EQUITY RESEARCH | July 27, 2020 | 10:48PM IST

India Internet A Closer Look Into the Future We expect the India internet TAM to grow to US$177 bn by FY25 (excl. payments), 3x its current size, with our broader segmental analysis driving the FY20-25E CAGR higher to 24%, vs 20% previously. We see market share likely to shift in favour of Reliance Industries (c.25% by

For the exclusive use of [email protected] FY25E), in part due to Facebook’s traffic dominance; we believe this partnership has the right building blocks to create a WeChat-like ‘Super App’. However, we do not view India internet as a winner-takes-all market, and highlight 12 Buy names from our global coverage which we see benefiting most from growth in India internet; we would also closely watch the private space for the emergence of competitive business models.

Manish Adukia, CFA Heather Bellini, CFA Piyush Mubayi Nikhil Bhandari Vinit Joshi +91 22 6616-9049 +1 212 357-7710 +852 2978-1677 +65 6889-2867 +91 22 6616-9158

[email protected] [email protected] [email protected] [email protected] [email protected] 85e9115b1cb54911824c3a94390f6cbd Goldman Sachs India SPL Goldman Sachs & Co. LLC Goldman Sachs (Asia) L.L.C. Goldman Sachs (Singapore) Pte Goldman Sachs India SPL

Goldman Sachs does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. For Reg AC certification and other important disclosures, see the Disclosure Appendix, or go to www.gs.com/research/hedge.html. Analysts employed by non-US affiliates are not registered/qualified as research analysts with FINRA in the U.S. The Goldman Sachs Group, Inc. Goldman Sachs India Internet Table of Contents

PM Summary: A Closer Look Into the Future 3

The landscape 5

Q&A with our global analysts 9

Overview of our internet TAMs 11

Companies in our global coverage with exposure to India Internet 16

Unicorns in India Internet 21

Snapshot of Facebook and Google in India 22

RIL + Facebook: The quest to create a ‘Super App’ 28

Assessing the COVID-19 impact by India internet segment 37

Online retail: Biggest battleground with focus on grocery 38

Travel: Mature but with pockets of growth 53

Food delivery: Near term cool-off after aggressive expansion 59

Ride-hailing: Multi-faceted competition; profitability uncertain 65

Entertainment: The most competitive internet sub-segment 71

Online gaming: 4x GTV growth over next five years 77

Advertising & classifieds: The most profitable vertical 81

Education: Profitable with high growth potential 85

Fintech: Large TAM but monetization elusive 87

Profiles of private internet companies 100 For the exclusive use of [email protected] Appendix: Global valuations, etc. 101

Disclosure Appendix 104 85e9115b1cb54911824c3a94390f6cbd

27 July 2020 2 Goldman Sachs India Internet PM Summary: A Closer Look Into the Future

We believe the recent Reliance Industries (RIL) and Facebook partnership could increase monetization levels of India internet, and garner c.25% of all internet Gross Transaction Value (GTV)1 by FY25. With a user base of 400mn+ in India, and three out of the top five apps in the country (in terms of Daily Active Users and time spent), we believe Facebook, along with its partner RIL, can bring more transacting users (c.100mn currently) into the fold, especially in e-commerce, the largest internet category. This increased penetration is a key driver of India internet, where we expect the TAM to grow 3x to reach US$177 bn over the next five years; overall we forecast internet to account for 7% of all consumption spend in India by FY25, vs 3.6%/20% in India/China at present.

We see India internet at an inflection point both in terms of growth and profitability. We present new analysis for multiple categories including e-commerce, entertainment, gaming, ride-hailing, advertising and fintech, among others. Overall, we expect 24% FY20-25E CAGR in GTV for India internet (20% earlier), with growth rates ranging from 14% in classifieds/travel to 75%+ in grocery/FMCG. We expect e-commerce (incl. grocery) to be the biggest battleground, constituting >50% of India internet’s TAM in FY25E, with Amazon, Flipkart and RIL/Facebook the likely contenders.

Profitability remains elusive for most India internet segments, but we believe consolidation, and diversification into newer verticals, will help bring down customer acquisition costs for platforms; we forecast a US$8 bn profit pool for India internet by FY25, with a potential total market value of US$246 bn2.

The key question remains whether a ‘Super App’, similar to WeChat in China, can emerge in India. Existing players have so far been largely unsuccessful; however, we believe Facebook and RIL have the right building blocks to create a platform with both high engagement and monetization, but execution remains key. In our base case, we expect c.25% of all internet GTV to be driven by a potential Super App (including RIL apps) by FY25, while in our blue sky scenario we expect c.35% internet GTV and 50%+ For the exclusive use of [email protected] of digital payments volumes to be driven by a potential Super App (incl. RIL apps) by FY25. We believe RIL would increasingly try to play a role across the consumer spectrum, including telecom network, devices, operating system and apps.

We extensively cross-reference work from our regional/global teams in terms of evolution of internet in their respective markets, and attempt to analyse India internet from both a global and local lens. Our top stock ideas with relatively more exposure to

India internet include: Buy (on CL) - Reliance Industries, Amazon, Alphabet, Prosus, Sea 85e9115b1cb54911824c3a94390f6cbd Ltd., HDFC Bank; Buy - Facebook, Walmart, Bharti Airtel, Maruti Suzuki, MMYT, Blue Dart; Sell - Info Edge and Jubilant Food.

1 Gross Transaction Value is the total amount of products/services sold though a platform. Platforms (marketplaces) charge a take rate (commission) on the GTV, which is recognized as revenue for the platform. 2 Value or valuation of different segments throughout this report refers to potential cumulative market value of all the firms within that sector assuming normalised profits and multiple. All such value numbers for FY24E (March 24E), based on FY25 net income.

27 July 2020 3 Goldman Sachs India Internet

See inside for... n Why RIL+FB could drive c.25% of all internet GTV by FY25, vs <5% today for super apps n Verticals which benefit the most from 50 GB of data at US$3 per month n <500k grocery orders per month to >5 mn in five years - drivers and winners n 1P vs 3P regulations - why we think it’s advantage RIL on pricing and supply chain n Why real-money games dominate the online gaming landscape with 2/3 share n Why we think cash burn of verticals such as travel and food delivery could look better post COVID n Digital payments: >US$200 bn in transactions but $0 revenues, yet an attractive vertical

...and a lot more.

Exhibit 1: Online penetration in India lower than China, but in line with Indonesia across most categories Penetration of online across different segments for India vs China, USA and Indonesia (2019 or latest available)

90%

80% Triangles show 70% India FY25E penetration, GSe China 60% US India 50% Indonesia 40%

30%

20%

10%

0% Air travel Payment (non- Advertisement Hotels Ecommerce Food services FMCG/ grocery cash as % of total)

Source: Euromonitor, Kantar, emarketer, Worldpay (FIS), iResearch, PhocusWright, Goldman Sachs Global Investment Research

For the exclusive use of [email protected] The authors would like to thank Ronald Keung, Miang Chuen Koh, Pramod Kumar, Anubhav Bajpai, Shyam Srinivasan, Chandramouli Muthiah, Pulkit Patni, Deepak Krishnan, Rahul Jain, Aditya Soman, Aditya Gupta, Heath Terry, Lisa Yang, Kate McShane and Ryan Wallace for their contributions to this report.

The prices in this report are as of the market close on July 24, 2020, unless otherwise stated. Fx rate of INR USD 75 (fixed Fx), and FY refers to year ending March. 85e9115b1cb54911824c3a94390f6cbd

27 July 2020 4 Goldman Sachs India Internet The landscape

India is one of the world’s largest internet markets, with c.450 mn smartphone users as of FY20 (Exhibit 12), second only to China. However, monetization remains low, with less than 10% of India’s population (of 1.3 bn) transacting online (Exhibit 2, vs. 40%+ in China), and internet accounting for just 4% of all consumption spend in India. We believe this is a function of income levels - India’s per capita GDP is US$2,000, with c.75% of the population earning less than US$2,500 per year (Exhibit 11). As such, we observe that despite online penetration in most categories being at less than 20%, GTV/revenue is growing only at 20-25% YoY.

Exhibit 2: Different segments address smaller subsets of the overall internet population India internet overview

>550 mn 450 mn 400 mn 300 mn (online (3G/4G users) (smartphones) (video viewers) gamers)

100 mn <10 mn 40-50 mn 200 mn 25 mn (food (shoppers, (online (travel delivery) digital (music education) buyers) payers) listeners)

For the exclusive use of [email protected] Smartphones exclude 4G feature phones. Data as of FY20 or latest available. Online education refers to paid users only. 550 mn 3G/4G users indicate unique users excluding multi-SIMs.

Source: Telecom Regulatory Authority of India, FICCI-EY, Company data, Goldman Sachs Global Investment Research

We note that companies in the India internet space continue to incur substantial cash burn, which we estimate to be >US$2.5 bn over the last 12 months. We see this as attributable to the following factors: (1) Operations are sub-scale - products build in anticipation of (still elusive) higher demand; (2) Competition is high - most segments

have at least two well-funded players, competing with the idea of winner-takes-all; and 85e9115b1cb54911824c3a94390f6cbd (3) Low income levels resulting in customers being very price sensitive - if platforms try to bring down cash burn, the growth falls sharply (as seen in travel, food delivery, ride-hailing, e-commerce, etc.). Thus, the biggest question remains how, if ever, will India internet become increasingly monetized.

We believe the answer lies in ‘engagement’ and ‘traffic’. India is a mobile-first market (less than 20 mn fixed broadband users), and consumers on average use 14 GB of data

27 July 2020 5 Goldman Sachs India Internet

a month/spend 3.5 hours a day on their smartphones (Exhibit 4 and Exhibit 7). 70% of this time spent is on social media and entertainment (Exhibit 8), with Facebook (including WhatsApp, Messenger and Instagram) and Google/YouTube the most popular apps (Exhibit 23); WhatsApp, for example, has a DAU (Daily Active User) base of 180mn, who spend 45 minutes per day on the app. We note that both Facebook and Google have invested or announced plans for significant investment in India; Facebook invested US$5.8 bn in Jio Platforms (a subsidiary of RIL) in April 2020, while earlier this month Google announced a US$10 bn investment in India over the next 5-7 years, through a mix of equity investments and partnerships, including a US$4.5 bn investment in Jio Platforms.

One of the biggest hurdles to profitability for internet companies in India is the cost of acquiring traffic/customers. If transactions were to be integrated in high-engagement platforms, monetization could improve, both in terms of access to a larger customer base, and potentially better unit economics. This is one of the key reasons why platforms try to create a Super App (Paytm, PhonePe, etc.), or attempt to diversify into newer verticals - cross sell to an existing customer to bring down the overall customer acquisition cost.

We believe the recent RIL and Facebook partnership can potentially increase the monetization levels of India internet as: (1) Consumers in the relatively higher income bands (Urban Mass and Urban Middle) are monetized through transactions - redirecting traffic from social media to e-commerce, O2O, financial services, etc.; and (2) Consumers in relatively lower income bands are monetized through advertisements - social media, entertainment, etc. As discussed later in this report, we believe the RIL and Facebook partnership can potentially garner c.35% of all internet GTV (either through direct sales or traffic) by FY25 in a blue sky scenario; c.25% in base case. We expect this to be a function of WhatsApp’s traffic dominance, combined with RIL’s strong presence in verticals such as e-commerce and entertainment, and RIL’s stated intent of partnering with startups in the country.

Exhibit 3: India mobile broadband subscriber growth has seen a 5x Exhibit 4: ...with data usage per user seeing a sharp increase over increase in the last five years... the same time period For the exclusive use of [email protected] Wireless broadband (3G + 4G) subscribers in India Data usage per month per data user

654 mn 14.6 Gb

545 mn

10.8 Gb

395 mn

6.4 Gb 258 mn 85e9115b1cb54911824c3a94390f6cbd

133 mn

1.3 Gb 0.8 Gb

Mar 16 Mar 17 Mar 18 Mar 19 Jan 20 Mar 16 Mar 17 Mar 18 Mar 19 Mar 20

Does not represent unique users and can include users with more than one SIM card. Source: Company data from Bharti Airtel

Source: Telecom Regulatory Authority of India

27 July 2020 6 Goldman Sachs India Internet

Exhibit 5: Mobile data usage in India is among the highest in the Exhibit 6: ...with the cost of data one of the cheapest world... Data price per GB (US$) Data usage (Gb per month per user) on mobile (excluding WiFi)

$8.0 India

China

South Korea

France

US $3.9

Japan

UK $1.4 Spain $1.0 $0.5 $0.6 $0.6 $0.2 Germany

0.0 3.0 6.0 9.0 12.0 15.0 India Russia China Indonesia Brazil UK Japan US

Data as of March 2020 or latest available Compiled by cable.co.uk in February 2020. India tariff compiled by Goldman Sachs.

Source: Nokia MBiT, Goldman Sachs Global Investment Research Source: cable.co.uk, Goldman Sachs Global Investment Research

Exhibit 7: Indian consumers spend an average of about 3.5 hours Exhibit 8: Social media and entertainment is where people in India per day on mobile devices spend the most time Average daily hours spent on mobile (2019, Android) India - split of time spent on mobile phone (2019)

Indonesia Others China Games 7% 6% South Korea News etc. 7% India Social media Japan Retail 42% 10% US

Russia

UK Entertainment 28% Germany

0.0 1.0 2.0 3.0 4.0 5.0

Source: App Annie State of Mobile 2020 Source: FICCI-EY

For the exclusive use of [email protected] Exhibit 9: India accounts for 9% of global app downloads... Exhibit 10: ...but less than 1% of global app store spend App downloads (2019, in mn) Spend on app store (2019, in US$ bn)

India, 19 mn, 9% India, $0.4 bn, Rest of the World, Rest of the World, 0% 185 mn, 91% $119.6 bn, 100% 85e9115b1cb54911824c3a94390f6cbd

Source: AppAnnie data sourced from Times of India Source: AppAnnie data sourced from Times of India

27 July 2020 7 Goldman Sachs India Internet

Exhibit 11: More than 75% of India’s population has an income level Exhibit 12: We expect smartphone growth to slow down given low below US$2,500 per year income levels Population by income bands (2019) India smartphone user base and smartphone penetration

100% 700 90% Smartphone users (mn) 51% 600 49% 80% Smartphone penetration 47% 44% 45% 70% 42% 500 60% 36% 50% 400 32% 40% 27% 24% 30% 300 20% 10% 200 0% India Indonesia China Brazil Russia Korea Japan USA 100

$1,500 & lower $1,501 - $2,500 $2,501 - $5,000 0 $5,001 - $10,000 $10,001 - $20,000 $20,001 & above FY16 FY17 FY18 FY19 FY20 FY21E FY22E FY23E FY24E FY25E

Source: Euromonitor Penetration calculated on total mobile subscriber base. FY20 represents March 20, and so on.

Source: IDC, Goldman Sachs Global Investment Research

Exhibit 13: India has more than 500 mn internet users, but penetration has room to increase Internet users (in mn) and internet users as % of population (May 2020 or latest)

100% Korea Germany UK US 90% Japan

80% Russia Thailand

70% Brazil

Indonesia China 60%

50% Internet penetration India 40%

30%

20% For the exclusive use of [email protected] 0 100 200 300 400 500 600 700 800 900 Internet users (mn)

Source: Internet World Stats 85e9115b1cb54911824c3a94390f6cbd

27 July 2020 8 Goldman Sachs India Internet Q&A with our global analysts

1. In your view, has WeChat led to faster growth or expansion for any of the categories such as food delivery, ride hailing, e-commerce, etc.?

Piyush Mubayi, Head of Asia TMT: We argue that the quicker pace of growth in verticals is often facilitated by traffic from WeChat.

2. If you had to think of three reasons why WeChat was able to create the Super App ecosystem, what would those be? How is WeChat monetized?

Piyush Mubayi, Head of Asia TMT: The high frequency of use of the messaging + social app, the leveraging of this traffic to build out the ecosystem and make investments, and the multiple uses of the app (including messaging/calling, social, payments, company accounts, ad options, etc.) are the major reasons why WeChat has emerged as the world’s preeminent social app. The continued popularity of the system can be attributed to the focus on user experience.

3. What model is preferred by Chinese e-commerce companies in terms of 1P (inventory) vs 3P (marketplace)? Is it different for grocery/FMCG vs electronics/apparel?

Ronald Keung, China Internet analyst: Alibaba and PDD are predominantly 3P marketplaces, while JD.com started off as a 1P online retailer of electronics/appliances and subsequently expanded into the 3P marketplace model (current mix of c.55%/45% in 1P/3P in GMV). We see the 3P model typically most popular for apparel & long-tail general merchandise, while the 1P model has been most popular amongst more standardized SKUs, in electronics, appliances and FMCG in China.

4. What have been the primary reasons for slower adoption of online grocery in China vs other categories?

Ronald Keung, China Internet analyst: We think slower adoption of online groceries vs. other categories, at 6% online penetration in 2019 vs. overall goods at 23%, had been due to a lack of standardization in fresh food (making it more challenging to order online) where supply chains are still largely dominated by small

For the exclusive use of [email protected] merchants in “wet markets” (that account for 70% of the overall grocery market) and a lack of cold-chain logistics infrastructure. That said, we expect growing structured retail share in groceries, with online penetration reaching 20% for fresh food by 2023E, to be driven by supermarkets and growing online 1P fresh food business models that are well funded by e-commerce giants including Alibaba, Tencent, Meituan and JD. The growth of China’s on-demand delivery rider capacity over the past few years in food delivery will play an important role in facilitating cost-effective & time-effective 30-minute grocery deliveries from stores and front distribution centers in China.

5. What have been drivers of Meituan’s profitability? 85e9115b1cb54911824c3a94390f6cbd

Ronald Keung, China Internet analyst: The profit turnaround of Meituan’s food delivery business since 2019 has been driven by higher average order value (AOV) and user delivery charges, introduction of an advertising (CPC-based) revenue stream, and a normalization in subsidy rates as competition with Ele.me stabilized (at relatively stable 60-70% market share over the past two years). Meituan’s relative market share leadership, despite being a late-comer in food delivery, was enabled by: (a) its already largest

27 July 2020 9 Goldman Sachs India Internet

restaurant review platform at the time, with good restaurant coverage/relationships, (b) a larger emphasis on a self-operated delivery model vs. Ele.me (that depended more on third-party delivery at the time), with a reputation for better delivery service quality, more optimal route planning, and therefore lower rider costs, and (c) its focus on less competitive lower tier cities at the beginning in 2015-16, before competing head-on with the incumbent Ele.me later on.

6. What did Meituan do differently vs Ele.me to increase its market share gap in food delivery?

Ronald Keung, China Internet analyst: Meituan’s relative market share leadership, despite being a late-comer in food delivery, was enabled by: (a) its already largest restaurant review platform at the time, with good restaurant coverage/relationships, (b) a larger emphasis on a self-operated delivery model vs. Ele.me (that depended more on third-party delivery at the time), with a reputation for better delivery service quality, more optimal route planning, and therefore lower rider costs, and (c) its focus on less competitive lower tier cities at the beginning in 2015-16, before competing head-on with the incumbent Ele.me later on.

7. What are the factors that have led to Sea Ltd. being able to establish market share dominance in gaming in South East Asia? What are the barriers to entry?

Miang Chuen Koh, ASEAN TMT analyst: (1) Strong support by key shareholder Tencent ensures Sea Ltd. a steady pipeline of high quality of games; (2) Early mover into mobile games, when other publishers were still focused on PC games; (3) Regional presence provides it better economics and bargaining power with game publishers on new games; and (4) Strong community management and marketing capabilities, alongside having established a comprehensive network of payment options in markets with low credit card penetration. The key barrier to entry is the access to high quality content.

