: Well-diversified services portfolio RJIO has been making serious investments in third-party apps, outlining its longer-term objective of monetising services on the ecosystem. It aims to capture value from internet- enabled content delivery and service platform, as highlighted in our note Reliance Industries - Betting big on integrated play stratagem.

Fig. 3: The wide spectrum of apps developed by RJIO

Source: Company

10 Edelweiss Securities Limited TechWeiss

The company has been investing in developing a wide variety of applications across entertainment, productivity, banking and security verticals. Some of its entertainment apps, specifically JioTV, JioCinema and JioSaavn, are gaining strong traction. The company charges INR99 for Jio Prime Membership per subscriber per annum.

As RJIO develops the app ecosystem, it continues to face stiff competition from vertical- specific OTT players. While JioCinema and JioTV enjoy substantial viewership amid tough competition, other apps in its ecosystem are struggling for traction. Additionally, we have reservations with respect to maturity of the audience and, hence, believe it would take at least its subscribers two–three years to mature to the evolving industry and be ready to pay meaningfully for content.

Table 1: RJIO faces competition from vertical-specific players in its popular apps RJIO apps Competition JioCinema Netflix, Amazon Prime, JioTv Hotstar, Voot, Zee5, Airtel Tv JioSaavn Wynk, Spotify JioNews Livemint, TOI, Inshorts Jiomoney Paytm, Phonepe, Googlepay Source: Company, Edelweiss research

Acquisitions by RJIO to develop its ecosystem and widen its offerings RJIO has made close to 20 acquisitions across industries in recent past to strengthen its digital positioning and improve the overall ecosystem experience for its customers. The company is meaningfully engaging with third-party app developers to widen its circle of competence to improve user experience vis-à-vis other standalone players.

Over the past one year, the acquisitions of Saavn, Eros International and AltBalaji are steps in this direction to strengthen its suite of offerings in the entertainment space. Over the past one year, the company has acquired several tech companies, which outlines its long- term vision of developing a superior ecosystem experience for its subscriber base.

The acquisition of Haptick InfoTech, a conversational AI Chatbot firm, underlines the company’s commitment to boost the digital ecosystem and provide Indian users conversational AI-enabled devices with multilingual capabilities, a la Amazon’s Alexa. NetraDyne is another such acquisition, which operates a vision-based analytics business, with focus on security, communications and surveillance.

The educational technology segment is another area RJIO is focusing on with a view to strengthen its position in the digital technology space. Its two acquisitions in the space are Embibe and Edcast (AI-powered knowledge cloud), and they are similar to Byjus and Unacademy. Besides, the company has invested in Grab a Grub Services – a technology- enabled asset-light logistics services firm – to expand e-commerce logistics services, thereby widening the universe of businesses it intends to enter, to provide additional services to its users.

11 Edelweiss Securities Limited Internet

Table 2: Acquisitions by RJIO Industry Company Business Deal Valuation Tech - Artificial Infotech AI chatbot with multilingual capabilities USD102.3mn, for 87% stake Intelligence - NetraDyne Artificial Intelligence firm which focuses on driver and fleet safety. USD24mn for 37.4% stake (Communication Reverie language Tech Cloud based language-as-a-service (LaaS) platform, for multilingual USD42mn for 83.3% stake based) capabilities Entertainment Savvn Global digital music OTT platform - online music streaming USD 670mn for 82% stake Eros International Global film entertainment- digital content producer, distributor USD48mn for 5% stake ALTBalaji OTT Video Content provider USD64mn for 25% stake Indian Film Combine Motion picture, radio, television and other entertainment activities USD171mn for 65% stake Education Embibe AI based EdTech startup USD180mn ; 73% stake Technology EdCast AI-Powered Knowledge Cloud USD1mn eCommerce Grab a Grub services Technology enabled asset-light Logistics services USD17mn for 83% stake Software/ Den Networks and Telecommunications/Broadcasting, Digital Cable TV service USD1.3bn Network related Corporation Open Telecom solutions provider that enable the migration to next- USD74mn for 100% stake generation network topologies. AirHop Communications Digital solutions in field of Self-Organizing Networks (SON), USD0.5mn providing automated real time network management KaiOS Technologies Makers of the operating system on which JioPhone and other feature USD7mn for 16% stake phones C-Square Info Solutions Software solutions, with focus on pharma sector USD4mn for 82% stake Other Easygov (Surajya Services ) Data solutions company - to provide easy and convenient access to USD3mn for 76% stake acquisitions schemes and services from Government SankhyaSutra Labs Software simulation services company that offered simulation USD2.5mn for 83% stake services for manufacturing and Industrial companies Kanoda Energy Systems Offers services in solar advisory, product design and technology USD10.7mn for 88% stake Vakt Holdings Blockchain - cloud networking service providing real-time data USD 5mn for 5.5% stake Source: Company, Edelweiss research