8. In your view, why has the adoption of mobile payments in China been higher than anywhere in the world?

Piyush Mubayi, Head of Asia TMT: Simplicity and ease of use for both the payer and the merchant, the high penetration of WeChat, the low cost to merchants (~20bps offline and <40bps online), the massive push in the offline segment by Tencent first, and the vibrant online economy across e-commerce, e-services, travel, online entertainment are reasons behind the success of payments in China. It helps that the For the exclusive use of [email protected] demographics are attractive and user/merchants are tech savvy.

9. How successful have companies like Tencent and Alipay been in transitioning from payments to lending and financial services?

Piyush Mubayi, Head of Asia TMT: In our Alibaba SOTP we value Ant Financial at US$205 bn and in our Tencent SOTP we value Fintech at US$100 bn. Both companies have been successful in payments, with consumption-related TPVs estimated at Rmb19tn and Rmb17tn respectively in 2020. We forecast Ant’s 85e9115b1cb54911824c3a94390f6cbd consumer loan balance to be Rmb1.7tn for FY2020, including Huabei and Jeibei, for a 12% market share. WeBank’s loan balances we forecast to be Rmb814 bn in 2020, including consumption loans, auto financing and SME lending.

27 July 2020 10 Goldman Sachs India Internet Overview of our internet TAMs

We expect India internet to grow to 3x its current size by FY25, reaching US$177 bn in GTV (Gross Transaction Value, excluding payments/fintech), driven mainly by increased penetration of categories such as e-commerce, online gaming, entertainment and education. Given the low level of online penetration in India, we believe market shares are likely to continuously shift among players; in general, barriers to entry across most internet segments appear low.

In terms of addressable population, we believe segments like travel (air and hotels), food delivery, ride-hailing (four-wheeler), education and subscription entertainment (audio/video OTT) are likely to be restricted to the top-100 mn consumers in India given the price points. However, other segments like payments, financial services, social media, ad-supported entertainment, grocery and consumer electronics/accessories are likely to have a larger addressable population.

Based on analysis done by our consumer team, we note that India has 30-40 mn individuals (FY20) with annual incomes of over US$10k. However, by FY25, we expect this cohort to more than double, potentially bringing in a new set of transacting consumers for Indian internet companies.

Exhibit 14: Urban mass likely to be a key driver of e-commerce by 2025 Working age population in India by cohorts

Working Annual Working Annual Population income Population income (2020) (US$) (2025E) (US$) Movers & 0.5 mn 300k Shakers 0.6 mn 460k

Govt URBAN 10 mn 19k employees MIDDLE 9 mn 27k Urban white collar/SME 21 mn 13k owners 24 mn 20k

Educated urban mass URBAN

For the exclusive use of [email protected] 39 mn 6k MASS 46 mn 9k

Urban blue collar/migrant 121 mn 3k workers 147 mn 5k

Rural landowners RURAL 118 mn 2.3k MASS 112 mn 3.3k

Rural labourers & emerging 252 mn 0.8k RURAL 264 mn 0.9k

85e9115b1cb54911824c3a94390f6cbd Source: Goldman Sachs Global Investment Research, NSSO

India internet is currently dominated by verticals, for example, Amazon/Flipkart in e-commerce, Swiggy/Zomato in food, Uber/Ola in ride-hailing, MakeMyTrip in travel, etc. Dominant vertical platforms have over time tried to diversify into newer categories. For example, Amazon, which started off with e-commerce, has forayed into grocery, travel, payments, entertainment and food-delivery, among other things. Similarly, Paytm started as a payments platforms and has diversified into e-commerce, travel, etc.

27 July 2020 11 Goldman Sachs India Internet

(Exhibit 15). However, none of these companies have so far been able to build scale in their newer verticals, and cross-selling continues to be limited across the internet ecosystem in India. We believe the partnership between RIL (Reliance Industries) and Facebook announced in April 2020 could change this, and potentially result in creation of a so-called ‘Super App’, with monetization capabilities across several verticals. We also expect consolidation to be a key theme within India internet over the next five years.

Key sector themes We expect e-commerce (including grocery) to be the biggest battleground for India internet companies, with a potential addressable market of US$112 bn by FY25 (c.60% of India internet). Within this segment, we expect Amazon, Flipkart/Walmart and RIL to be the key players, with RIL’s push initially likely to be in grocery/FMCG, and over time into categories such as apparel and electronics. We expect 3-4 players to co-exist in India e-commerce, given the size of the vertical.

For categories such as travel, we view underlying economic growth as the key driver for segments such as air travel, and shift to online as the driver for hotels. MMYT continues to be the dominant platform here with more than 50% market share currently, and we do not see room for more than two platforms to co-exist.

We expect the size of the addressable market to be limited to less than US$10 bn (by FY25) for categories such as food delivery and ride-hailing, given these services are likely to stay restricted to key urban centres (in terms of volume contribution). In addition, presence of two broadly equal-sized players, as is the case today, will result in sub-optimal margins, in our view.

We view advertising as an attractive industry, and expect it to have the second largest profit pool across verticals by FY25 (excluding OTT and e-commerce). Here we believe the dominance of Google and Facebook will sustain, with some incremental market share to telcos (Jio, Airtel) and e-commerce platforms (Amazon, Flipkart, RIL). Within video/audio OTT, we expect advertisement will continue to contribute more than 50%

For the exclusive use of [email protected] of segment revenues (subscription is likely to be limited to less than one-tenth of the internet population).

We forecast fintech in India to be a US$2.5bn revenue pool by FY25, split 20%-60%-20% between payments, lending and insurance. While we expect digital payment platforms to process more than US$200bn of merchant payments annually by FY25 (c.US$900 bn including P2P), the revenue pool for payment platforms is likely to remain small given the dominance of UPI, a zero commission payment network. We 85e9115b1cb54911824c3a94390f6cbd believe WhatsApp has the potential to become the dominant platform in payments, given its ‘top of the funnel’ traffic.

Economics As discussed earlier, profitability remains elusive for most India internet segments. For categories such as online retail, grocery, food delivery and fintech, stiff competition will likely keep margins under pressure in the near term. However, for travel, we expect

27 July 2020 12 Goldman Sachs India Internet

profitability over the next 12 months as we expect a decline in competitive intensity in the sector. We note that categories such as advertising, classifieds and education are already profitable. Overall, we forecast a US$8 bn profit pool (net income) for India internet by FY25, and a potential total value of US$246 bn (assuming 25-30x normalized multiple, in line with global internet peers) by FY24.

Exhibit 15: Platforms are targeting multiple verticals of India internet Overview of a number of Indian companies’ presence in internet sub segments

Times Reliance Internet Industries

Ecommerce    

Grocery    

Travel    

Food   

Ride hailing

Video/Music    

Gaming   

Advertising       

Social media 

Search 

Education  

Payments/Fintech        

Companies shown above are those that operate across multiple categories of India internet and/or are the largest in their verticals in terms of market share, transactions, GTV or revenues (as of 2019 For the exclusive use of [email protected] or latest available data). For Info Edge, grocery + food and fintech is through associate companies Zomato and Policybazaar, respectively.

Source: Company information, compiled by Goldman Sachs Global Investment Research

85e9115b1cb54911824c3a94390f6cbd

27 July 2020 13 Goldman Sachs India Internet

Exhibit 16: Take rates in India vary from 0% to 25% in different categories Current take rate (commissions) for various internet categories in India

25% 20-25% 20% 15-20% 15-17%

6% 5-6% 5% 4% 1.5-2% 0%

Food TransactionRide hailing Hotels Apparel Television Air travel Mobile Grocery Payment Payment delivery games phones (wallet) (UPI)

E-commerce take rate from Amazon excluding closing fee.

Source: Amazon.in, Company data, Goldman Sachs Global Investment Research For the exclusive use of [email protected] 85e9115b1cb54911824c3a94390f6cbd

27 July 2020 14 Goldman Sachs India Internet

Exhibit 17: We expect India internet to reach US$177 bn GTV by FY25E India internet landscape

Food & Gaming & Advertise- Fintech/ India E-comm Travel Education ride-hailing OTT/video ment Payments Internet

FY20 $2.3 $2.3 $60 $32 bn $16 bn $7 bn $1 bn NA GTV bn bn bn

FY20-25E 29% 14% 19% 29% 17% 45% NA 24% CAGR

FY25E $112 $177 $31 bn $16 bn $8 bn $5 bn $5 bn NA GTV bn bn

Take rate* 11% 8% 23% 25% NA NA NA NA

FY25E $2.4 $3.7 $6.2 $2.5 $67 $43 bn $5 bn $5 bn revenue bn bn bn bn bn

Profit* margin 8% 12% 13% 18% 23% 22% 20% 12%

$3.6 $0.3 $0.5 $1.1 $1.2 $0.5 FY25E $1 bn $8 bn profits bn bn bn bn bn bn

Assumed 30x 30x 30x 30x 25x 30x 30x* multiple

$109 $246 Valuation $9 bn $15 bn $34 bn $30 bn $30 bn $20 bn (FY24E) bn bn

For the exclusive use of [email protected] use the exclusive For Time to 2-3 years 0-1 year 1-2 years 2-3 years Profitable Profitable 3-4 years profitability

Amazon, MMYT, Swiggy, Disney, Paytm, Google, Key players Flipkart, Oyo, Zomato, Dream11, Byju’s Google, Facebook Bigbasket Booking Ola, Uber YouTube PhonePe

List of segments above is not exhaustive. Advertisement revenues excluding OTT and e-commerce advertising, but including classifieds. *For take rate, e-commerce shown is excl. grocery; for gaming, take rate for transaction gaming. *Profit represents net income, assuming segments reach steady state by FY25. Assumed 30x multiple in line with global internet peers, except advertising, where 25x multiple in line with advertising peers. *We value payments at 10x EV/Sales. We do not include payments GTV here as there could be double counting. Valuation in the chart refers to potential cumulative implied market value of all the firms within that sector by FY24E (March 2024), based on FY25E net income/sales and assumed multiples as discussed above. ‘Key players’ represent the largest players in each segment in terms of one or more of the following: GTV, revenue, transactions, traffic share (all based on latest available data). INR USD of 75. FY represents year ending March. 85e9115b1cb54911824c3a94390f6cbd

Source: Euromonitor, Company data, FICCI-EY, Goldman Sachs Global Investment Research

27 July 2020 15 Goldman Sachs India Internet Companies in our global coverage with exposure to India Internet

Alphabet - Buy (on CL), covered by Heather Bellini: US$1 tn market cap; 18% upside potential Google (Alphabet’s subsidiary) is the market leader in India’s digital advertisement market, with 40%+ market share, per our estimate. We expect the company to further deepen its presence in India, with the recently announced US$10 bn in investments over the next 5-7 years, including US$4.5 bn in Jio Platforms. Google is the dominant platform in India in categories such as entertainment (YouTube), navigation (Google Maps), search, and email. Its Android operating system has 90%+ market share in smartphones in India, while its recently launched payments app has 40%+ market share in mobile payments. We expect advertisement revenue to remain the mainstay for Google in India, but believe the company could increase monetization either through investments, or through enabling transactions (commerce/fintech on Google Pay, video/music subscription on YouTube, etc.). Further, we believe Google’s partnership with Jio Platforms could expand the Android ecosystem in India to mid-to-low income consumer groups (who currently use a feature phone).

Facebook - Buy, covered by Heather Bellini: US$662 bn market cap; 15% potential upside India makes up 10-20% of the global user base of Facebook, with the country being the largest market in terms of audience reach for WhatsApp and Facebook, and the second largest market for Instagram. We believe Facebook will increasingly focus on monetization of its user base in India, particularly those using WhatsApp (400mn+ users); in its 1QCY20 earnings call, Facebook mentioned it will be leveraging its partnership with Jio Mart to enable commerce for small businesses, and also online payments through WhatsApp. We estimate e-commerce and mobile payments in India to be a US$1 trillion market by FY25 (total transaction value, including P2P); WhatsApp + Jio Mart have already launched grocery delivery on their platform, and RIL recently announced expansion of Jio Mart into categories such as fashion, electronics, etc. We forecast RIL + FB to have a c.30% market share in India e-commerce, and 10-20% traffic share in categories such as O2O, travel, etc. by FY25E. In addition, we forecast 40% market share for WhatsApp in payments in our blue sky scenario, with potential monetization through fintech. We value Facebook’s c.10% stake in Jio Platforms at US$7.5 bn, vs its investment of US$5.8 bn in April 2020.

For the exclusive use of [email protected] Reliance Industries - Buy (on CL), covered by Nikhil Bhandari: US$185 bn market cap; 8% potential upside We believe RIL’s existing dominance in telecom and offline retail, combined with the online traffic dominance of its partner Facebook, can create the fastest growing internet platform in India. We believe the convergence of such a platform with the right products (JioMart and a potential Super App) and right price points (leveraging the low cost structure and strong balance sheet) should drive deeper e-commerce penetration and monetization opportunities. Within e-commerce, we forecast RIL online GMV to reach US$35 bn in FY25E with a 31% market share, driven by a 51% market share in online groceries. In

addition, we believe RIL is well-positioned to monetize verticals such as entertainment, gaming and 85e9115b1cb54911824c3a94390f6cbd education, with additional potential upside in a blue sky scenario from O2O businesses and fintech.

Amazon - Buy (on CL), covered by Heath Terry: US$1.5 tn market cap; 26% potential upside India has been an important market for Amazon with the company investing more than US$5bn in the country, so far. While it is the second largest e-commerce player in India with 36% share in 2019, per

27 July 2020 16 Goldman Sachs India Internet

Euromonitor, we believe Amazon will continue to be a key beneficiary of the e-commerce growth in India that is expected to grow at CAGR of 29% between FY20-25, enabled by the investments it has made in fulfillment (owns 32 million square cubic feet, as per press reports). In January 2020, Jeff Bezos announced US$1bn of investment in India with digitization of SMBs (small and medium-sized businesses) being a key focus area for the company and exports being a top priority with a goal of at least US$10bn in cumulative exports by Indian businesses on Amazon Worldwide by 2025. Amazon India’s exposure to other verticals include grocery, travel, entertainment and payments. Amazon Pay looks to tap the digital payment opportunity in India by offering a gamut of services including money transfer, utility payments, insurance products and Smart Stores that helps customers discover products within a store through QR code scan. Apart from facilitating faster delivery of goods through Prime, we believe that the company’s investment in video content (Bollywood and regional) could be a major factor driving Prime membership growth in India, over the next few years.

Walmart – Buy, covered by Kate McShane: US$372 bn market cap; 4% upside potential Walmart is the largest shareholder of Flipkart, India’s largest online retail platform with 44% market share (c.US$13 bn GMV) in 2019, per Euromonitor; Flipkart also owns PhonePe, the second largest payments platform in India, with c.US$10 bn of payments processed in the month of May 2020. We expect Flipkart to benefit from growth in India e-commerce, especially in under-penetrated categories such as apparel & fashion. WMT continues to invest in e-commerce as evidenced by its recent partnership with Shopify, its added investment in Flipkart, and its recent announcement regarding the launch Walmart+ (subscription model offering same day delivery for groceries and general merchandise, with opportunities for discounted fuel, access to health and wellness services, etc.) which will continue to drive top line growth and should accelerate the overall earnings algorithm. WMT’s ability to manage the business and costs through different environments remains impressive (EBIT margin nearly flat in 1Q20 despite COVID-19 costs) - and we think the company should continue to benefit from: 1) food-at-home growth, 2) e-comm adoption/new customer acquisition; 3) the potential for consumers to look to Walmart for value in a trade-down scenario, and 4) retail consolidation.

Prosus - Buy (on CL), covered by Lisa Yang: US$155 bn market cap; 39% upside potential Prosus has sizable exposure to India in its private assets portfolio across Food Delivery, Classifieds and For the exclusive use of [email protected] Payments. In Food, Swiggy (in which Prosus has a 40% stake) is a leading first-party delivery platform in India with revenue growing 182% yoy in FY20 driven by expansion into new cities, reaching 160k restaurant partners (vs. 85k at end-FY19). In Classifieds, OLX India is a Prosus-owned horizontal player with a strong position in the autos vertical and a smaller but growing presence in real estate and jobs. We estimate that the online classifieds market in India was worth c.US$740mn in 2019 having grown at a >20% CAGR over the previous three years, with that momentum expected to continue over the next few years. In Payments, Prosus’ PayU is a payment gateway and processor which operates in 18 emerging markets, of which India is its largest market accounting for half of its total payment value (TPV) with 85e9115b1cb54911824c3a94390f6cbd volumes growing 30% in FY20. The business benefits from the structural shift towards digital payments in India, and is in the early stages of expanding into credit. Prosus remains focused on creating value both organically and via M&A in the three core segments, as demonstrated by recent in-market consolidation deals in other geographies (OfferUp, Grupo Zap, EMPG, Encuentra24, etc.), and we note the company has US$8bn of gross cash on its balance sheet.

27 July 2020 17 Goldman Sachs India Internet

HDFC Bank – Buy (on CL), covered by Rahul Jain: US$81 bn market cap; 12% upside potential We expect HDFC Bank to benefit from the rising digital adaptability in the country. HDFC Bank has improved its productivity across deposits, lending and fee income by moving more and more transactions to the digital platforms, coupled with an early mover advantage in certain loan products such as: 1) “3-hour” loans in SMEs (less than Rs 50mn); and 2) “10-second” personal loans, etc. Consequently, HDFC Bank is one of the most efficient retail banks in the region with its cost-to-income ratio further improving to 39% in FY20 from 42% in FY18. Furthermore, it is the market leader in payments with 30% market share in credit card transactions currently. We estimate the credit card receivables for HDBK to grow at a 28% CAGR in FY20-23E. Given this backdrop, we expect HDBK to be well positioned to capitalize on this digital opportunity with an EPS CAGR of 17% over FY20-23E.

Sea Ltd - Buy (on CL), covered by Miang Chuen Koh: US$62 bn market cap; 12% upside potential We believe Sea Ltd is rapidly transforming from an ASEAN/Taiwan internet leader towards a global EM internet play. For its gaming business, we estimate that India already makes up c.8% of its total revenues in 2Q, and that it will grow in importance. Indeed, c.20% of the downloads of its top game Free Fire came from India in 2Q. Free Fire is also the second highest revenue grossing game in India, behind PUBG Mobile, according to SensorTower. We think Sea Ltd’s early mover advantage will allow it to leverage the explosive growth of the market ahead (India gaming revenues to 4X between 2020-25E), and allow the company to potentially be one of the key market share winners in this space. Indeed, Sea Ltd has been able to do the same in regions like LATAM. We also do not rule out Sea Ltd exploring other digital opportunities in India, as it also entered the e-commerce market in LATAM late last year, after initially focusing on LATAM’s gaming opportunity.

Bharti Airtel - Buy, covered by Manish Adukia: US$41 bn market cap; 10% upside potential We expect Bharti Airtel, India’s second largest telecom operator (revenue market share), to benefit from growth across internet segments such as entertainment, gaming, advertising and fintech. Bharti Airtel has high engagement apps in the music/video segments, and also has a payment bank license. As discussed later in this report, we expect these segments to grow at 30-40% CAGR over the next five years. In addition, the company recently mentioned it remains open to the idea of partnering with existing internet platforms across different verticals, which could further aid Bharti’s growth. However, we expect the core For the exclusive use of [email protected] value driver of the business to remain telecom, with the segment set to benefit from increasing data usage, smartphone adoption, and broadband penetration in India (see here for more on our Bharti Buy thesis).

Maruti Suzuki – Buy, covered by Pramod Kumar: US$24bn market cap; 11% upside potential An increase in ride hailing (GSe +18% CAGR over the next five years) should impart a tailwind to India’s leading car maker Maruti Suzuki, which has c.50% market share as of FY20. Maruti Suzuki dominates the 85e9115b1cb54911824c3a94390f6cbd Indian compact car market and its select models (WagonR, Dzire, Eeco and Celerio) are among the most popular choice of models for cab drivers including the ones working with Uber or Ola. This is primarily due to Maruti Suzuki’s compact cars being among the most fuel efficient (8 out of top 10 fuel efficient cars are from Maruti) and cheaper to maintain. These traits along with high residual prices make Maruti a preferred partner not only for the drivers but also for financers. Moreover, amidst rising prices of diesel fuel, CNG (compressed natural gas) has emerged as a cleaner and cheaper fuel alternative. In the urban centers such

27 July 2020 18 Goldman Sachs India Internet

as Delhi (NCR) and Mumbai, the bulk of the taxis are powered by CNG, and Maruti Suzuki dominates this segment with a wide range of models and it sold over 106k units in FY20 (15% CAGR in last five years). Even if the ride-hailing industry looks for EVs or Hybrids to lower running expenses, Maruti Suzuki stands to gain volumes as it is working on: a) large scale localization of hybrid/electric technology in India via parent Suzuki’s alliance(s), b) widening its portfolio of hybrid cars to offset diesel; and c) launch of an India specific compact EV.

Info Edge - Sell, covered by Manish Adukia: US$5 bn market cap; 29% downside potential We expect classifieds to be one of the slowest growing segment across all internet verticals, at 14% FY20-25E CAGR, and believe Info Edge’s valuation (at 84x CY21 P/E) does not reflect this slowdown. We believe the company’s three key verticals of recruitment, real estate and food delivery (65%/9%/18% of our SOTP, respectively) are likely to face near term headwinds due to the impact of COVID-19, with recovery in the real estate segment unlikely before FY22. However, we are constructive on the longer term outlook for Info Edge and believe the company will benefit from the characteristics that are typical of the online classified industry globally - network effects, barriers to entry, and high operating leverage. In addition, Info Edge’s diversified product portfolio makes it a proxy for not only classifieds, but also internet and fintech (see here for more).

Jubilant Foodworks - Sell, covered by Aditya Soman: US$3 bn market cap; 46% downside potential Increasing competition from food aggregators is one of the key reasons for our Sell thesis on JUBI given the former’s aggressive expansion into smaller Indian cities/towns over the past year. Food aggregators like Swiggy and Zomato are now present in 500+ cities compared to 282 for Dominos (as of 4QFY20) and as a result consumers have a higher number of restaurants to order home delivery from. Besides the already increasing competition, Amazon has also launched its food delivery service in Bengaluru, and we believe this poses the risk of higher consumer discounting which will put pressure on JUBI’s demand and margins. As discussed later in this report we see the potential for RIL and its partners to create a Super App and if the same were to include food delivery service, this could drive increased promotional activity in the industry.

MakeMyTrip - Buy, covered by Manish Adukia: US$2 bn market cap; 42% upside potential For the exclusive use of [email protected] MakeMyTrip has more than 50% market share in all key segments of Indian online travel, including flights, hotels and buses. We believe MMYT, as the market leader, is likely to be a key beneficiary of the shift to online travel in India. The company’s scale results in a virtuous cycle of higher traffic, higher take-rates and higher investments in product/marketing. In addition, we expect the impact of the COVID-19 outbreak will lead to consolidation in the OTA space given stretched peer balance sheets, which could lead to more than 10 percentage points of market share gain for MMYT (in hotels) over the next three years. Lastly, we expect MMYT to reach EBITDA breakeven by end of this fiscal year, a key catalyst for the stock 85e9115b1cb54911824c3a94390f6cbd performance. Valuation at 2.3x CY21 EV/Sales is two standard deviations below history (see here for more details).

Blue Dart Express Limited - Buy, covered by Pulkit Patni: US$700 mn market cap; 33% upside potential We see profitability for Blue Dart at an inflection point, driven by lower oil prices, higher delivery volumes, established delivery infrastructure, and a relatively strong balance sheet (vs peers). E-commerce currently

27 July 2020 19 Goldman Sachs India Internet

accounts for 24% of Blue Dart’s total volume; while volume growth in this segment has remained strong over the last couple of years, muted revenue growth has been seen as a result of weaker realization due to an unfavorable mix (shift in cargo towards ground from air express). We believe this shift mix has largely played out, and hence expect e-commerce segment revenue growth to be strong at 17% CAGR over FY20E-22E vs 2.7% CAGR over FY16-FY19. We expect the stock to re-rate higher due to: (1) Strong revenue growth profile post Q1FY21; (2) Better cost control, driven by operating leverage and the lower oil environment; and (3) Improving return ratios - we expect ROE to increase from 16% to 27% over FY19 to FY22E (see here for more). For the exclusive use of [email protected] 85e9115b1cb54911824c3a94390f6cbd

27 July 2020 20 Goldman Sachs India Internet Unicorns in India Internet

In this section, we provide a representative list of private companies within India internet (with a last round valuation of at least US$1 bn in the private market per press reports and as shown in Exhibit 125) and then overlay our industry growth forecasts and size of the segment as detailed in Exhibit 17. [Note: There is no GS view or valuation included for any of the companies shown.]

Exhibit 18: A look at some of India’s internet unicorns Last round valuation for a number of India internet companies (per press reports) and GSe for growth rate of segments they operate in (Note: List not exhaustive)

$16 bn

Color legend Size of bubble indicates potential size of underlying Dark blue: Online industry (TAM) in retail & payments FY25E (GS estimates) Orange: Logistics, mobility, delivery & $12 bn travel

Grey: Gaming, insurance & edtech

$8 bn

Last round valuation (per press reports) round valuation (per press Last $4 bn For the exclusive use of [email protected]

$0 bn 0% 10% 20% 30% 40% 50% FY20-25E GTV/revenue CAGR for segment

Last round valuation data from company wherever available (Swiggy), or else from press reports and thus may not reflect current valuations in some cases. List is not exhaustive, and includes consumer internet companies (including e-commerce logistics) with valuation benchmark either in 2019 or 2020. Market size and growth estimates are GS assumptions for FY25E in terms of revenue/GTV for the industry. Unicorns indicate companies with a last round valuation of at least US$1 bn in the private market (see Exhibit 125). Snapdeal not included here since recent valuation not available.

85e9115b1cb54911824c3a94390f6cbd Source: Company information, Press reports (Economic Times, Livemint, Entrackr, Financial Express, Inc42, YourStory), Goldman Sachs Global Investment Research

27 July 2020 21 Goldman Sachs India Internet Snapshot of Facebook and Google in India

In the following two sections, we focus on Facebook in more detail as we believe its platforms (WhatsApp/Facebook/Instagram) have the ability to materially alter the market share landscape of certain internet categories in India, mainly grocery and payments. In addition, post Google’s announcement of US$10 bn of investment in India over the next 5-7 years, including a US$4.5 bn investment in Jio Platforms, we believe Google too could look to further deepen its presence in India, and increase monetization.

Google and Facebook are the two most dominant platforms in India in terms of traffic, with c.400 mn visitors per month, and reach of >95%. Together, Google and Facebook apps account for three hours of time spent (per active user per day) in India, which is >80% of total time spent by a user on a smartphone.

Exhibit 19: Facebook and Google have close to 400mn unique Exhibit 20: ...and have a reach of more than 95% visitors on their platforms in India... Reach as of May 2020 Total unique visitors/viewers (in mn), May 2020

Google Google

Facebook Facebook

Times Internet Times Internet

Amazon Amazon

Microsoft Microsoft

Bytedance Bytedance

Truecaller Truecaller

Flipkart Flipkart

Paytm Paytm

Network 18 (RIL) Network 18 (RIL)

0 mn 100 mn 200 mn 300 mn 400 mn 0% 20% 40% 60% 80% 100%

For both desktop and mobile. For both desktop and mobile.

Source: comScore Source: comScore

Facebook: Traffic leader but focus now on monetization 3 For the exclusive use of [email protected] India makes up 10-20% of the global user base of Facebook , with the country being the largest market in terms of audience reach for WhatsApp and Facebook, and the second largest market for Instagram. However, Facebook’s revenues in India (US$800-900 mn in 2018, as per Moneycontrol) is just about 1-2% of the company’s total revenues. In our view, this is a function of the fact that the overall size of the digital advertisement market in India, the segment Facebook primarily operates in, is relatively small at about US$3 bn as of 2019. 85e9115b1cb54911824c3a94390f6cbd

3 As of 2019, for Instagram, Facebook and WhatsApp in that order; data from Hootsuite, We Are Social, and Company.

27 July 2020 22 Goldman Sachs India Internet

Exhibit 21: India is the largest market for Facebook in terms of Exhibit 22: ...and the second largest market for Instagram audience reach... Instagram audience reach (in mn) as of April 2020 Facebook audience reach (in mn) as of April 2020

280 120

190 88 82

130 64 120

86 46 72 39 63 31 48 26 25 41 37 37 22 21

Source: We Are Social, Hootsuite Source: We Are Social, Hootsuite

We believe Facebook will increasingly focus on monetization of its user base in India, particularly those using WhatsApp. WhatsApp remains the platform of choice for Indian consumers, with more than 400mn MAUs, 180mn DAU, and 46 minutes of daily time spent per active user (Exhibit 23); these metrics are the highest across all apps in India, with the other dominant platform being YouTube/Google (Exhibit 19 and Exhibit 20). We expect WhatsApp’s user base in India to reach c.700mn by 2024, in line with our forecasts of the smartphone user base (incl. 4G feature phones) in the country.

We believe part of the strategic rationale for Facebook’s investment in Jio Platforms earlier this year was to begin monetizing WhatsApp’s large user base in India via payments/e-commerce; we note that in its 1QCY20 earnings call, Facebook mentioned it will be leveraging its partnership with Jio Mart to enable commerce for small businesses, and also online payments through WhatsApp. We estimate e-commerce and mobile payments in India to be a US$1 trillion market by FY25 (total transaction value, including P2P); WhatsApp + Jio Mart have already launched grocery delivery on their platform, and RIL recently announced expansion of Jio Mart into categories such as fashion, electronics, etc. For the exclusive use of [email protected] WhatsApp also has a product called WhatsApp for Business, where merchants/service providers can communicate with their customers through verified accounts (versus doing the same via SMS); recently, Facebook said WhatsApp for Business has a user base of 15mn in India. Integration of payments in WhatsApp for Business can help this product to scale further, in our view, giving vendors the ability to collect payments within the app and ‘close the loop’ with their customers. WhatsApp has been seeing strong

engagement from users in the last few months on its tie-up with banks for basic 85e9115b1cb54911824c3a94390f6cbd services such as balance enquiry, updates, card statements, etc., with c.1 mn users applying for WhatsApp banking as per ICICI bank.

Recently, Facebook also rolled out Instagram Reels in India, its short-form video feature. We note that TikTok was banned in India in June 2020, creating a white space in the segment - TikTok had c.50 mn DAUs (Daily Active Users) in India, spending 40+ minutes on the app per day (June 2020); Facebook could potentially look to capture a share of

27 July 2020 23 Goldman Sachs India Internet

this market with Instagram’s new product feature. As per press reports, since the ban on some Chinese apps in India on June 30, average daily time spent on Instagram is up from 16 mins to 37 mins, on Facebook from 30 mins to 40 mins, and on YouTube from 57 mins to 70 mins.

Exhibit 23: Facebook’s apps are amongst the most popular in India; we expect WhatsApp to have almost 700mn users by 2024 Downloads, DAUs and time spent for a few select apps in India, and MAUs for Facebook apps in India

200 Monthly Active Users (mn) 800 800 WhatsApp

700 700

160 600 Smartphone users WhatsApp 600 inc. 4G phones 500 500

400 400 Youtube Facebook

120 300 300

200 200

100 Instagram 100 Facebook

0 0 Size of bubble 2014 2015 2016 2017 2018 2019 2020E 2021E 2022E 2023E 2024E 80 indicates time

Daily Active Users (mn) Users Active Daily spent per active user

FB Messenger Instagram TikTok 40

Amazon Flipkart PhonePe MX Player Hotstar MyJio Snapchat Google Pay 0 Paytm 50 75 100 125 150 175 200 225 250 Downloads (in mn, six months ended June 2020)

For YouTube, downloads data not available. MAU data does not necessarily represent year end, but could be a particular month within the year. DAU is average of last six months. DAU, MAU and time spent for Android, as per SimilarWeb. Dark blue color represents Facebook apps; orange is entertainment apps, light blue is other social, and other colors represent ecomm/payments. GS estimates for smartphone and Facebook-related users.

Source: Company data, Hootsuite, We Are Social, Press reports (e.g. Economic Times, Livemint), Statista, IDC, SimilarWeb, Goldman Sachs Global Investment Research

WhatsApp Pay and other investments WhatsApp first launched its payments service in India in early 2018 but has since been For the exclusive use of [email protected] awaiting regulatory approvals to expand its user base beyond 1 million. However, as per a recent press report, WhatsApp Pay is now in compliance with regulations, and as such we believe a full scale launch could be imminent. As per press reports, WhatsApp has also listed lending, through partnership with banks, as one of its objectives in a recently filed Memorandum of Understanding (MoU) with regulators in India.

With its dominant organic traffic through social/chat, we believe WhatsApp has the

potential to become the market leader in digital payments in India. During its 85e9115b1cb54911824c3a94390f6cbd 4QCY19 earnings call, Facebook said it expects payments to be free or as cheap as possible, and will look to monetize businesses through advertisements. In addition, Facebook mentioned that the products/technologies they build in India will be expanded to other countries/regions across the world.

Apart from its recent US$5.8 bn investment in Jio Platforms, Facebook has investments in a couple of other Indian startups.

27 July 2020 24 Goldman Sachs India Internet

n In February 2020, Facebook participated in Unacademy’s US$110 mn capital raising round. Unacademy is an education-technology platform, with a focus on competitive exams. The platform has a paid subscriber base of 200k users, and has been valued at US$510 mn, as per Economic Times. n In 2019, Facebook invested US$20-25mn for a stake in Meesho, a social commerce company. Meesho had an annualized GMV of US$334 mn as of Sept 2019, and was expecting to exit March 20 with an annualized GMV of US$850 mn. Meesho leverages WhatsApp to connect buyers and sellers, and was valued at US$700 mn in 2019, as per Economic Times. n In 2017, Facebook placed a US$610 mn bid (albeit unsuccessful) for the digital rights of the Indian Premier League, the most popular sports league in India in terms of revenues. In 2019, Facebook secured exclusive digital content rights for global ICC (International Cricket Council) events in India until 2023; these rights involve post-match recaps and key match moments, among other things.

The above indicate that Facebook could continue to look for ways to increase the monetization of its large user base in India.

Exhibit 24: WhatsApp payment is integrated in the chat window of the user Illustration of payment flow chart of WhatsApp

Step 2: Enter the amount to be Step 1: Press on the ’+’ sign at the paid/transferred and click on Send Step 3: Enter the UPI pin linked with the bottom of the WhatsApp chat window underlying bank account and click and click on payment Submit. Amount gets transferred to the linked bank account of the receiver immediately For the exclusive use of [email protected] 85e9115b1cb54911824c3a94390f6cbd

Source: Screenshot of WhatsApp iOS app in India

Google: Dominant; further scaling up India investments Google is the dominant platform in India in categories such as entertainment (YouTube - 50 minutes time spent/day/active user), navigation (Google Maps), search (99%

27 July 2020 25 Goldman Sachs India Internet

market share in mobile search in May 2020, per Statista), and email. It also has the highest market share in smartphone operating system, with press reports suggesting 90% of smartphones in India are running on Android. Lastly, Google’s payment app has 44% market share in UPI payments in India, with 540mn transactions in May 2020.

As per KPMG, Google and Facebook together account for 70-80% of India’s digital advertisement spend (US$3 bn in 2019). Google recently announced the acquisition of a 7.73% stake in Reliance Industries’ subsidiary Jio Platforms (for US$4.5 bn), and RIL mentioned that the focus of the partnership will be on developing low cost 4G/5G smartphones; we believe this could be a step towards Google’s efforts in deepening the penetration of Android operating system in India. India has 300mn+ feature phones (non-Android phones at US$10-15 price points vs US$50-60 starting price of smartphones), and if Jio + Google were to capture a subset of this segment, Google could get an opportunity to monetize these consumers through advertisements (YouTube, search, etc.), in addition to access to data of consumers in the mid-to-low income level segment in India. We also believe there is potential for Google and RIL to potentially partner for JioPhone operating systems (currently 100mn+ in number).

Google Pay and other investments Google’s payment application, Google Pay, has 75mn transacting users in India, with 540mn transactions (44% market share on UPI4) in May 2020; at US$24 average value per transaction for UPI, this translates into US$150 bn of annualized payment GTV (Gross Transaction Value) for Google Pay. However, with no commissions allowed on UPI (by regulation), revenue for the payments business is likely to be close to zero and we see payments as a customer acquisition tool for Google. Per press reports, Google Pay is looking to foray into SME lending by the end of 2020 in partnership with banks in India, while its consumer loan product is already live. In addition, we believe Google onboarding merchants to its platform to enable transactions for consumers is another possibility; per press reports, Google is working on a version of the Google Pay app that could enable shopping.

We note that Google already offers services such as flights & hotel booking on its For the exclusive use of [email protected] portal, with a recent press report suggesting Google could also foray into food delivery, with deliveries likely to be made by third-party platforms like Dunzo. These suggest Google too, similar to Facebook, may be trying to find additional avenues to monetize its large user base in India.

Google has said its US$10 bn in investments in India over the next 5-7 years will include a mix of equity in large Indian companies, startups, partnerships, as well as infrastructure investments such as data centers. Post its recent investment in Jio 85e9115b1cb54911824c3a94390f6cbd Platforms, we could see additional investments in the India internet ecosystem from Google over the next few years. Google’s existing investments in India include Dunzo (online delivery), Cuemath (education), Aye Finance (fintech), Freshworks (SaaS-based customer support platform), Practo (health-tech) and Cardekho (auto classifieds); except Dunzo, other investments are through CapitalG.

4 Unified Payments Interface, explained in the Fintech section.

27 July 2020 26 Goldman Sachs India Internet

Exhibit 25: Android is the dominant mobile phone operating system Exhibit 26: Google’s apps are the leaders in their respective in India categories Split of unique visitors (mobile phones) by operating system, March 2020 Daily Active Users (in mn) and time spent for select Google apps in India

150 mn

49:59

120 mn Grey boxes show time spent per active user 90 mn per day, in minutes iOS, 5 mn, 1% Android, 377 mn, 99% 60 mn

12:03 30 mn 9:05 6:51 3:29

0 mn YouTube Google (search) Gmail Google Maps Google Pay

Source: comScore Pre COVID data (February 2020); for Android.

Source: SimilarWeb

Exhibit 27: YouTube had 3x as many visitors as the number two app Exhibit 28: Google has the highest market share in mobile in entertainment payments (UPI) Unique visitors (March 2020) for apps in entertainment category, India UPI transactions share (in million)

YouTube 360 mn 1,247 1,235 MX Player 113 mn 92 115 Others Hotstar 113 mn 186 1,000 120 Google Play Music 96 mn 71 127 Paytm Jio TV 84 mn 454 460 Jio Saavn 61 mn 368 PhonePe

Gaana Music 39 mn Google Pay Amazon Video 39 mn 515 540 434 Google Movies & TV 38 mn

Zee5 38 mn Mar 20 Apr 20 May 20

Source: comScore Source: Press report (Techcrunch), NPCI For the exclusive use of [email protected] 85e9115b1cb54911824c3a94390f6cbd

27 July 2020 27 Goldman Sachs India Internet RIL + Facebook: The quest to create a ‘Super App’

We believe the ability to create a Super App, and consequently drive monetization, is a function of time spent on a particular platform. Higher the time spent, higher is the probability that a user may engage in a transaction (e-commerce, food, tickets, fintech, etc.) or can be exposed to advertisements. India internet platforms have been largely unsuccessful (in terms of driving traffic) in creating a Super App so far, given high-frequency traffic in India is concentrated among social media platforms, mainly Facebook/WhatsApp and Google/YouTube. We believe WhatsApp, together with its partner Reliance Industries has the potential to create a Super App, akin to what we have seen in the case of China with WeChat/Tencent; in our view this will be a function of WhatsApp’s dominant traffic share coupled with RIL’s execution ability in consumer-tech businesses.