12 Edelweiss Securities Limited TechWeiss

Edelweiss Securities Limited, Edelweiss House, off C.S.T. Road, Kalina, – 400 098. Board: (91-22) 4009 4400, Email: [email protected]

Aditya Narain Head of Research [email protected]

13 Edelweiss Securities Limited Internet

DISCLAIMER Edelweiss Securities Limited (“ESL” or “Research Entity”) is regulated by the Securities and Exchange Board of India (“SEBI”) and is licensed to carry on the business of broking, depository services and related activities. The business of ESL and its Associates (list available on www.edelweissfin.com) are organized around five broad business groups – Credit including Housing and SME Finance, Commodities, Financial Markets, Asset Management and Life Insurance.

This Report has been prepared by Edelweiss Securities Limited in the capacity of a Research Analyst having SEBI Registration No.INH200000121 and distributed as per SEBI (Research Analysts) Regulations 2014. This report does not constitute an offer or solicitation for the purchase or sale of any financial instrument or as an official confirmation of any transaction. Securities as defined in clause (h) of section 2 of the Securities Contracts (Regulation) Act, 1956 includes Financial Instruments and Currency Derivatives. The information contained herein is from publicly available data or other sources believed to be reliable. This report is provided for assistance only and is not intended to be and must not alone be taken as the basis for an investment decision. The user assumes the entire risk of any use made of this information. Each recipient of this report should make such investigation as it deems necessary to arrive at an independent evaluation of an investment in Securities referred to in this document (including the merits and risks involved), and should consult his own advisors to determine the merits and risks of such investment. The investment discussed or views expressed may not be suitable for all investors.

This information is strictly confidential and is being furnished to you solely for your information. This information should not be reproduced or redistributed or passed on directly or indirectly in any form to any other person or published, copied, in whole or in part, for any purpose. This report is not directed or intended for distribution to, or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction, where such distribution, publication, availability or use would be contrary to law, regulation or which would subject ESL and associates / group companies to any registration or licensing requirements within such jurisdiction. The distribution of this report in certain jurisdictions may be restricted by law, and persons in whose possession this report comes, should observe, any such restrictions. 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. This information is subject to change without any prior notice. ESL reserves the right to make modifications and alterations to this statement as may be required from time to time. ESL or any of its associates / group companies shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. ESL is committed to providing independent and transparent recommendation to its clients. Neither ESL nor any of its associates, group companies, directors, employees, agents or representatives shall be liable for any damages whether direct, indirect, special or consequential including loss of revenue or lost profits that may arise from or in connection with the use of the information. Our proprietary trading and investment businesses may make investment decisions that are inconsistent with the recommendations expressed herein. Past performance is not necessarily a guide to future performance .The disclosures of interest statements incorporated in this report are provided solely to enhance the transparency and should not be treated as endorsement of the views expressed in the report. The information provided in these reports remains, unless otherwise stated, the copyright of ESL. All layout, design, original artwork, concepts and other Intellectual Properties, remains the property and copyright of ESL and may not be used in any form or for any purpose whatsoever by any party without the express written permission of the copyright holders.

ESL shall not be liable for any delay or any other interruption which may occur in presenting the data due to any reason including network (Internet) reasons or snags in the system, break down of the system or any other equipment, server breakdown, maintenance shutdown, breakdown of communication services or inability of the ESL to present the data. In no event shall ESL be liable for any damages, including without limitation direct or indirect, special, incidental, or consequential damages, losses or expenses arising in connection with the data presented by the ESL through this report.

We offer our research services to clients as well as our prospects. Though this report is disseminated to all the customers simultaneously, not all customers may receive this report at the same time. We will not treat recipients as customers by virtue of their receiving this report.