What has happened so far in India? Paytm, which started off as a payments platform, has over time built other verticals into its product, including travel, e-commerce, movie tickets, etc. PhonePe, which is the payments platform owned by Flipkart/Walmart, is one of the largest UPI (Unified Payments Interface) applications, facilitating more than 400mn transactions a month. PhonePe has introduced something called Switch on its app, which allows users to access a truncated version of apps of various services including grocery (Grofers), travel (MakeMyTrip), ride-hailing (Ola), among many other things (Exhibit 33). However, both Paytm and PhonePe have less than 15mn DAUs (Daily Active Users), with time spent per user per day of five minutes or less (Exhibit 23). This DAU number is a very small subset of the 450mn smartphone user base in India. Even MyJio, which has more than 300mn downloads (GSe), has DAUs of <15 mn, despite having integrated mini apps such as payments, music, video, news, etc., within the app.

In our view, the relatively low uptake of these applications/platforms is a function of the core source of traffic being not very powerful and/or sticky in terms of user engagement, which WhatsApp + RIL could potentially change. For the exclusive use of [email protected]

Case study: WeChat/Tencent Tencent’s WeChat is the world’s largest social network in terms of user engagement, with more than 1 billion MAUs (Monthly Active Users) who spend 80+ minutes on the platform every day. Tencent’s overall strategy has been to use its hubs, i.e., social and communications, to target and grow spokes. Hubs provide a significant organic traffic, which helps Tencent grow verticals that range from content to mini-programs (food delivery, e-commerce, etc.) to payments (WeChat Pay). 85e9115b1cb54911824c3a94390f6cbd

What are WeChat mini-programs? WeChat’s mini-programs (mini apps within WeChat) facilitated US$113 bn of GMV (Gross Merchandise Value) in 2019, which was +160% YoY; to put this in context, mini-programs’ total GMV was 38%/80%/200% of JD/PDD/Meituan’s overall 2019 GMV/GTV (Gross Transaction Value).

27 July 2020 28 Goldman Sachs India Internet

Mini-programs are a lighter version of their native apps; this lighter form factor is typically achieved by having less content in the user interface, and keeping only the most-used functions. A mini-program does not require a separate installation process, and also has access to WeChat Pay.

Launched in 2017, WeChat mini-programs surpassed 300mn DAUs (Daily Active Users) in November 2019 and are supported by 1.5mn developers designing millions of mini programs across 200+ industries/verticals. Our regional internet analysts forecast GMV from mini-programs to more than triple by 2021 to US$400 bn+ in China, with a potential take rate of 1.5%-2% in the longer term.

Mini-programs can be a significant source of traffic Tongcheng-Elong, an online travel platform with a current market cap of US$4bn, saw 84% of its MAUs (end 2019) come from Tencent-based channels, with higher contribution from users via channels such as WeChat Wallet and mini-programs drop-down bar. ‘Tongcheng Travel’ is one of the top mini-programs in the WeChat ecosystem, and accounted for 15% of WeChat mini-programs GMV in 2019 (of US$113 bn).

Exhibit 29: WeChat had 1.2 bn MAUs as of 1QCY20 History of WeChat (y-axis shows Monthly Active Users in mn)

1,400 Users can hide Added floating articles and window expand them later Users can to view again 1,200 open 3 days of Moments 1.2 bn MAUs as of 1,000 1Q20 Interface whole new design 800 Added Time Added WeChat Launched moment video, Capsule Mini Added Top Stories WeChat red packet Program 600 Launched Games Added WeChat phone Mini album; Program 400 Share photos to moments

200

Added WeChat Pay, Official Accounts, etc. 0 2012 2013 2014 2015 2016 2017 2018 2019 1Q20 For the exclusive use of [email protected]

Source: Company data, Goldman Sachs Global Investment Research

Investments As per our regional internet analysts, investments are a central part of Tencent’s strategy. In 2018, Tencent mentioned it had invested in more 700 companies so far, with 122 of them passing US$1bn valuation, and 63 public listings over the past 11 years (until 2018); Tencent mentioned that investments allow the

company to build a larger ecosystem beyond its own business capabilities. Some of Tencent’s 85e9115b1cb54911824c3a94390f6cbd investments in China include: games (Kingsoft), entertainment/media (Huya, Bilibili), food delivery (Meituan), e-commerce (JD, PDD, VIPshop), ride-hailing (DidiChuxing), classifieds (WUBA), etc. We believe this investment strategy could potentially be adopted by RIL as an approach to expand its internet/technology ecosystem.

27 July 2020 29 Goldman Sachs India Internet

Exhibit 30: WeChat is a one stop solution for most internet needs WeChat app screenshot

WeChat’s main chat interface Discovery tab with moments, Moments tab where contacts channels and mini programs share photos, texts and links

Channels tab to view short- form videos

A series of mini programs Mini programs e.g. Tencent video mini program listed within WeChat Pay tab For the exclusive use of [email protected] 85e9115b1cb54911824c3a94390f6cbd

Source: Company data, Goldman Sachs Global Investment Research

27 July 2020 30 Goldman Sachs India Internet

Exhibit 31: WeChat ecosystem comprises many things from social to commerce to payments to entertainment WeChat ecosystem, as of 2019

The WeChat Ecosystem

Individual users Group-chat communities

45bn daily messages 410mn daily video/audio calls Scan QR code to add friends WeChat Social Payments or to join group chats Red Packet

1,203mn Monthly Active Users Traffic diversion Traffic diversion 85min+ Private traffic daily time spent per user Social traffic

Official Traffic diversion Mini Accounts Programs

Traffic diversion

3.5mn+ active official accounts c.850mn MAUs Encouraging original and high-quality content 2.3mn+ mini programs avaiable Focus on picture + text content + video 42.6x monthly average times of use per user Content Social $Ecommerce $Advertising Creation Sharing $Advertising $Offline commerce $Ecommerce $Smart living $Mini games $Merchant solutions

Social Traffic Traffic Social Sharing Support Support Sharing of of Content Content Moments

Text/picture/video/mini video sharing Information feed based on time of posting Commercial + offline Payment $Advertising Payments, accepted at 10mn+ stores

Source: Company data, QuestMobile, Aladin, Data compiled by Goldman Sachs Global Investment Research

What can Facebook + RIL do? As we have seen in the case of China, we believe the highest potential to create a For the exclusive use of [email protected] Super App lies with the dominant social media platforms, which in India’s case happens to be Facebook/WhatsApp. In its recent earnings call, Facebook mentioned it will be leveraging its partnership with Jio Mart to enable commerce for small businesses, and also online payments through WhatsApp. We believe WhatsApp/FB and Reliance Industries may also enter newer verticals over time to build consumer use cases.

While RIL already has a presence across retail, entertainment, and payments

(through Jio Payments Bank), we believe for verticals such as travel, food delivery, 85e9115b1cb54911824c3a94390f6cbd ride-hailing, etc., RIL/FB could potentially take a partnership approach. This could either be in the form of tie-ups with platforms or through investments in some of the dominant platforms in these verticals, an approach similar to that taken by Tencent in China (as discussed above). In fact, during its recent AGM, RIL announced potential integration with Indian startups, including helping them with distribution/marketing and access to capital. RIL/FB can then direct traffic from their potential Super App to these

27 July 2020 31 Goldman Sachs India Internet

verticals, and monetize it through a share of the commissions, which we believe can be in the range of 2-3% (slightly higher than the 1-2% commissions of WeChat, given a more fragmented market structure in India). The following exhibit shows our base case expectations of the timeline and the business model of a potential Super App that RIL + Facebook could create, and also puts forward a blue sky view on the same.

Exhibit 32: E-commerce, payments and entertainment are likely to be key segments RIL + FB could initially focus on An illustrative timeline, potential business models, market share and valuation of various segments RIL + FB could launch on the potential Super App

Grocery Status: Already launched; expect Non-grocery Status: Announced launch during AGM; WhatsApp integration (mini-app) over potential integration with WhatsApp over next 12 months next 12 months Model: 3P to begin with; foray into 1P Model: Mostly 1P for electronics; 1P + over time; 1% commission to FB traffic. 3P for fashion; 1% commission to FB for Short traffic term Market share: 50% in base case, 55% in blue sky Market share: 20% in base case; 30% in blue sky Value: US$16 bn in base case; US$26 bn in blue sky Value: US$12 bn in base case; US$23 bn in blue sky

Video & Status: Standalone apps live; potential Payments Status: WhatsApp Pay in pilot; expect music WhatsApp integration over next 12 full-scale launch on UPI over next 12 months months Model: Largely content aggregator; ad Model: Potentially with Jio Payments revenue share with FB Bank; zero revenues on UPI Market share: 15-20% in base case; Market share: c.10% in base case; 25-35% in blue sky Blue sky: 70%+ in P2P; c.40% in P2M Medium Value: US$3 bn in base case; Value: US$0.5 bn in base case; US$6 bn in blue sky term US$2 bn in blue sky

Online Status: RIL has talked about it but Education Status: Presence through Embibe; gaming launch strategy unclear super app integration over time Model: Can potentially develop games Model: Can also potentially partner with or partner with gaming companies existing online education platforms Market share: 15% in base case; Market share: 10% in base case; 25% in blue sky (casual gaming) 25% in blue sky Value: US$1 bn in base case; Value: US$2.5 bn in base case; US$2 bn in blue sky US$9 bn in blue sky

Long term Fintech Status: RIL has not talked about it; O2O Status: RIL has not talked about it; launch strategy unclear launch strategy unclear Model: Can potentially partner with For the exclusive use of [email protected] Model: Partner with banks/insurers for existing platforms (MMYT, Swiggy, Ola), selling products; earn commissions and charge 2-3% commissions Market share: 10% in case case; c.20% Market share: 5-10% of total traffic in blue sky through the Super App in base case; 20% in blue sky Value: US$0.5 bn in base case; Value:

Base case values shown are the contribution to our implied value/target price for Reliance Industries. Market shares are for FY25E. Our blue sky values assume a higher market share vs the base case for RIL, and also higher online penetration in categories such as e-commerce, gaming and education. Blue sky also assumes RIL + FB foray into some of the segments they have not announced any strategy about.

Source: Goldman Sachs Global Investment Research 85e9115b1cb54911824c3a94390f6cbd

We believe suitability of verticals within a Super App will depend on the level of user engagement required. Said differently, high frequency, low ticket-value items like food delivery, ride hailing, grocery, tickets (movie, bus, air), payments, etc., can be integrated into a Super App, in our view. However, for verticals like education, apparel/electronics, travel (hotels), gaming, we believe native apps will continue to provide a superior user experience relative to mini apps.

27 July 2020 32 Goldman Sachs India Internet

We believe existing platforms across suitable categories (ticketing, food delivery, ride-hailing, grocery, etc.) will be keen to tie-up with a potential Super App, as the latter could become a significant source of traffic for the platforms, and could help bring down customer acquisition costs. As noted above, in China, Tencent-based channels accounted for 84% of MAUs (Monthly Active Users, in 2019) for Tongcheng-Elong, an OTA (Online Travel Agent). With WhatsApp having a dominant share in user traffic in India (180mn DAUs, 45 minutes time spent per day), and RIL potentially acting as a platform for partnership/investments in internet verticals, we could see a potential RIL/FB Super App becoming a meaningful driver of traffic for different verticals within India internet.

By FY25E, we estimate c.US$60 bn of GTV (c.35% of India internet) could pass through the potential RIL/FB Super App (incl. RIL apps) in a blue sky scenario (vs. US$40 bn in our base case); this is in addition to our estimate of US$90 bn processed in merchant payments (>US$500 bn including P2P) in a blue sky scenario.

10 FAQs on RIL + Facebook and Google Below, we try to address some of the most frequently asked investor questions on RIL’s tie-up with Facebook and Google.

1. What makes Reliance Industries uniquely positioned as a partner for a Super App?

GS view: First, RIL is the country’s largest retailer with more than 11k brick-and-mortar stores. The company is the market leader in categories such as grocery, fashion, electronics, etc., making it a partner of choice for platforms looking to foray into commerce. With its existing retail footprint, RIL could potentially help manage the entire supply chain of retail (and provide back-end support), while WhatsApp could act as a source of traffic, a complementary relationship in our view. Second, RIL has a payments bank licence (together with the State Bank of India), which can help power payments for a potential Super App; we note WhatsApp has been looking to launch payments in India since early 2018. Third, RIL has a strong presence in both video and music OTT, with its apps Jio TV and JioSaavn among the top 5 and top 3 apps in their respective categories (in terms of downloads); these apps could potentially be

For the exclusive use of [email protected] integrated into a Super App, helping drive traffic. And lastly, Jio Platforms has made a number of investments in tech businesses (Embibe, Haptik, etc.) and could potentially continue to make similar internet/tech investments, and act as a monetization driver for a potential Super App.

2. What does RIL get out of the Facebook/WhatsApp partnership?

GS view: Traffic. In most internet verticals, including grocery, e-commerce and payments, India already has established and well-capitalised players in the form of Amazon, Flipkart and Paytm, among others. As

discussed earlier, WhatsApp/Facebook is an extremely high user-engagement platform, and can help drive 85e9115b1cb54911824c3a94390f6cbd traffic to RIL’s products in different internet segments. This can help bring down customer acquisition costs for RIL, while at the same time providing it the opportunity to quickly expand market share in its internet businesses.

3. What does Facebook get out of an RIL investment/partnership?

27 July 2020 33 Goldman Sachs India Internet

GS view: Monetization and a one-stop internet platform. As discussed earlier, we believe one of the key considerations for the RIL tie-up for Facebook is the latter’s intent to monetize its more than 400mn users in India. In addition, if Facebook were to create a Super App on WhatsApp, RIL could act as a one-stop solution for various internet verticals, starting with grocery, e-commerce, payments and entertainment, and over time to gaming and O2O services such as food, ride-hailing, ticketing, etc.

4. How will the monetization be shared between RIL and Facebook?

GS view: We believe for platforms which are owned by RIL, such as e-commerce, entertainment, education, etc., it will retain the majority of the profit pool, and pay a commission of around 1-2% to Facebook for traffic. For verticals like travel, O2O, etc., where RIL could partner these platforms, and monetize through WhatsApp traffic, we expect Facebook to retain majority (two-thirds) of the 2-3% commissions.

5. Can RIL cross-subsidize across telecom and internet platforms?

GS view: Technically yes, RIL can cross-subsidize. For example, a Jio subscriber can be offered coupons on their recharges that can be used for e-commerce/grocery, etc. Or Jio’s existing Prime services, where the company provides access to a suite of apps for free, can be expanded to offer other services such as, say, reward points on transactions, inclusion of services such as discounted/free shipping, etc. RIL/FB could also potentially have favorable payment terms if a user pays via WhatsApp Pay, for example.

6. Will Airtel customers lose out?

GS view: Unlikely. There is nothing to stop Airtel from partnering with existing e-commerce/travel/O2O platforms for similar tie-ups as above. In fact, it is a fairly common phenomenon across India TMT - recharge/pay on one platform, and use coupons for discounted tariffs on another platform. In addition, we note that Net Neutrality regulations in India do not permit preferential treatment of apps by telecom networks. Thus, we see no reason why Airtel subscribers will be at a disadvantage vs Jio subscribers.

7. Why the quest for Super Apps?

GS view: We view Super Apps as the Holy Grail in terms of the products India internet businesses would ultimately strive to create. The cost of acquiring traffic/customers is the biggest hurdle to profitability of For the exclusive use of [email protected] Indian internet companies, in our view. With a potential Super App, higher customer engagement will likely lead to more vendors/verticals on the platform, which in turn will bring in more users - a virtuous cycle. All this while continuously bringing down customer acquisition costs, and incremental opportunity to cross-sell across verticals. Diversification/cross-sell could enable platforms to increase scale and achieve profitability faster.

8. Why has no one been successful so far in creating a Super App? 85e9115b1cb54911824c3a94390f6cbd GS view: Lack of organic traffic at scale. As discussed above, while apps such as Paytm and PhonePe have tried to create a Super App, the scale (measured in terms of DAUs) for these platforms is much lower than that for social media (Exhibit 23), creating a hurdle for monetization. Having said that, we have been quite impressed by the PhonePe app in terms of ease of use and offerings, which gives a user the access to multiple mini-apps across different categories, with the ability to complete the transaction (including payment) within the app (Exhibit 33). We believe RIL + FB could potentially look to create a similar app,

27 July 2020 34 Goldman Sachs India Internet

which coupled with the WhatsApp traffic advantage, could make them a partner of choice for verticals and drive monetization.

9. What is the likely role of Google?

GS view: RIL recently announced a US$4.5 bn investment by Google in Jio Platforms for a 7.73% stake; RIL said the initial focus will be on developing low cost 4G/5G smartphones. While Facebook and Google compete in the advertisement market, and together have 80%+ share of digital ads in India, RIL’s comments suggest the partnership with Google has more to do with leveraging the Android operating system for low cost phones, while WhatsApp/Facebook will be a source of traffic for internet platforms of RIL, in our view. As such, Google and Facebook will likely be collaborating with RIL in different verticals, and not competing directly with each other. From RIL’s standpoint, we believe they would increasingly try to play a role across the consumer spectrum, including telecom network (Jio), devices (JioPhone + smartphone with Google), operating system (KaiOS + Google collaboration) and apps (JioMart, JioTV, JioSaavn, etc.)

10. What are the similarities of RIL/Facebook and Tencent/WeChat?

GS view: Tencent owns the traffic source in the form of WeChat, and has a strong social network. This is the same as Facebook in India, through its WhatsApp, Facebook and Instagram platforms; RIL does not own any platform with a significant source of traffic. On the other hand, while Tencent has minority stakes in various internet platforms (including e-commerce companies such as JD and PDD), it does not have its own e-commerce business, unlike RIL which has an offline presence and has launched Jio Mart (online). We believe the RIL + Facebook partnership has the potential to replicate Tencent and its investment ecosystem (see Exhibit 14 of our June 2020 Tencent report for details of its investments). For the exclusive use of [email protected] 85e9115b1cb54911824c3a94390f6cbd

27 July 2020 35 Goldman Sachs India Internet

Exhibit 33: PhonePe has integrated mini-apps of various categories; RIL + FB could take a similar route Interface of the PhonePe iOS app

Home Page: Includes UPI Home Page 2: Bill and My Money tab: Can buy payments, and a few mini-apps subscription payments, etc. investments and insurance

Switch tab: Gives access to mini- Swiggy within PhonePe: Clicking Payment: Through the linked UPI apps in categories such as travel, on Swiggy mini-app takes user to account or debit/credit cards food, grocery, games, etc. native app like interface For the exclusive use of [email protected] 85e9115b1cb54911824c3a94390f6cbd

Source: PhonePe iOS app screenshots

27 July 2020 36 Goldman Sachs India Internet Assessing the COVID-19 impact by India internet segment

Exhibit 34: We expect e-commerce, entertainment/gaming and education to see an increase in sales due to the impact of COVID, while there could be a negative near term impact on the travel and food delivery segments Blue bars and lines show our current forecast; orange shows the forecast excluding COVID impact. Bar chart shows online penetration in FY25E. Line chart shows sales/GMV indexed to 100 in Dec 2019

Structural beneficiary Other V-shaped recovery Grocery 300 175 6.7% ecommerce 21%

260 19% 150 5.0%

220 125

180 100

+25% 140 +10% 75

Steady 100 Steady 50 state sales Dec 19 Jun 20 Dec 20 Jun 21 state sales Dec 19 Jun 20 Dec 20 Jun 21 impact due impact due Online accounted for 15-20% sales for country’s offline "..customers sticking to ordering online even after easing in grocery retailers in 2QCY20, vs 3-5% pre-COVID lockdown restrictions." - Walmart India to ET

U-shaped recovery V-shaped recovery Travel Food 140 delivery 120 120 100 100

80 80

60 13% 60 48% 40 40 20 12% -10% 44% 0%

Steady 0 Steady 20 state sales Dec 19 Jun 20 Dec 20 Jun 21 state sales Dec 19 Jun 20 Dec 20 Jun 21 impact due impact due We expect significant consolidation in market share of While we expect customers to choose delivery over eating online travel due to COVID, helping platforms such as out in the short term, we see overall order volumes to stay MMYT under pressure + we expect supply side pressure

Gaming & Structural beneficiary Education Structural beneficiary 160 240 OTT 10% 17% 220 15% 9% 200 140 180 For the exclusive use of [email protected] 160 120 140

+10% +10% 120

Steady 100 Steady 100 state sales Dec 19 Jun 20 Dec 20 Jun 21 state sales Dec 19 Jun 20 Dec 20 Jun 21 impact due impact due We expect increased sampling of online video content and Lockdown and home schooling to result in increased gaming due to the lockdown. Movie releases on OTT to sampling of edtech platforms in our view, resulting in online help retain paid video subscribers in our view penetration resetting to a higher level

For grocery, 2QCY20 comment sourced from Economic Times (ET). For gaming & OTT, bar chart shows paid video subscribers as % of total smartphone users. For Education, bar chart shows edtech as % 85e9115b1cb54911824c3a94390f6cbd of total after-school tutoring spend.

Source: Company data, Press reports (including Economic Times), Goldman Sachs Global Investment Research

27 July 2020 37 Goldman Sachs India Internet Online retail: Biggest battleground with focus on grocery

$32 bn $112 bn 29% $3.6 bn $109 bn (FY20 GMV) (FY25E GMV) (FY20-25E CAGR) (FY25E net income) (FY24E valuation)

We expect e-commerce, including grocery, to be the biggest battleground for Indian internet companies (c.60% of total TAM), given it is likely to be at least 3x bigger than the next largest vertical in terms of profit pool. We forecast Indian e-commerce will reach US$112 bn5 in GMV by FY25E (year ended March 2025), growing at a 29% CAGR over FY20-25E, with grocery and fashion/apparel likely to be the key drivers of incremental growth, in our view. Overall, we forecast online retail penetration to reach 12.2% by FY25E, vs 5.0% in FY20.

Growth in India’s e-commerce is likely to come from: (1) better penetration into categories such as grocery/FMCG; (2) improving payment ecosystems; (3) ease of shopping (though WhatsApp etc.); and (4) consumers favouring online over offline due to COVID-19.

India’s retail market India’s retail market size as of 2019 was US$635 bn (revenues, Euromonitor data), split 59%-41% between grocery and non-grocery (Exhibit 37), with apparel/footwear, electronics & appliances and leisure/personal goods among the larger categories within non-grocery. India’s offline retail presence (measured in retail space per capita) and share of modern retail is at the lower end vs global peers, with a population density among the highest in the world (Exhibit 35). We believe these factors augur well for online to win market share vs offline.

Exhibit 35: India’s retail space presence at the lower end vs global Exhibit 36: India’s e-commerce penetration has been slower than peers that of China/Indonesia, but faster than Brazil/Russia Retail space vs population density (2019) E-commerce penetration with T0 indexed to India’s 2019 penetration level of c.5% For the exclusive use of [email protected]

2,500 USA 5% 5%

2,000 4% 4%

Brazil 1,500 Japan UK 3% (2009-16) 3% South Korea 1,000 Russia Russia China India 2% 2% Brazil (2010-17) Indonesia China 500 Indonesia (2005-12) India (2011-18) 85e9115b1cb54911824c3a94390f6cbd 1% (2012-19) 1% Retail space (sq m) per 1,000 people 1,000 per m) (sq space Retail 0 0 100 200 300 400 500 600 0% 0% Persons per square km T-7 T-6 T-5 T-4 T-3 T-2 T-1 T0

Source: Euromonitor Source: Euromonitor, Goldman Sachs Global Investment Research

5 Sources for the exhibits (a summary from Exhibit 17) at the start of this and the following eight sections are as follows: Euromonitor, FICCI-EY, Company data, Goldman Sachs Global Investment Research.

27 July 2020 38 Goldman Sachs India Internet

Exhibit 37: 59% of India’s total retail market is attributable to grocery India’s total retail market (revenues, US$ bn, 2019)

27%, Apparel & footwear, $71 bn

22%, Electronics & appliances, $56 bn Non grocery, $258 bn, Grocery, $376 bn, 59% 41% 9%, Health & beauty, $24 bn 11%, Home & garden, $28 bn

27%, Leisure & personal goods, $68 bn

4%, Others, $11 bn

INR USD of 75.

Source: Euromonitor, Goldman Sachs Global Investment Research

Composition of online retail Within non-grocery, online already contributes 11.1% of the total market (2019), having taken 140 bps share on average vs offline every year over the past five years, and we expect online penetration to reach 20.7% by FY25E in this category, driven mainly by higher penetration within apparel/footwear and electronics & appliances. While online penetration in categories such as consumer electronics is fairly high at c.40% as of 2019 (per Euromonitor, Exhibit 38), we see room for significant growth in categories like apparel, appliances, and health & personal care, where online penetration in India remains materially lower vs peers like China (Exhibit 39). Overall, we expect electronics & appliances and apparel/fashion to make up 73% of non-grocery e-commerce in India by FY25E (March 2025), marginally lower than the 77% in 2019.

For the exclusive use of [email protected] As far as incremental growth is concerned, we expect grocery to be the biggest driver with a 44% contribution to incremental e-commerce GMV between FY20 and FY25. Overall, we expect India’s e-commerce penetration to reach c.12% by FY25E, lower than current penetration levels in China and the US (Exhibit 41). 85e9115b1cb54911824c3a94390f6cbd

27 July 2020 39 Goldman Sachs India Internet

Exhibit 38: Online penetration in most categories in India fairly low Exhibit 39: Relative to other countries, India’s online penetration E-commerce penetration of different categories in India (2019) has potential to expand in categories such as appliances, apparel, beauty & healthcare Online penetration by category for e-commerce in other countries (2019)

60% Consumer electronics 39% China Apparel & footwear 12% 50% USA Beauty & personal care 4% 40% Indonesia Home and garden 3% 30% Appliances 3%

Consumer health 3% 20%

Non grocery 11.1% 10%

Grocery 0.4% 0% Overall e-commerce 4.7% Consumer Apparel & Appliances Beauty & Consumer Home and electronics footwear personal care health garden

Source: Euromonitor, Goldman Sachs Global Investment Research Source: Euromonitor, Goldman Sachs Global Investment Research

Exhibit 40: We expect grocery and apparel/fashion to be the biggest drivers of India e-commerce FY25E vs FY20 India e-commerce market size by category (US$ bn)

$8 bn $112 bn $2 bn $5 bn $14 bn

$16 bn

$35 bn Ecommerce share by value Others Baby, beauty &6% personal care 8% Home & $32 bn Furnishing Electronics 9% 2019 48%

Apparel

For the exclusive use of [email protected] 29%

FY20 market size Grocery Apparel & Electronics & Health and Home and garden Others (jewellery, FY25E India footwear appliances beauty games & toys, ecommerce personal goods, market size etc.)

FY20 indicates year ended March 2020. INR USD of 75.

Source: Euromonitor, Goldman Sachs Global Investment Research, India Brand Equity Foundation 85e9115b1cb54911824c3a94390f6cbd

27 July 2020 40 Goldman Sachs India Internet

Exhibit 41: We expect online retail to account for 12% of the overall Exhibit 42: Our forecasts suggest India’s e-commerce penetration retail market in India by FY25E will rise faster than the US at same levels, but slower than China Penetration of online retail E-commerce penetration, index to T0 = c.5% online penetration

18% 18%

24.6% 16% 16% China (2002-16) 14% UK 14% India Germany (2007-15) (2011-19) 15.2% (2019-25E) 12% 12% 12.2% 10% 10% USA 7.0% 7.0% (2008-17) 5.0% 8% 8%

1.7% 6% 6%

FY15 FY20 FY25E Brazil Indonesia USA China 4% 4% India Other countries (2019) T0 T+1 T+2 T+3 T+4 T+5 T+6 T+7 T+8 T+9

FY20 is year ended March 2020. Source: Euromonitor, Goldman Sachs Global Investment Research

Source: Euromonitor, Goldman Sachs Global Investment Research

Key players and competition The online retail market in India is largely controlled by horizontals, mainly Amazon and Flipkart (owned by Walmart). We expect horizontals like Flipkart and Amazon to be present across most e-commerce categories; for context, Amazon India had (pre-COVID) 200k sellers on its platform, and 50mn SKUs, according to a press report (Economic Times, 30 May). However, we believe vertical-focused companies are likely to thrive in categories like beauty (Nykaa), furniture (Pepperfry, Urbanladder, etc.), pharma, and grocery (JioMart, Grofers, etc.). Over time, we think further consolidation is likely and some vertical players could be of interest to larger horizontal players (similar to Myntra’s acquisition by Flipkart in 2014).

We believe given the sheer size of e-commerce (including grocery) relative to other segments, this area is likely to see the most amount of capital investments, and elevated competition, especially with the entry of Reliance Industries (RIL) in this space. At present, Amazon and Flipkart are the largest players, according to data from

For the exclusive use of [email protected] Euromonitor (Exhibit 43), with Paytm a distant third with low single-digit market share. We believe Paytm’s relatively lower level of success can be attributed to the platform’s higher focus on payments vs e-commerce, and lower investment in the supply chain vs established players. RIL, through its offline retail network, already has an established supply chain. We note that RIL is by far the largest retailer in the country with 11k+ stores, and we expect the company to be among the top three platforms in India’s e-commerce industry by FY25E (March 2025). We forecast c.50% market share for RIL in grocery/FMCG by FY25E, and 20-25% in non-grocery categories, in our base 85e9115b1cb54911824c3a94390f6cbd case. This translates into a 30% market share for RIL in the overall India e-commerce sector by FY25E.

27 July 2020 41 Goldman Sachs India Internet

Exhibit 43: Amazon and Flipkart operate in the larger categories of India e-commerce Key players in India online retail

Grocery

Ecommerce market share (2019)

Others Jiomart 16% Paytm Flipkart 4% (incl. Myntra) 44%

Apparel Amazon 36% & footwear

Consumer electronics & appliances

Home Size of total offline market offline of total Size

Beauty & cosmetics Take rates on Amazon India

Mobile cases etc. Power banks Apparel Furniture Healthcare Health & personal care Books Televisions Baby products Mobile phones Laptops Large appliances Grocery & gourmet Beauty products 0% 5% 10% 15% 20%

Level of online penetration For the exclusive use of [email protected]

Take rate data sourced in July 2020 and excludes closing/logistics fee.

Source: Goldman Sachs Global Investment Research, Amazon.in, Euromonitor

Upside from advertisements As per Dentsu Aegis Network, Rs21 bn (US$280 mn) was spent on e-commerce advertisement in India in 2019, translating into 0.9% of e-commerce GMV (GSe). In

China, the advertisement revenue to GMV ratio ranges from 2% to 3.8% for platforms 85e9115b1cb54911824c3a94390f6cbd such as JD.com, Alibaba and PDD, whereas for Amazon this ratio was around 5% in 2019. Driven by growth in e-commerce, and increased monetization by platforms, we expect advertisements on e-commerce platforms in India to grow at a 48% CAGR over the next five years (FY20-25E) to reach US$2.2 bn by FY25E, translating into 2% of e-commerce GMV.

27 July 2020 42 Goldman Sachs India Internet

The economics Globally, take rates can range from low single digits to mid-teens, depending on the category, with EBITDA margin for global e-commerce platforms ranging from +30% to -10% in CY20. We expect take rates in India of around mid-single digit in electronics & appliances, mid-teens in apparel, and around 10% in other non-grocery e-commerce, in line with the take rates prevalent today (excluding delivery charges). We expect grocery to be largely a 1P model, with some 3P done by Reliance, for which we expect take rates of around 4%.

We assume a 20% steady state EBITDA margin for marketplaces (3P models), and 7.5% for inventory (1P) models, resulting in an EBITDA profit pool of US$4.1 bn for the e-commerce industry in FY25 (year ended March 2025). In addition, we expect another US$800 mn in EBITDA from e-commerce advertising in India (at a 35% margin, in line with global advertising companies). However, we expect the market to remain competitive in the near term, and do not expect profitability for e-commerce platforms before 2022.

At a current corporate tax rate of 25%, we estimate a net profit pool of US$3.6 bn by FY25E; at 30x P/E (in line with internet peers), we arrive at a total potential market value of US$109 bn for the Indian e-commerce sector by FY24E.

Perspective from our India Industrials team on e-commerce logistics This section has been contributed by our India Industrials analysts Pulkit Patni and Deepak Krishnan.

The current market size of India’s e-commerce logistics industry is US$1.3 bn, based on our estimate of 2.1mn parcel deliveries per day and an average cost estimate of Rs100 per parcel, with additional revenue from reverse logistics and cash on delivery. Our analysis suggests that the average cost to transport a parcel in India stands at Rs80-100 per parcel of up to 0.5 kg, with the cost being divided in three parts: a) first mile, b) warehousing, and c) last mile. Further, last mile delivery in India has two unique characteristics, cash on delivery and reverse logistics, which further add to the revenue on last mile for the logistics companies. We also see significant potential for e-tail logistics in India; currently apparel is the

For the exclusive use of [email protected] largest category by volumes and consumer electronics by value. We forecast India e-commerce to be a US$112 bn TAM (GTV) in FY25, and at 7% logistics cost (in line with industry average), we believe e-commerce logistics can be a c.US$8 bn market in FY25 (per our Internet team).

85e9115b1cb54911824c3a94390f6cbd

27 July 2020 43 Goldman Sachs India Internet

Exhibit 44: Horizontal e-commerce companies in India reportedly Exhibit 45: EBITDA margins range from +30% to -10% for global had a cumulative annual loss of US$1.7 bn in FY19 e-commerce companies India e-commerce annual losses (in US$ bn) EBITDA margin (CY20E) for global e-commerce platforms

FY16 FY17 FY18 FY19 30%

25%

20%

15%

10%

5%

0% -$1.4 bn -$1.3 bn -5% -$1.6 bn -$1.7 bn -10%

-15% Amazon India Flipkart Snapdeal Paytm Mall Shopclues Alibaba Amazon VIPShop JD.com MercadoLibre Pinduoduo

List not exhaustive and data sourced from press reports. INR USD of 75. Source: Goldman Sachs Global Investment Research

Source: Press reports (including Economic Times, Livemint, etc.), Data compiled by Goldman Sachs Global Investment Research

Breakdown of regulations in e-commerce In India, FDI (Foreign Direct Investment) is not allowed in the inventory based model of e-commerce, but 100% FDI is allowed in a marketplace. We note that domestically owned companies are allowed to engage in inventory based e-commerce. Starting February 1, 2019, the Government of India implemented a revised set of regulations on e-commerce. Below we reproduce three key points from these regulations, which we believe are important from a competition standpoint.

n An e-commerce marketplace entity will not exercise ownership or control over the inventory. n An entity having equity participation by an e-commerce marketplace entity (or its group companies), or having control on its inventory by e-commerce marketplace entity (or its group companies), will not be permitted to sell its products on the platform run by such a marketplace entity. n E-commerce entities providing marketplace will not directly or indirectly influence the sale price of

For the exclusive use of [email protected] goods or services.

These regulations are applicable only to marketplaces with FDI, and are not applicable to domestically-owned e-commerce entities. During our India internet tour in June 2019, 1mg Technologies mentioned that the FDI regulations led to some changes in operating structures but that they have not caused any meaningful disruption in business, while Snapdeal mentioned that the implementation of these regulations have not matched expectations.

Press reports indicate companies such as Amazon and Flipkart created new operating structures to comply 85e9115b1cb54911824c3a94390f6cbd with the change in regulations, while continuing to exercise some control over inventory. The reports suggest Amazon owns minority stakes in the parent companies of Cloudtail and Appario, two vendors on Amazon’s platform. Cloudtail’s parent entity Prione Business Services used to be joint venture between Amazon and its Indian JV partner Catamaran Ventures (49:51 shareholding). However, post the change in FDI rules in 2019, Amazon reduced its stake in Prione to 24%, which resulted in Cloudtail (the subsidiary of

27 July 2020 44 Goldman Sachs India Internet

Prione and a vendor on Amazon) ceasing to be a group company as per press reports.

With regulations disallowing foreign-owned marketplace entities from influencing pricing, we believe domestically-owned entities could potentially offer competitive pricing in their attempt to win market share. Said differently, foreign-owned marketplaces could potentially have lower cash burn, helping improve unit economics for the overall industry. In addition, with domestically-owned entities allowed to operate an inventory-based e-commerce model, we believe such platforms can have higher control on the supply chain and fulfillment.

We note that 100% FDI is permitted in food retail (through the approval route), and the above discussed regulations are not applicable to online grocery. We note that platforms such as Amazon and Grofers operate an inventory based model in online grocery in India.

Closer look at grocery delivery Grocery in India is a US$380 bn category as of FY20 (GSe, with data for CY19 from Euromonitor), making up c.60% of the total retail market. However, online penetration currently stands at <0.5% (absolute size

We believe the online grocery market in India is at an inflection point, and expect it to grow 18x over the next five years, to reach US$37 bn in GMV (6.7% penetration) by FY25E. We view the following as the key drivers of this shift: (1) higher acceptance of online purchases among Indian consumers, especially since COVID-19; (2) RIL’s foray into the space leveraging its large offline distribution capabilities; (3) ability to order groceries through WhatsApp, a platform with >400 mn MAUs in India; and (4) greater support from brands (we note HUL recently talked about a higher focus on

For the exclusive use of [email protected] e-commerce). Overall, we forecast online grocery orders to grow from <300k per day in 2019, to more than 6mn per day by FY25E.