ESL and its associates, officer, directors, and employees, research analyst (including relatives) worldwide may: (a) from time to time, have long or short positions in, and buy or sell the Securities, mentioned herein or (b) be engaged in any other transaction involving such Securities and earn brokerage or other compensation or act as a market maker in the financial instruments of the subject company/company(ies) discussed herein or act as advisor or lender/borrower to such company(ies) or have other potential/material conflict of interest with respect to any recommendation and related information and opinions at the time of publication of research report or at the time of public appearance. ESL may have proprietary long/short position in the above mentioned scrip(s) and therefore should be considered as interested. The views provided herein are general in nature and do not consider risk appetite or investment objective of any particular investor; readers are requested to take independent professional advice before investing. This should not be construed as invitation or solicitation to do business with ESL.

14 Edelweiss Securities Limited

TechWeiss

ESL or its associates may have received compensation from the subject company in the past 12 months. ESL or its associates may have managed or co-managed public offering of securities for the subject company in the past 12 months. ESL or its associates may have received compensation for investment banking or merchant banking or brokerage services from the subject company in the past 12 months. ESL or its associates may have received any compensation for products or services other than investment banking or merchant banking or brokerage services from the subject company in the past 12 months. ESL or its associates have not received any compensation or other benefits from the Subject Company or third party in connection with the research report. Research analyst or his/her relative or ESL’s associates may have financial interest in the subject company. ESL and/or its Group Companies, their Directors, affiliates and/or employees may have interests/ positions, financial or otherwise in the Securities/Currencies and other investment products mentioned in this report. ESL, its associates, research analyst and his/her relative may have other potential/material conflict of interest with respect to any recommendation and related information and opinions at the time of publication of research report or at the time of public appearance. Participants in foreign exchange transactions may incur risks arising from several factors, including the following: ( i) exchange rates can be volatile and are subject to large fluctuations; ( ii) the value of currencies may be affected by numerous market factors, including world and national economic, political and regulatory events, events in equity and debt markets and changes in interest rates; and (iii) currencies may be subject to devaluation or government imposed exchange controls which could affect the value of the currency. Investors in securities such as ADRs and Currency Derivatives, whose values are affected by the currency of an underlying security, effectively assume currency risk. Research analyst has served as an officer, director or employee of subject Company: No ESL has financial interest in the subject companies: No ESL’s Associates may have actual / beneficial ownership of 1% or more securities of the subject company at the end of the month immediately preceding the date of publication of research report. Research analyst or his/her relative has actual/beneficial ownership of 1% or more securities of the subject company at the end of the month immediately preceding the date of publication of research report: No ESL has actual/beneficial ownership of 1% or more securities of the subject company at the end of the month immediately preceding the date of publication of research report: No Subject company may have been client during twelve months preceding the date of distribution of the research report. There were no instances of non-compliance by ESL on any matter related to the capital markets, resulting in significant and material disciplinary action during the last three years except that ESL had submitted an offer of settlement with Securities and Exchange commission, USA (SEC) and the same has been accepted by SEC without admitting or denying the findings in relation to their charges of non registration as a broker dealer. A graph of daily closing prices of the securities is also available at www.nseindia.com Analyst Certification: The analyst for this report certifies that all of the views expressed in this report accurately reflect his or her personal views about the subject company or companies and its or their securities, and no part of his or her compensation was, is or will be, directly or indirectly related to specific recommendations or views expressed in this report.

Additional Disclaimers

Disclaimer for U.S. Persons This research report is a product of Edelweiss Securities Limited, which is the employer of the research analyst(s) who has prepared the research report. The research analyst(s) preparing the research report is/are resident outside the United States (U.S.) and are not associated persons of any U.S. regulated broker-dealer and therefore the analyst(s) is/are not subject to supervision by a U.S. broker-dealer, and is/are not required to satisfy the regulatory licensing requirements of FINRA or required to otherwise comply with U.S. rules or regulations regarding, among other things, communications with a subject company, public appearances and trading securities held by a research analyst account.

This report is intended for distribution by Edelweiss Securities Limited only to "Major Institutional Investors" as defined by Rule 15a-6(b)(4) of the U.S. Securities and Exchange Act, 1934 (the Exchange Act) and interpretations thereof by U.S. Securities and Exchange Commission (SEC) in reliance on Rule 15a 6(a)(2). If the recipient of this report is not a Major Institutional Investor as specified above, then it should not act upon this report and return the same to the sender. Further, this report may not be copied, duplicated and/or transmitted onward to any U.S. person, which is not the Major Institutional Investor.