We expect a step change in online grocery penetration due to COVID-19, and expect the industry to grow at c.100% YoY for the foreseeable future. According to press reports, online/home-delivery of grocery accounted for 15-20% of sales for a few of the retail chains in India in 2QCY20, vs 3-5% pre-COVID. 85e9115b1cb54911824c3a94390f6cbd

27 July 2020 45 Goldman Sachs India Internet

Exhibit 46: India has one of the lowest penetrations of modern grocery retail and online grocery India vs global peers grocery retail landscape

80% Indonesia Size of bubble indicates total grocery 70% retail market size in

India Russia 60%

UK Online FMCG penetration (2019) Germany 50% Korea 20% Korea China 15% Japan 8% USA UK 8% 40% India (FY25E) 7% China USA 6% Russia 3% Japan Germany 2% Grocery retail as % of store based retailing (2019) retailing based of store % as retail Grocery 30% India (FY20) 0% Indonesia 0% Brazil Brazil 0%

20% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Modern retail as % of total grocery retail (2019)

Source: Kantar, Euromonitor, Goldman Sachs Global Investment Research

Exhibit 47: We expect online grocery to be a US$37 bn market by Exhibit 48: We expect RIL to be a key driver of growth in online FY25E, translating into 6.7% penetration grocery, accounting for 50%+ market share by FY25E India online grocery market size (GMV) and online as % of total grocery YoY growth rates for India online grocery including and excluding RIL

140%

6.7% 55% FY20-25E 120% 18x over 5 years CAGR excl. RIL; (79% FY20-25E 79% overall CAGR) 100% 4.7% 80%

3.1% 60%

1.9% 40%

For the exclusive use of [email protected] 1.1% 0.5% 20% 0.3% $1 bn $2 bn $5 bn $9 bn $15 bn $25 bn $37 bn 0% FY19 FY20E FY21E FY22E FY23E FY24E FY25E FY21E FY22E FY23E FY24E FY25E

Online grocery (US$ bn) Online penetration Online grocery YoY growth Growth ex RIL

INR USD of 75. FY indicates year ended March. FY indicates year ended March.

Source: Euromonitor, Goldman Sachs Global Investment Research Source: Goldman Sachs Global Investment Research

Business models in grocery 85e9115b1cb54911824c3a94390f6cbd A number of business models exist within the online grocery delivery space in India: (1) Fully integrated inventory model: Platforms control the entire supply chain including last mile customer delivery (examples include BigBasket, Amazon); (2) Inventory model without last mile: Models like Grofers, which let retailers and SMEs deliver the last mile; and (3) Marketplaces: Like Swiggy and Zomato, which do not own the supply chain but just facilitate delivery, or platforms that just accept orders on behalf of the

27 July 2020 46 Goldman Sachs India Internet

retail store and charge a commission.

While these delivery models are likely to be most prevalent in urban areas (with high population density), we also expect rising uptake of ‘buy online, pick up in store’ or ‘delivered by store’ models, especially in less dense areas. From a profitability standpoint, we believe models that require the fewest touchpoints between the producer and the consumer are likely to be most popular over time. In India, we have seen most platforms pivot towards 1P (inventory) over time as the economics in a 3P grocery model are hard to work, given the thin (10-15%) margins that mom & pop stores make; this margin doesn’t leave enough to cover the logistics cost for platforms in our view.

From the consumers’ standpoint, per analysis published by our US team, price is the most important factor that would influence consumers to switch where they shop for groceries, followed by location. The team’s analysis concluded that online does not necessarily always offer better value (price) or better convenience vs brick & mortar stores (see Supermarket Shift: Expect Measured Disruption for more).

We acknowledge that a number of challenges exist in moving the grocery category online, including low product margins, shipping costs, refrigeration, handling needs and consumers’ aversion to buy grocery online, especially fresh produce. As such, we expect only about 7% of total grocery to be online by FY25E, with an even lower penetration for fresh produce. Within non-fresh produce, we believe higher-margin private labels could become a sizable part of online grocers; note that for Grofers, more than one-third of its sales come from private labels (2019 or latest available data), and this ratio may continue to rise over time.

FAQs on online retail in India 1. What are the key characteristics of the 1P (inventory) and 3P (marketplace) models in e-commerce?

GS view: The 1P (inventory) model allows better control on pricing and fulfillment. With the vendor also For the exclusive use of [email protected] acting as the platform, the company has greater control over the supply chain, and by potentially eliminating intermediaries, it can offer lower prices. The 3P (marketplace) model allows the ability to scale up faster vs 1P as the platform can tie up with existing vendors. However, the customer fulfillment experience may be sub-par vs the 1P model as the distribution may be managed by the vendor (and not the e-commerce platform). In the context of India, FDI is not allowed in the inventory model of e-commerce, except for grocery/FMCG. Amazon, Flipkart, and Paytm operate the 3P model in India for non-grocery e-commerce, but for grocery, Amazon, Bigbasket, and Grofers use the 1P model. 85e9115b1cb54911824c3a94390f6cbd 2. Are different models suitable for different segments?

GS view: The 1P (inventory) model works better for categories with standardized and limited SKUs such as electronics, appliances and FMCG. The 3P (marketplace) model is more ideal for categories such as apparel & fashion, and general merchandise.

27 July 2020 47 Goldman Sachs India Internet

3. Can you show how the price paid by a consumer is typically distributed across the supply chain for FMCG and consumer durables in India?

GS view: Per our estimates, after removing taxes, about 17% of the total price paid by the consumer for the product goes to pay the retailer and the distributor/wholesaler. See example below.

Exhibit 49: About 17% of the total amount paid by the consumer (post tax) goes towards the channel in offline retail Illustrative example showing value chain of FMCG and consumer durables in India

Consumer Amount indexed to 100 FMCG Comments durables Amount paid by consumers 112 128 Goods & Services Tax (12) (28) 12% for FMCG; 28% for durables Post tax realisation for vendor 100 100 Indexed to 100 Margin of retailer (13) (13) 15% of retailer’s cost Passed on to wholesaler/distributor 87 87 Margin of wholesaler/distributor (4) (4) 5% of cost Passed on to manufacturer 83 83 Cost of goods sold (41) (67) Gross profit for manufacturer 41 16 50% margin in FMCG; 19% durables

Source: Goldman Sachs Global Investment Research

4. What are the economics of online grocery like?

GS view: Online grocery platforms in India are (pre-COVID) loss-making, as we believe the scale is currently sub-par. Due to the nature of B2C internet businesses in India (elevated competition), prices tend to be competitive vs offline to increase customer adoption, resulting in lower gross margins for platforms. In addition, the platforms spend a significant amount of money on distribution, and selling & marketing. However, at a bigger scale, we believe distribution costs can be re-allocated over a larger number of orders, resulting in economies of scale. In addition, a shift towards higher contribution from private label (currently around one-third for online grocery platforms) could lead to better margins, in our view. Please For the exclusive use of [email protected] see our April 2020 report for more color on the economics of Grofers. The below table compares the economics of Avenue Supermarkets (Dmart) with online grocery platforms in India. 85e9115b1cb54911824c3a94390f6cbd

27 July 2020 48 Goldman Sachs India Internet

Exhibit 50: Over time, we expect online grocers can get to a similar profit per order as modern retail stores Illustrative example of the economics of brick & mortar retail vs 1P online grocery

Online Online Amount indexed to 100 Dmart grocery grocery (existing) (steady state) Amount paid by consumers 110 110 110 Goods & Services Tax (10) (10) (10) Post tax realisation 100 100 100 Cost of goods sold (85) (88) (85) Gross profit 15 12 15 Employee costs (4) (7) (2) Other costs (3) (3) (1) Selling & marketing costs (4) (1) Distribution costs (9) (4) EBITDA 9 (11) 7 D&A and finance charges (2) (1) (0) Taxes (2) 0 (2) Net income 5 (12) 5

GST blended rate assumed at 10%. Dmart numbers for FY20. Online grocery numbers estimates per GS.

Source: Goldman Sachs Global Investment Research

5. What model is RIL likely to adopt?

GS view: While RIL has started with a marketplace (3P) model for grocery, we believe it will pivot towards an inventory (1P) model over time. We believe the economics of 3P in grocery is sub-optimal. The low take rates (usually <5%) for the platform is not enough to cover logistics cost, unless the platform is also acting as a B2B supplier for the mom & pop stores. As mentioned earlier, a 3P model is ideal to scale up the business initially, but over time we see merit in RIL pivoting towards 1P. We note that Grofers started as a 3P platform, but over the past 2-3 years has fully transitioned towards an inventory model. However, we expect RIL to operate a mix of 1P and 3P for non-grocery e-commerce categories, with 3P mostly for For the exclusive use of [email protected] apparel/fashion, and 1P mostly for electronics/appliances.

Below table shows the economics of on-demand grocery, assuming no B2B revenues for the platform. 85e9115b1cb54911824c3a94390f6cbd

27 July 2020 49 Goldman Sachs India Internet

Exhibit 51: We think it is very difficult to make positive unit economics in a marketplace model Illustrative example showing the economics of a 3P (marketplace) grocery model

Order value For retailer (in INR) S1 S2 S3 Comments Amount paid by consumers 500 1,000 1,500 Goods & Services Tax (45) (91) (136) Assumed 10% blended GST Post tax realisation for retailer 455 909 1,364 of which margin of retailer 59 119 178 About 12-13% of selling price Commission to online platform (20) (40) (60) at 4% take rate Retailer profit (INR per order) 39 79 118

For delivery platform (in INR) S1 S2 S3 Comments Revenue per order (INR) 20 40 60 Take rate as above Delivery cost (50) (50) (50) About Rs50 per order Contribution margin for platform (30) (10) 10 Excluding promotion costs

Source: Goldman Sachs Global Investment Research

6. What advantage does RIL have in grocery?

GS view: We see RIL’s existing store network and presence across 7k+ towns and cities (for overall retail) as an advantage. The company already has a large geographical footprint, unlike existing online grocery platforms which are restricted to 25-30 cities. This allows RIL to operate an online grocery service even in cities with low online demand, as incremental cost of the platform is limited given already existent offline supply chain. In addition, we believe RIL’s partnership with Facebook will act as a key advantage, helping drive traffic to JioMart at a very low customer acquisition cost.

Consolidating supply chain We also expect India’s internet platforms to help the mom & pop grocery stores (more For the exclusive use of [email protected] than 10 mn as per Flipkart) move their sourcing online, with RIL likely to play a key role in this. We note that more than 90% of India’s grocery market remains unorganised, with room for consolidation in the supply chain. By storing goods closer to consumers and forming partnerships with offline retailers, we believe internet platforms like JioMart could help create significant efficiencies in the supply chain. We believe RIL is likely to leverage its procurement capabilities to create value for the mom & pop stores, while at the same time assisting these retailers manage working capital and inventory, and 85e9115b1cb54911824c3a94390f6cbd potentially also last-mile delivery.

For context, in China, both Alibaba and JD have their FMCG B2B strategies that aim to help offline supermarkets/grocery stores/mom & pop stores move their sourcing online through their respective 1688 and Xingtonglu platforms. In addition, for fresh produce, internet platforms in India could adopt an omni-channel approach, using both offline stores (via partnerships) and their own warehouses to offer delivery.

27 July 2020 50 Goldman Sachs India Internet

Exhibit 52: Various models exist in grocery; the lower the number of touch points, the better the profitability Supply chain for different grocery models in India

Format Key players Manufacturer Distribution Wholesaler Retailer Consumer

Traditional Mom & Pop offline stores retail

Format Key players Manufacturer Distribution Supermarket Consumer

Avenue, Modern Reliance, Offline Future Retail Retail

Format Key players Manufacturer Distribution Consumer

Online inventory- based with Bigbasket, full supply Amazon chain

Format Key players Manufacturer Distribution Dark stores Consumer

Online inventory based Grofers without last mile

Format Key players Manufacturer Distribution Wholesaler Retailer Consumer

Online market Swiggy, place Zomato model

Format Key players Manufacturer Distribution Retailer Consumer

Online market place with JioMart supply chain

Dark stores represent mom & pop stores which act as last mile distribution/delivery points. Key players’ represent the largest players in each segment in terms of one or more of the following: GTV, revenue, transactions, traffic share (all based on latest available data).

Source: Company data, compiled by Goldman Sachs Global Investment Research

Competition in online grocery For the exclusive use of [email protected] Online grocery in India has so far been largely a duopoly, with BigBasket and Grofers accounting for 80%+ of this market. The category has been growing at >50% YoY growth for the last couple of years, but we believe the outbreak of COVID-19 this year resulting in a greater and faster shift to online, and the recent entry of RIL should accelerate this growth to 79% CAGR during FY20-25E.

We believe RIL’s partnership with Facebook could result in the company becoming a

market leader in the online grocery space, with c.50% share by FY25E. RIL is already 85e9115b1cb54911824c3a94390f6cbd the market leader in India’s offline grocery space, but its overall market share remains at <1% in the online category. In the offline space, growth is driven to a large extent by store growth, which has been hampered by availability of real estate and the approval process for setting up new stores. However, given the presence of a supply chain already, RIL could potentially scale up its online business quite rapidly, de-linking grocery sales from store adds; according to RIL, JioMart is already receiving 250k orders per day (c.25% of the industry per GSe). Having said that, we do see grocery as a large

27 July 2020 51 Goldman Sachs India Internet

category where two or more players can co-exist over time.

Perspective from our Healthcare team This section has been written in collaboration with our India Healthcare analysts Shyam Srinivasan and Chandramouli Muthiah.

The two key healthcare tech trends that have seen an impetus during the COVID-19 pandemic given the restriction on people movement are: (1) Tele-medicine and (2) E-pharmacies.

Tele-medicine: The government cleared the guidelines on tele-medicine in late March-2020, to ensure primary care consultations continued online. As per Practo, there has been a 500% increase in online doctor consultations since March 2020, with 80% of the consumers using tele-medicine for the first time.

E-pharmacies are steadily gaining share, reaching about 2% of the overall Indian Pharmaceutical Market in FY20, in our view driven by competitive pricing and home delivery options.

More recently, health-tech platforms have branched into ancillary services like diagnostics, etc. From a consumer perspective, we have seen chronic patients in the therapy areas of diabetes, cardiovascular, hypertension and orthopedics with repetitive demand patterns adopting digital platforms the most.

E-Pharmacies make up about 2% of e-commerce GMV (FY20, GSe); we note that during our Internet tour in June 2019, PharmEasy mentioned that the online pharma sector in India had sales of

27 July 2020 52 Goldman Sachs India Internet Travel: Mature but with pockets of growth

$16 bn $31 bn 14% $0.3 bn $9 bn (FY20 GTV) (FY25E GTV) (FY20-25E CAGR) (FY25E net income) (FY24E valuation)

Travel is one of the most mature online businesses in India, with online penetration levels of around 35% as of FY20, and >50% penetration in some segments like domestic air and rail. We expect online travel market in India to double over the next five years to reach US$31 bn FY25 (March 2025), growing at 14% CAGR from FY20 levels (Exhibit 53). At a blended take rate of 8%, this translates to a potential revenue pool of US$2.4 bn for internet platforms.

We foresee three key drivers of longer term growth of online travel in India: (1) Increased adoption of internet platforms in under-penetrated segments such as hotels, international travel and bus (online volume penetration <20% in each of these segments); (2) Elevated growth in the underlying demand in sectors like air and hotels due to rising income levels (FY20-25E CAGR of c.9% in private consumption expenditure in India, in line with our consumer team forecasts); and (3) Deeper penetration of travel into lower tier towns.

Exhibit 53: We expect the online travel market in India to reach US$31 bn by FY25E, growing at a FY20-25E CAGR of 14% India travel market

Total travel market FY20 Total travel market FY25E

Rail, $8 bn Rail, $7 bn FY20-25E CAGR

Air, $15 bn Air, $25 bn Total Online Bus, $9 bn US$46 Bus, $8 bn US$66 bn bn Outbound, $8 bn 11% 16% Outbound, $7 bn Hotels, $10 bn For the exclusive use of [email protected] 9% 20% Hotels, $16 bn

4% 11% Online travel market FY20 Online travel market FY25E

4% 15% Rail, $5 bn Rail, $4 bn 3% 6% Air, $7 bn US$31 US$16 Bus, $3 bn Air, $15 bn bn bn Bus, $2 bn Outbound, $2 8% 14% 85e9115b1cb54911824c3a94390f6cbd bn

Outbound, $1 bn Hotels, $2 bn Hotels, $6 bn

INR USD of 75. FY indicates year ending March.

Source: Company data, Goldman Sachs Global Investment Research

27 July 2020 53 Goldman Sachs India Internet

Exhibit 54: Travel spend as % of consumer expenditure in India in line with peers like Indonesia and the USA, but room for online penetration to go up India vs a few select global peers on travel landscape (2019)

65%

60% Bubble size USA indicates size of total travel 55% industry in 2019 Japan

50% China

India (FY25E) 45%

Thailand 40% India Online penetration of travel

35% Germany Indonesia

30% 2% 3% 4% 5% 6% 7% 8% 9% 10% Travel as % of consumption expenditure

Euromonitor travel market definition also includes cabs, cruises, etc.

Source: Euromonitor, Goldman Sachs Global Investment Research

We forecast domestic hotels to be the fastest-growing online travel segments in India (c.20% growth CAGR FY20-25E), with air and buses growing at mid-teens CAGR. We note that in the air segment, online penetration in India is broadly in line with other markets (Exhibit 62), but penetration is significantly lower vs peers in the hotel segment (Exhibit 58). We believe take rates (and profit pools) are a function of: (1) degree of online penetration (higher penetration results in lower take rates), and (2) supplier consolidation (lower the consolidation, higher the take rates.) As such, we foresee mid/budget hotels segment to be the key area of focus for online travel platforms in the near future (Exhibit 55). For the exclusive use of [email protected] The online travel market in India is fairly competitive, with the key categories of players being: (1) Indian OTAs (MakeMyTrip, Yatra, Cleartrip, etc.); (2) Foreign OTAs (Booking Holdings, Expedia, Trivago, etc.); (3) Budget/alternative accommodation providers (Oyo, FabHotels, Airbnb, etc.); and (4) Horizontal e-commerce players (Paytm, Flipkart, Amazon, etc.). However, despite the presence of multiple players, we estimate MakeMyTrip to be by far the largest player in India online travel, with c.50% market share (2019) in each of its three key categories of air, hotels and bus. We 85e9115b1cb54911824c3a94390f6cbd estimate that segments such as domestic air and bus are likely already profitable for travel platforms, while mid/budget hotels continue to incur cash burn.

27 July 2020 54 Goldman Sachs India Internet

Exhibit 55: Higher the supplier fragmentation, higher the take rates, Exhibit 56: MMYT has the highest market share among travel apps and lower the online penetration in India Online penetration vs supply chain fragmentation for different travel App downloads on Google Play last six months (in million, Jan 20 - Jun segments in India 20)

60% Rail (<3% take rate) 21 50% Domestic air (5% take rate) 16 40% 15 15 Chain hotels (10-12% take rate) 30% 8 Bus 20% (8% take rate)

Online penetration (FY20) 10% 1 1 1 0 0 Fragmented supply chain Mid/budget hotels (20% take rate) 0% 1 10 100 1,000 10,000 100,000 Number of suppliers (log scale)

Source: Goldman Sachs Global Investment Research MMYT includes Ibibo and Redbus.

Source: SimilarWeb

Hotels to remain the key battleground We expect hotels to be the fastest growing segment within online travel (20% FY20-25E CAGR), as the fragmented supply chain of c.2mn rooms in India increasingly moves online; we note that <10% of total room inventory in India (as of 2019) is affiliated with chains, vs 20%/70% in China/US (Exhibit 57). In our view, this higher fragmentation of suppliers (and low occupancy levels and low online penetration) will result in structurally higher takes rates for hotel platforms in India vs global peers. We estimate hotels alone will contribute c.47% of the online travel revenue pool in India by FY25 (36% in FY20), making it the key battleground within the space.

MMYT is the largest hotel aggregator in India, with ~50% market share of online, and ~10% of the total hotel market (2019); we expect its market share to rise by c.12 percentage points over the next three years in the hotels segment, likely due to consolidation in the sector resulting from COVID-19, with overall market share

For the exclusive use of [email protected] increasing by about 600 bps. MMYT’s scale has its advantages; since MMYT is able to drive higher traffic for hotels, it is able to garner higher commissions from them. This, in turn, provides MMYT greater headroom to invest in advertising, promotions and technology, helping it further fortify its brand and market share. 85e9115b1cb54911824c3a94390f6cbd

27 July 2020 55 Goldman Sachs India Internet

Exhibit 57: India has amongst the least penetration of chain Exhibit 58: ...and online penetration of hotels also among the affiliated hotels... lowest in the world Chain affiliated hotels as % of total, 2019 Online hotel penetration (value, 2018)

56% 70%

47% 47%

49% 37%

37%

22%

20%

7%

USA UK Germany China India USA UK Germany China India

Source: China Hospitality Association, Horwath HTL, Statista Source: iResearch, Phocuswright, Goldman Sachs Global Investment Research

Exhibit 59: India has a large supply of unbranded rooms, which run at low occupancy levels India hotel landscape as of 2019

Hotel supply in India (rooms) Occupancy Average daily rate (US$)

$80 66% 65-70%

$56 Others, 1.8 Chain- mn affiliated, 35-40% 140k $30

Chain-affiliated Unbranded hotels Oyo and Fabhotels Chain-affiliated Unbranded hotels MMYT reported

INR USD of 75.

Source: Horwath HTL, Company data

The budget hotel revolution Budget hotels have added (on-boarded on their platforms) close to 200k rooms over the last four years For the exclusive use of [email protected] (total supply of 2mn hotel rooms in India), with Oyo alone adding more than 80% of this inventory. The need for such platforms stems from the fact that the hotel supply chain in India is quite fragmented (>90% non-chain affiliated rooms), and the budget hotel platforms promise a standardized experience to consumers looking for budget hotels (

Crunchbase data suggests Oyo (Not Covered) has raised more than US$3 bn in cumulative capital till date, and during our interaction with Oyo in June 2019, the company mentioned they were adding 15-20k rooms

per month in India. However, we note that press reports (New York Times, Economic Times) in recent 85e9115b1cb54911824c3a94390f6cbd months indicate Oyo has been scaling back operations, with the company looking to increase its focus on profitability. Per the same press reports, Oyo’s room inventory is down by about 65k rooms since October 2019, or about 25% of total supply on its platform.

Higher spend on marketing & promotions by budget platforms such as Oyo had resulted in elevated competitive intensity for traditional OTAs like MMYT. However, we expect the competitive environment

27 July 2020 56 Goldman Sachs India Internet

to improve materially in this segment as: (1) Oyo could become less aggressive on expansion and spend on selling & marketing; and (2) the COVID-19 outbreak results in consolidation within the online travel space, with weaker balance sheet platforms likely scaling back operations.

Exhibit 60: Budget hotel platforms have raised significant Exhibit 61: ...as Oyo increased its room inventory by 25x in two capital in recent years... years, before scaling back in the last few months Cumulative capital raised over time by India travel platforms Oyo room inventory in India over time

$5 bn

250k $4 bn

185k 173k $3 bn

$2 bn Budget hotels 72k

$1 bn OTAs 10k

$0 bn Mar 17 Mar 18 Dec 18 May 19 Jan 20 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Budget hotels include Oyo, Treebo and Fabhotels. For Oyo, total capital raised is included - part of the capital raised might be deployed in other foreign markets. OTAs include Source: Company data, Press reports (incl. New York Times), compiled by Goldman Sachs MMYT, Yatra, Cleartrip. INR USD of 75. Global Investment Research

Source: Crunchbase, Company data, Goldman Sachs Global Investment Research

Air: Strong underlying tailwinds + potential from international We forecast 11% growth (FY20-25E CAGR) for the overall air bookings in India, reaching US$25 bn by FY25E (March 2025). For domestic aviation, online penetration is at c.65% (FY20), and we see limited room for this number to increase. Thus, domestic air growth for OTAs is likely to be in line with underlying market growth. However, online penetration in international air remains low at around 20%, and we believe OTAs like MakeMyTrip can grow 2-3x faster vs the underlying international air market (which we forecast to grow 10% FY20-25E CAGR) as we expect them to win share vs offline.

For the exclusive use of [email protected] Exhibit 62: Online air penetration in India quite high already, but Exhibit 63: China saw an inflection point in outbound after reaching not for international US$4k per capita income; India a few years away from that Online air penetration (value, 2018) India and China GDP per capita (US$) vs outbound departures

83% 100 2013 90 80 64% 2011 2012 59% 70 52% 60 2010 44% 85e9115b1cb54911824c3a94390f6cbd 50 2009 40 2006 2007 30 2004 19% 2019 20 2003 1999 China Outbound departures (mn) departures Outbound 10 India 0 2004 Domestic International Overall China US Europe 0 1,000 2,000 3,000 4,000 5,000 6,000 7,000 India Global (overall) GDP per capita (US$)

Source: iResearch, Phocuswright, Goldman Sachs Global Investment Research Source: World Bank, Goldman Sachs Global Investment Research

27 July 2020 57 Goldman Sachs India Internet

COVID-19 impact Online travel is one of the worst hit sectors due to the outbreak of COVID-19, with recovery likely to be “U-shaped” at best. We expect domestic travel in India to recover faster relative to international travel (incl. hotels and holidays/packages); for domestic travel, we expect to reach pre-COVID volumes by early 2021, but for international, we believe recovery in growth to take longer. However, online penetration of international travel is quite low in India (<20% as of 2019) and we expect online international travel to reach pre-COVID levels faster vs offline (early FY22 vs end FY22).

Profitability could be achieved faster Profitability has been elusive in India online travel, given significant competition. However, we believe COVID-19 is likely to lead to consolidation in India online travel, helping improve profitability. For example, we forecast MMYT’s March 2021 revenues to be c.20% lower vs its Dec 2019 levels, but due to savings in selling & marketing costs, we expect MMYT to reach cash-flow break-even in 4QFY21. For India travel, we expect 15-16% steady state EBITDA margins, or c.12% net income margins; this results in a potential net income pool of US$300 mn by FY25. At 30x P/E (in line with global internet peers), we arrive at a potential market value of US$9 bn for the India online travel segment by FY24E (March 2024). For the exclusive use of [email protected] 85e9115b1cb54911824c3a94390f6cbd

27 July 2020 58 Goldman Sachs India Internet Food delivery: Near term cool-off after aggressive expansion

$3.7 bn $8.8 bn 19% $0.3 bn $9 bn (FY20 GTV) (FY25E GTV) (FY20-25E CAGR) (FY25E net income) (FY24E valuation)

Online food delivery in India has grown 4x over the last two years, from less than US$1 bn in GTV in FY18 to US$3.7 bn in FY20 (March 2020). In our view, this growth has been fueled by: (1) Expansion into new cities (500+ for Zomato/Swiggy vs <50 in early 2018); (2) Improving supply side dynamics in terms of restaurants and riders (200k+ riders on Swiggy/Zomato vs <30k in early 2018); and (3) Spend on customer acquisition by platforms (monthly cash burn of US$50 mn for India food delivery platforms pre-COVID, GSe).

We believe growth is likely to take a pause; we estimate 25-30 mn Indian consumers now order food online, which is around the range of the working population in the Urban Middle (US$15k average annual income) cohort in India. We believe online food delivery is already well penetrated in customer cohorts that can order food online, and now accounts for c.90% of the delivery and takeout market in the organised food services sector, per our estimate. Incremental growth is likely to come from higher order frequency by the same set of consumers as well as new consumers moving up the income curve (Exhibit 67). We forecast -20% GTV growth in FY21 (COVID-19 impact), and 32% growth CAGR during FY21-25E (19% FY20-25E CAGR), reaching US$8.8 bn in FY25E (c.200 mn orders per month). At 25% take rate, this translates into a revenue pool of US$2.2 bn for the industry.

Per Euromonitor data, two-thirds of India’s food services market (of US$54 bn in 2019) remains unorganized (kiosks and street-food stalls), amongst the highest in its peer set (Exhibit 65). Share of organised food services has grown at about 30bps annually over the last five years, and we see little reason to forecast a change in this trend in the near to medium term. Delivery and takeout contributed about 20% of the total

For the exclusive use of [email protected] organised food services market, and we expect this to increase to 40% by FY25 (March 2025) as we expect India’s working age population to increasingly prefer ordering in, vs cook-at-home. As a proportion of overall food services market, delivery at 4% in India is significantly lower vs peer average of 7% (Exhibit 64), and we expect share of delivery to rise. 85e9115b1cb54911824c3a94390f6cbd

27 July 2020 59 Goldman Sachs India Internet

Exhibit 64: Food services as % of consumer expenditure and delivery penetration in India lower than most global peers India vs a few select global peers on food services landscape (2019)

20% Online penetration of food services

13% 13% Korea

9% 16%

5% 5% 5% 4% 2% 1%

12% Japan Indonesia India Thailand Brazil Germany USA Korea China

China

8% Thailand USA Indonesia Delivery services of food as % Delivery Germany

India FY25E Bubble size indicates Japan size of food delivery 4% Brazil India (2019) industry in 2019

0% 2% 4% 6% 8% 10% 12% 14% Food services % of consumption expenditure

FY25 is year ended March 2025.

Source: Euromonitor, Goldman Sachs Global Investment Research

Exhibit 65: More than two-thirds of spending in food services in Exhibit 66: We expect share of delivery within organised food India is in unorganised stalls/kiosks, etc. services to go up, with delivery reaching US$9 bn by FY25 Spend on food services by category (2019) India food delivery market (in US$ bn)

2% 1% 4% 3% 1% 6% 13% 8% 20% 22% Offline dining 32% 33% $23 bn 22% 34% 49% Online food delivery 68% 17% $18 bn

For the exclusive use of [email protected] 91% $15 bn $15 bn 78% 77% $12 bn 66% 65% 8% 58% 50% 48% $14 bn

24% $14 bn $9 bn

$9 bn India China Japan Indonesia Thailand Brazil Germany USA Korea $4 bn $3 bn CafØs/Bars & full service restaurants Limited-Service Restaurants $1 bn Street Stalls/Kiosks & others FY18 FY20 FY21E FY25E

Source: Eurmonitor INR/USD of 75. FY20 is year ended March 2020 and so on.

85e9115b1cb54911824c3a94390f6cbd Source: Euromonitor, Goldman Sachs Global Investment Research

27 July 2020 60 Goldman Sachs India Internet

Exhibit 67: We expect India’s delivery market to grow 2x in five years India consumer cohorts

FY20 FY25E Online Online Income deliveries Total Income deliveries Total Category HH split HH split (annual) per HH per orders (mn) (annual) per HH per orders (mn) month month Urban middle Top 10 mn 3.0 30.0 Top 15 mn 5.0 75.0 US$ 15k US$ 22k 30 mn HHs (35 mn in FY25E) Next 20 mn 2.0 40.0 Next 20 mn 3.5 70.0

Educated urban mass Top 20 mn 1.0 20.0 Top 20 mn 1.5 30.0 US$ 6k US$ 9k 40 mn HHs (45 mn in FY25E) Next 20 mn 0.5 10.0 Next 25 mn 1.0 25.0

Urban blue collar US$ 3k 120 mn 0.0 0.0 US$ 5k 150 mn 0.1 15.0

Orders per month (potential) 100 mn 215 mn

HH = household

Source: Company data, Goldman Sachs Global Investment Research, Census, Labour Bureau, Ministry of Finance

Competition: A duopoly (for now) Post recent consolidation, online food delivery in India is now largely a two-player market, with Swiggy and Zomato accounting for more than 90% of the total market. However, since both these players are broadly equal-sized (in terms of orders per day), and continue to get funded by global tech companies (Ant, Tencent, Meituan, etc.), competitive intensity remains high with cash burn of around US$50 mn per month for the industry (pre-COVID, GSe). As such, it is unclear which of these two platforms could emerge as a market share winner in the longer term. In addition, Amazon recently launched its food delivery services in India, and we expect this to lead to an increase in the competitive intensity in the space.

In recent years, India has also seen growth in cloud kitchens, which essentially can be thought of as delivery-only restaurant brands. Cloud kitchens have helped in standardizing the supply chain and expanding the footprint for food delivery platforms, and we do not view cloud kitchens as competition to online delivery platforms. We For the exclusive use of [email protected] believe growth of cloud kitchens is likely to accelerate in India, as there could potentially be supply side disruption for traditional brick & mortar restaurants in the near term (due to COVID-19). 85e9115b1cb54911824c3a94390f6cbd

27 July 2020 61 Goldman Sachs India Internet

Exhibit 68: Indian food delivery is a largely two-player market Zomato vs Swiggy (pre-COVID numbers)

>500 $1.6 bn c.500

200k+ 1.5 mn 1.5 mn 200k+

36 mn $0.9 bn 33 mn

Zomato Swiggy Zomato Swiggy Zomato Swiggy Zomato Swiggy Zomato Swiggy Number of cities Number of riders Capital raised Orders per day App downlods

Data as of October 2019 or latest available. Capital raised from inception based on data from Crunchbase. App downloads for six months ending June 2020 (data for Android).

Source: Press reports (incl. Economic Times), Crunchbase, Company data, SimilarWeb, Compiled by Goldman Sachs Global Investment Research

Industry profitability: Elusive but not altogether out of reach With likely deceleration in order volume growth in the near-term, we believe focus of food delivery platforms in India is likely to continue to shift from discount-led volume growth to better unit economics. We believe a combination of higher take rates, rationalisation of rider incentives, and lower spend on promotions will help the industry reach profitability, but we expect this only in FY23.

In addition, we believe food delivery platforms in India could over time try to play a role across the value chain of restaurants, from procurement to marketing to table

For the exclusive use of [email protected] reservation, delivery, payments, etc., helping improve monetization and unit economics.

However, given low absolute ticket sizes and high frequency of online food orders, we believe consumers are unlikely to spend a lot of time browsing for products across platforms, unless there are restaurants exclusive to platforms, which we view as unlikely to be sustained. As such, two platforms offering very similar restaurant offerings (i.e. Swiggy and Zomato over time) may face sub-optimal margins, given less efficient utilization of fleets and high customer acquisition costs (vs a market with one dominant 85e9115b1cb54911824c3a94390f6cbd player). We believe some form of consolidation or co-operation in the industry (over time) could make margins more attractive.

We expect steady state EBITDA margins of c.18% for the industry, translating into an EBITDA pool of US$400 mn by FY25E, and net income pool of c.US$300 mn. Applying a 30x P/E multiple, in line with global internet peers, we get to a market valuation of US$9 bn by FY24E (March 2024) for the India food delivery segment.

27 July 2020 62 Goldman Sachs India Internet

Exhibit 69: We expect delivery efficiency in India to improve over Exhibit 70: We foresee EBITDA breakeven by FY23E for food time delivery in India Zomato orders/rider/hour and delivery cost per order (in Rs) Zomato revenue per order vs cost per order (in Rs)

1.7 110 160

Marketing & discounts 1.6 Orders/rider/hour 100 140

1.5 Delivery cost per order (Rs) - RHS 90 Delivery cost 120 1.4 80 Revenue 100 1.3 70 80 1.2 60 60 1.1 50 40 1.0 40

0.9 30 20

0.8 20 0 FY19 FY20 FY21E FY22E FY23E FY24E FY25E FY19 FY20 FY21E FY22E FY23E FY24E FY25E

Zomato is 23%-owned by Info Edge, a company under GS coverage. Zomato is 23%-owned by Info Edge, a company under GS coverage.

Source: Goldman Sachs Global Investment Research Source: Goldman Sachs Global Investment Research

COVID-19 impact Discretionary consumer spend, and as a consequence dining out, will likely continue to be negatively impacted in the near term due to the outbreak of COVID-19. In addition, order volumes for food delivery platforms could stay subdued as Indian consumers may choose to eat home-cooked food rather than food delivered from outside. However, we believe penetration of online food delivery could accelerate, as consumers are likely to prefer ‘ordering in’ vs ‘eating out’ for the foreseeable future. As per Zomato, its food delivery GMV has recovered to 60% of pre-COVID levels by early July 2020. For the exclusive use of [email protected] 85e9115b1cb54911824c3a94390f6cbd

27 July 2020 63 Goldman Sachs India Internet

India’s food delivery market vs the world Below we show some key stats of India food delivery platforms Zomato and Swiggy in 2019 vs their peer set in China, the US and Europe. We note that cash burn per order for India food delivery platforms is the highest globally (pre-COVID), despite the lowest AOV (average order value) in its peer set. Zomato and Swiggy are almost fully 1P (own-delivered platforms), and so we believe industry take rates over time can inch up to 25%+.

Exhibit 71: India’s online food delivery market is less than 10% the size of China’s Global food delivery KPIs

Take rates of global food delivery platforms

22% 21% 20%+ 19% 20% 20% 19% 17%

14% 14%

11% 10%

Asia Americas Europe MENA Blended Delivery Hero Takeaway JustEat GrubHub Uber Eats Meituan Ele.me Zomato/ Swiggy Orders per day (mn) Food delivery unit India China Europe USA economics (US$) Industry Meituan Delivery Hero Grubhub Meituan 23.9 Average order value 3.47 6.35 12.13 32.91 Take rate 23.5% 14.0% 20.0% 22.2% Ele.me 13.0 Revenue per order 0.81 0.89 2.43 7.30

Delivery Hero 1.8 Rider cost per order (0.73) (0.66) (1.41) (3.76) As a % of AOV 21.2% 10.5% 11.6% 11.4% Zomato/ Swiggy 1.5 As a % of revenue 90.0% 74.8% 58.1% 51.5%

Other costs per order (0.60) (0.20) (0.43) (2.51) JustEat 0.6 As a % of AOV 17.3% 3.2% 3.6% 7.6% As a % of revenue 73.6% 22.6% 17.9% 34.3% GrubHub 0.5 Cash profit/burn per order (0.52) 0.02 0.58 1.04 As a % of AOV -15.0% 0.4% 4.8% 3.1% Takaway 0.4 As a % of revenue -63.7% 2.6% 24.0% 14.2%

Number of riders Number of customers (mn) For the exclusive use of [email protected]

650k+ 353 mn 600k+ 245 mn

30 mn+ 200k+ 200k+ 25 mn+ 23 mn c.20 mn c.15 mn each

Delivery Hero Takeaway JustEat GrubHub Meituan Ele.me Zomato/ Meituan Ele.me Zomato Swiggy Swiggy

Data as of 2019 or latest available. USD fx rate used INR 75; Rmb 7.09; Eur 0.92. India take rate, India economics, India number of customers, and Ele.me data are based on GSe. 85e9115b1cb54911824c3a94390f6cbd

Source: Company data, Goldman Sachs Global Investment Research

27 July 2020 64 Goldman Sachs India Internet Ride-hailing: Multi-faceted competition; profitability uncertain

$3 bn $8 bn 18% $0.2 bn $6 bn (FY20 GTV) (FY25E GTV) (FY20-25E CAGR) (FY25E net income) (FY24E valuation)

In 2019, Indian consumers spent c.US$300 bn on transportation6 (per Euromonitor), of which we estimate about US$3 bn (1%) was spent on ride-hailing. We expect ride-hailing GTV in India to grow at an 18% CAGR over the next five years, and reach US$8 bn by FY25E (March 2025).

Ride-hailing has been around in India for 7-8 years, and is now fairly well penetrated in terms of geographic footprint, with presence across more than 200 cities in the country. Incremental growth, in our view, could be driven by: (1) Improving disposable income levels; (2) Consumers potentially substituting personal cars for shared mobility; and (3) Rising penetration due to shared mobility at lower price points. In addition, we believe ride-hailing companies could also expand focus to inter-city travel over time.