15 Edelweiss Securities Limited

Internet

In reliance on the exemption from registration provided by Rule 15a-6 of the Exchange Act and interpretations thereof by the SEC in order to conduct certain business with Major Institutional Investors, Edelweiss Securities Limited has entered into an agreement with a U.S. registered broker-dealer, Edelweiss Financial Services Inc. ("EFSI"). Transactions in securities discussed in this research report should be effected through Edelweiss Financial Services Inc.

Disclaimer for U.K. Persons The contents of this research report have not been approved by an authorised person within the meaning of the Financial Services and Markets Act 2000 ("FSMA").

In the United Kingdom, this research report is being distributed only to and is directed only at (a) persons who have professional experience in matters relating to investments falling within Article 19(5) of the FSMA (Financial Promotion) Order 2005 (the “Order”); (b) persons falling within Article 49(2)(a) to (d) of the Order (including high net worth companies and unincorporated associations); and (c) any other persons to whom it may otherwise lawfully be communicated (all such persons together being referred to as “relevant persons”).

This research report must not be acted on or relied on by persons who are not relevant persons. Any investment or investment activity to which this research report relates is available only to relevant persons and will be engaged in only with relevant persons. Any person who is not a relevant person should not act or rely on this research report or any of its contents. This research report must not be distributed, published, reproduced or disclosed (in whole or in part) by recipients to any other person.

Disclaimer for Canadian Persons This research report is a product of Edelweiss Securities Limited ("ESL"), which is the employer of the research analysts who have prepared the research report. The research analysts preparing the research report are resident outside the Canada and are not associated persons of any Canadian registered adviser and/or dealer and, therefore, the analysts are not subject to supervision by a Canadian registered adviser and/or dealer, and are not required to satisfy the regulatory licensing requirements of the Ontario Securities Commission, other Canadian provincial securities regulators, the Investment Industry Regulatory Organization of Canada and are not required to otherwise comply with Canadian rules or regulations regarding, among other things, the research analysts' business or relationship with a subject company or trading of securities by a research analyst.

This report is intended for distribution by ESL only to "Permitted Clients" (as defined in National Instrument 31-103 ("NI 31-103")) who are resident in the Province of Ontario, Canada (an "Ontario Permitted Client"). If the recipient of this report is not an Ontario Permitted Client, as specified above, then the recipient should not act upon this report and should return the report to the sender. Further, this report may not be copied, duplicated and/or transmitted onward to any Canadian person.

ESL is relying on an exemption from the adviser and/or dealer registration requirements under NI 31-103 available to certain international advisers and/or dealers. Please be advised that (i) ESL is not registered in the Province of Ontario to trade in securities nor is it registered in the Province of Ontario to provide advice with respect to securities; (ii) ESL's head office or principal place of business is located in India; (iii) all or substantially all of ESL's assets may be situated outside of Canada; (iv) there may be difficulty enforcing legal rights against ESL because of the above; and (v) the name and address of the ESL's agent for service of process in the Province of Ontario is: Bamac Services Inc., 181 Bay Street, Suite 2100, Toronto, Ontario M5J 2T3 Canada.

Disclaimer for Singapore Persons In Singapore, this report is being distributed by Edelweiss Investment Advisors Private Limited ("EIAPL") (Co. Reg. No. 201016306H) which is a holder of a capital markets services license and an exempt financial adviser in Singapore and (ii) solely to persons who qualify as "institutional investors" or "accredited investors" as defined in section 4A(1) of the Securities and Futures Act, Chapter 289 of Singapore ("the SFA"). Pursuant to regulations 33, 34, 35 and 36 of the Financial Advisers Regulations ("FAR"), sections 25, 27 and 36 of the Financial Advisers Act, Chapter 110 of Singapore shall not apply to EIAPL when providing any financial advisory services to an accredited investor (as defined in regulation 36 of the FAR. Persons in Singapore should contact EIAPL in respect of any matter arising from, or in connection with this publication/communication. This report is not suitable for private investors. Copyright 2009 Edelweiss Research (Edelweiss Securities Ltd). All rights reserved

Access the entire repository of Edelweiss Research on www.edelresearch.com

16 Edelweiss Securities Limited