Exhibit 72: India’s spend on transport and transport services as % of consumer expenditure is among the highest in the world India vs a few select global peers on transport landscape (2019)

50% India transport spend (2019, US$ bn) 45% Purchase of India personal transport, 40% Spend $31 bn on buses & $290 Operation 35% taxis, bn of personal Thailand $131 bn transport, $128 bn 30% China

25% Japan Brazil

Indonesia 20% World For the exclusive use of [email protected] 15% Germany

10% Transport services as % of transport expenditure transport of as % services Transport Size of bubbles indicate total transport expenditure (2019) 5% USA

0% 0% 2% 4% 6% 8% 10% 12% 14% 16% 18% 20% Transport as % of consumer expenditure 85e9115b1cb54911824c3a94390f6cbd

Transport spend excluding air.

Source: Euromonitor, Goldman Sachs Global Investment Research

India’s spend on transport services as a proportion of total transport expenditure is among the highest in the world, as personal car ownership remains low (Exhibit 73).

6 Purchase and operation of personal vehicles, and transport services (excl. air).

27 July 2020 65 Goldman Sachs India Internet

However, historical data suggests the proportion of transport services spend tends to decline over time as income levels rise.

Ride-hailing as a service competes not just with personal vehicle ownership, but also with other modes of public transport like traditional taxis, auto rickshaws (three-wheelers), buses, and other public transport like trains and metro. Our analysis suggests that four-wheeler ride-hailing in India works out to be more expensive than most forms of public transport (Exhibit 75). While ride-hailing is likely to be almost always cheaper than ownership of a chauffeur-driven car, for self-driven cars, ride-hailing screens cheaper only when monthly usage (in terms of kms driven of self-driven car) is low (Exhibit 75). Per analysis published by our US team (see here), ride-hailing in the US works out to be significantly more expensive vs. owning a car.

Exhibit 73: Vehicle ownership in India lowest among peers Exhibit 74: Transport services spend has typically seen a declining Household passenger vehicle ownership (2018) trend as % of total spend on transport Transport services as % of total transport spend

93% 60%

50% 74% 69% 40%

30%

20% 31% 28% 10%

13% 0% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

India Indonesia China Korea Japan USA China India USA Japan

Source: Euromonitor, SIAM Source: Euromonitor

For the exclusive use of [email protected] 85e9115b1cb54911824c3a94390f6cbd

27 July 2020 66 Goldman Sachs India Internet

Exhibit 75: Ride-hailing in India works out to be cheaper vs self-driven cars if travel needs are limited, or if a chauffeur-driven car is preferred Economics of car ownership vs. four-wheeler ride-hailing - grey highlighted cells show outcomes when ride-hailing works out to be cheaper vs an owned car

Calculation of cost of car ownership INR Cost per kilometre (Rs) Upfront cost of car (Rs, assumed) 600,000 Chauffeur-driven car Life of car 10 years

Salvage value @ 20% 120,000 Uber/Ola Price of fuel Rs80 per litre Black & yellow cab Kms driven per month 750

Mileage 14 kms per litre Self-driven car

Annual cost of car ownership INR Auto rickshaw

Fuel 51,429 Owned two wheeler Apportioned cost of car 48,000 Insurance (1.5% of value of car) 9,000 Local (1st class) For Mumbai city, assuming Maintenance (Rs1 per km) 9,000 Metro average distance Parking etc. 10,000 travelled of 10 Annual cost of ownership of self-driven car 127,429 Bus (AC) kms Cost per km of self-driven car (Rs) 14 Bus (non-AC)

Add: Chauffeur salary 175,000 Local train Annual cost of ownership of chauffeur-driven car 302,429 0 5 10 15 20 25 Cost per km of chauffeur-driven car (Rs) 34

Cost per kilometre of self-driven car Cost per kilometre of chauffeur-driven car Upfront cost of car (Rs) Upfront cost of car (Rs) 14 400,000 600,000 750,000 1,000,000 1,250,000 34 400,000 600,000 750,000 1,000,000 1,250,000 300 Rs20 Rs25 Rs29 Rs36 Rs42 300 Rs69 Rs74 Rs78 Rs84 Rs91 Kms 500 Rs15 Rs18 Rs20 Rs24 Rs28 Kms 500 Rs44 Rs47 Rs49 Rs53 Rs57 driven per 750 Rs12 Rs14 Rs16 Rs18 Rs21 driven per 750 Rs31 Rs34 Rs35 Rs38 Rs40 month month 1,000 Rs11 Rs12 Rs13 Rs15 Rs17 1,000 Rs25 Rs27 Rs28 Rs30 Rs32 1,500 Rs9 Rs10 Rs11 Rs13 Rs14 1,500 Rs19 Rs20 Rs21 Rs22 Rs24

This table is for illustrative purposes only, and makes a number of assumptions in terms of life of car, fuel costs, etc. Rs600k upfront cost of car is the average value for ride-hailing cars in India. Kms driven per month shows average.

Source: Goldman Sachs Global Investment Research, Press reports (inc. India Today)

Ride-hailing economics

For the exclusive use of [email protected] Unless the market is a virtual monopoly of sorts, we see ride-hailing as a relatively unattractive industry. For ride-hailing to be successful: (1) consumer level price needs to be competitive enough vs. other modes of transport; (2) the economics for drivers need to make sense; and (3) the platform needs to be profitable over time. On top of these, there is regulatory risk. For example, as per press reports (Economic Times, November 2019), the government of India is considering capping ride-hailing commissions at 10% (current industry average around 20%; Exhibit 76), with surge pricing to potentially get capped at 2x of base fare. 85e9115b1cb54911824c3a94390f6cbd

For ride-hailing platforms, we think the drivers of better unit economics could be higher take rates and/or higher frequency of rides per user. Take rates for ride-hailing in India, at around 20%, are already in line with global peers, and we see limited potential for take rates to move up, especially if the market continues to have two broadly equal-sized players. Globally, the ride hailing market has been characterized by fairly intense competition, which has resulted in take rates remaining under pressure, while

27 July 2020 67 Goldman Sachs India Internet

customer acquisition costs have stayed high. In addition, we note that if platforms try to increase the density of cars available, it could lead to poorer unit economics for drivers, resulting in lower supply over time.

In our view, for ride-hailing to be sustainably profitable over time, while also achieving robust growth, consumer behaviour needs to gradually shift from owned cars to public transport. While this may be particularly difficult to achieve in an emerging market like India where rising income levels could result in consumers moving more towards personal transport, we believe convenience factors of ride-hailing such as no hassle with parking or car maintenance etc., availability of a chauffeur-driven car, and rising traffic on roads in India’s urban centres could over time increase consumers’ affinity towards ride-hailing.

Exhibit 76: Ride-hailing take rates in India broadly in line with Exhibit 77: US ride-hailing companies still loss making; our analyst global peers Heath Terry expects breakeven in 2021 Ride-hailing take rates (2019) Adjusted EBITDA margin for Uber and Lyft

20% 27% 10%

21% 0% 20% 20% 19% -10% Uber -20% Lyft -30%

-40%

-50%

-60%

Lyft (North Uber (global) Indonesia Didi (China) Ola/Uber (India) -70% America) 2017 2018 2019 2020E 2021E 2022E

Didi and Lyft data as of 2018. Source: Company data, Goldman Sachs Global Investment Research

Source: Company data, Goldman Sachs Global Investment Research, Press reports (ET)

Perspective from our Autos team This section has been contributed by our India Autos analysts Pramod Kumar and Anubhav Bajpai. For the exclusive use of [email protected] CNG: The low hanging cheap and green alternative to boost driver economics Compressed Natural Gas (CNG) for a long time has been evaluated as the cheaper and cleaner (lower emissions) alternative to gasoline/diesel fuels. But now, amidst rising prices of diesel fuel, sharp increases in BS6 diesel car prices, and a focus on enhancing CNG availability (plans to open 10k CNG pumps), we see CNG as the most appropriate alternative to diesel, especially for cabs/ride-hailing. Moreover, the CNG cars are c.10% cheaper on-road vs. comparable diesel vehicle and are 20-25% cheaper to operate (Exhibit

78). As a result, we believe there could be a 35-45% increase in monthly net income for cab drivers if they 85e9115b1cb54911824c3a94390f6cbd switch to CNG powered cars. This surplus in our view, could be a significant tailwind for the ride-hailing industry. Ride-hailing platforms can potentially look to increase take rates, given better driver economics, helping achieve better unit economics.

While broad availability of CNG continues to be a challenge in the near term, the government of India is looking to rapidly expand the CNG network. In the major cities such as Delhi (NCR), Mumbai, Agra, Kanpur,

27 July 2020 68 Goldman Sachs India Internet

etc., where CNG availability has been improved, the bulk of cabs and 3Ws are now powered by CNG.

Maruti Suzuki dominates the CNG vehicle segment with a wide range of products such as the compact car (Alto, WagonR and Celerio), compact sedan (Tour S), MPV (Eeco, Ertiga) and LCV (Super Carry). Moreover, the company is looking to introduce more CNG powered models (such as Swift/Dzire) in the near term. Even if the ride-hailing industry looks for Hybrids or EVs to lower running expenses, we believe Maruti Suzuki stands to benefit as it is working on: (a) Large scale localization of hybrid/electric technology in India via parent Suzuki’s alliance(s); (b) Widening its portfolio of hybrid cars to offset diesel; and (c) Launch of India specific compact EV.

Exhibit 78: Economics for drivers get better with higher frequency of trips. CNG has potential to boost surplus for drivers (and aggregators) by 35-45%. Table showing driver income for ride-hailing in India under different scenarios and fuel types

Diesel cab CNG cab Driver income analysis Low Mid High Mid High Trips per day 6 9 12 9 12 GS assumption Distance per trip 10 kms 10 kms 10 kms 10 kms 10 kms GS assumption Price per km Rs17 Rs17 Rs17 Rs17 Rs17 Based on exhibit 75 Gross receipts per day (Rs) 1,020 1,530 2,040 1,530 2,040 Less: GST @ 5% (Rs) (51) (77) (102) (77) (102) Less: Revenue share (Rs) (204) (306) (408) (306) (408) Assumed 20% take rate Net receipts per day (Rs) 765 1,148 1,530 1,148 1,530 Additional incentives 0 61 122 61 122 Assumed 4-6% Total driver income per day 1,020 1,591 2,162 1,591 2,162 Working days 24 24 24 24 24 GS assumption Monthly gross income (Rs) 24,480 38,189 51,898 38,189 51,898

Monthly costs (Rs) Low Mid High Mid High Diesel: Rs78/L & 14km/L; CNG: Fuel cost 8,023 12,034 16,046 6,750 9,000 Rs50/kg & 16km/kg Maintenance cost 1,440 2,160 2,880 2,160 2,880 Rs1 per kilometre Insurance etc 845 845 845 795 795 Annual = 1.5% of value of car Car lease cost 9,653 9,653 9,653 8,925 8,925 Rs600k loan; 7 years @ 9% Total monthly cost 19,961 24,692 29,424 18,630 21,600

Monthly net income (Rs) 4,519 13,497 22,474 19,559 30,298

For the exclusive use of [email protected] This table makes a number of assumptions in terms of useful life of car, fuel costs, etc.

Source: Goldman Sachs Global Investment Research

Competition in India ride-hailing In India, the ride-hailing market is a duopoly of sorts, similar to food delivery. In its

February 2020 presentation, Uber mentioned it has more than 50% market share in 85e9115b1cb54911824c3a94390f6cbd India. However, press reports (Techcrunch, 8 February) have also mentioned Ola saying they are India’s ‘largest mobility platform’. As per the same press report, Uber plans to expand its India presence from around 50 cities in early 2020 to around 200 cities by end of 2020, including onboarding of two- and three-wheelers.

In a press interview (CNBC-TV18, December 2019), Uber mentioned that its two- and three-wheeler segment in India is growing fast. We note that in 2019, Uber had

27 July 2020 69 Goldman Sachs India Internet

partnered with Yulu to offer micro-mobility (bikes and two-wheeler), and as per the above interview, Uber wants to position itself as a platform for everyday travel needs in the city. We believe ride-hailing companies are also likely to increase focus on EVs (Electric Vehicles), especially in the two- and three-wheeler categories.

Profit pool likely to be small While Ola mentioned in a public interview (YourStory, October 2019) that it is a profitable business, press reports (Financial Express, January 2020) indicated Ola was loss making at the PAT level in FY19. As per Uber (CNBC-TV18, December 2019), its India business is not profitable yet, but the company said it was getting there. We note that our US analysts expect Uber and Lyft to not be profitable at the EBITDA level until 2021.

We expect total gross bookings of US$7.6 bn for ride-hailing in India by FY25, an 18% FY20-25 CAGR, broadly in line with growth in other O2O segments such a food delivery. At 20% take rate, this would translate to a revenue pool of US$1.5 bn. We assume a steady-state EBITDA margin of 18%, similar to food delivery, translating into an EBITDA pool of US$300 mn by FY25E (March 2025), or a net income pool of US$200 mn. At 30x P/E, in line with global internet peers, we arrive at a market value of US$6 bn for ride-hailing in India by FY24E (March 2024).

Exhibit 79: Indian ride-hailing is a largely two-player market Exhibit 80: We expect the Indian ride-hailing market to grow at an Ola vs Uber 18% CAGR over the next five years 2019-2024 gross bookings CAGR

24 mn 23%

21 mn 200+ 18%

13 mn 13 mn From 14% $3 bn in 12% FY20 50 to $8 2-3 mn bn by 2 mn FY25E

Ola Uber Ola Uber Ola Uber Ola Uber Number of cities Rides per day App downloads (last MAUs (Nov 19) six months) Lyft (North America) India Uber (global) Indonesia For the exclusive use of [email protected]

Data as of Jan 2020 or latest available. App downloads for 6 months ending June 2020. Rides FY20-25E for India; 2019-2025E for Indonesia. INR USD of 75.

per day are pre-COVID numbers. Source: Goldman Sachs Global Investment Research Source: SimilarWeb, Press reports (Economic Times, Financial Express) 85e9115b1cb54911824c3a94390f6cbd

27 July 2020 70 Goldman Sachs India Internet Entertainment: The most competitive internet sub-segment

$1.3 bn $4.3 bn 27% $0.6 bn $19 bn (FY20 revenue) (FY25E revenue) (FY20-25E CAGR) (FY25E net income) (FY24E valuation)

India’s smartphone user base has tripled from 150mn in March 2015 to 450mn now, and is 2.5x the number of TV screens in the country. Smartphone users in India consume 14-15 GB of data a month (per Bharti Airtel, Jio), among the highest in the world, with >70% of the data usage towards entertainment apps, primarily video. Based on our discussions with platforms in the ecosystem we estimate India has close to 400mn consumers who view video on their mobile phones (c.200mn who stream music), and we expect the number of digital video viewers to rise to 650mn+ by FY25E (Exhibit 83), driven by: (1) increase in smartphone (600mn by FY25E), and smart-feature phone (150mn+ by FY25E) adoption; and (2) higher availability of regional language content. We expect smartphones/digital to continue to gain share from television in terms of both subscription and advertisement revenues.

Overall, we expect India’s digital entertainment industry (video and audio) to have revenues of US$4.3 bn by FY25E, translating into a 27% FY20E-25E CAGR.

Exhibit 81: 28% of time spent on mobile is on entertainment Exhibit 82: Online video consumption in India among the highest India - split of time spent on mobile (2019) globally Hours of video content watched online per week (2019)

US Others Games India 6% 6% News etc. Singapore 8% Italy Social media Retail 42% UK 10% South Korea

France

For the exclusive use of [email protected] Germany Entertainment 28% Japan

0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0

Source: FICCI-EY Source: Limelight Networks

Digital video: Diverse ecosytem; to grow 3x in five years Digital video is a relatively nascent industry in India as far as cultivating paying habits among consumers is concerned; as per FICCI-EY, India had c.11mn paying digital video 85e9115b1cb54911824c3a94390f6cbd subscribers in 2019 (vs. c.130mn Pay TV subscriptions), and low single-digit million paying audio subscribers. However, revenues of digital video subscription have doubled over the last 12 months (to US$400mn), and we expect growth of 33% over the next five years (FY20E-25E CAGR), 5-6x faster than TV/cinemas, albeit at a much smaller base. By FY25E, we expect digital video subscription revenues to grow to US$1.7bn, representing 11% of the total video subscription market (OTT + TV +

27 July 2020 71 Goldman Sachs India Internet

cinema), vs. 3% in FY19 (Exhibit 84). This growth, in our view, will be driven by our expectation of a 5x jump in paying customers of digital video to 68mn by FY25E (March 2025).

We believe growth in digital video (paying) subscribers will be fueled not just by further smartphone penetration, but also due to a rise in connected TVs (from less than 5mn right now, per FICCI-EY) to over 25mn by FY25E (GSe); per Hotstar India Watch Report 2019, while 2019 saw a 4x growth vs. 2018 in connected TVs (7x in digital video consumption), 90%+ of online video consumption still happens on mobile phones.

Regional content is likely to play a key role in the proliferation of online video; as per FICCI-EY, 37% of all online video consumption in India happened in regional languages (56% in Hindi, 7% English) in 2019. Investment in local content (Hindi/regional languages) and originals (TV shows etc.) will continue to keep growth in digital video subscription elevated in our view. Digital video subscription is also likely to benefit from the recent trend of some movies bypassing theatrical release and getting launched directly on OTT platforms (e.g., Gulabo Sitabo, Gunjan Saxena, etc.).

Exhibit 83: We expect more than 650mn users in India to consume Exhibit 84: We expect digital video to take share from television video content online by FY25E, with c.10% being paying users and movies Online video viewers in India (in mn) and paying users as % of total Split of video (subscription) revenue in India

700 3% 8% 10% 11% 600 10% 20% 16% 8% 16% 500 7% 400 5% Digital video 300 Box office 3% 77% Television 200 76% 72% 2% 100 1%

0 FY18 FY19 FY20 FY21E FY22E FY23E FY24E FY25E

Online video viewers (mn) Of which paid users FY19 FY22E FY25E

FY20 indicates year ended March 2020 and so on. TV and digital represent subscription revenues; Box office represents domestic box office; FY19

indicates year ended March 2019, and so on. Source: FICCI-EY, Goldman Sachs Global Investment Research For the exclusive use of [email protected] Source: FICCI-EY, Goldman Sachs Global Investment Research

Challenges to growth of digital video include competition from significantly cheaper television subscription, and the fragmented nature of content on OTT; our analysis suggests that including bandwidth costs, OTT video works out to be 1.6-3.6x more expensive (for wireless data and home broadband, respectively) vs. television content (Exhibit 85). We thus do not foresee any significant cord cutting by Indian consumers, but expect OTT video to be broadly a complementary service to television, unless home broadband footprint in India expands materially (currently 19mn households), and 85e9115b1cb54911824c3a94390f6cbd bandwidth charges on home broadband converge closer to that of wireless data (currently 3-4x higher).

27 July 2020 72 Goldman Sachs India Internet

Exhibit 85: Television works out to be significantly cheaper vs. OTT video in India Comparison of cost to consumer for OTT vs. television in India

On home On Television In INR broadband smartphone subscription Price per year of OTT

Amazon Prime Video 999 ZEE5 999 Hotstar VIP 399 Annual cost of OTT subscription 2,397 Cost per month of OTT subscription 200 Bandwidth cost 699 213 Cost to consumer per month (Rs) 899 413 250

Wireless and home broadband bandwidth costs represent cheapest plans available at Jio (minimum 1.5 GB per day for wireless, adjusted for 30 days); assumes minimum three subscriptions to offset content in Television.

Source: Company data, Goldman Sachs Global Investment Research

Advertisement forms another key component of online video in India, with a size of c.US$700mn as of FY20E (GSe), almost 1.6x as large as subscription. YouTube is by far the most popular advertisement-supported digital video platform in India, with 265mn monthly active users (Economic Times). We expect advertisement growth in online video to be at a 24% FY20E-25E CAGR, but slower than the 33% growth in video subscription. We expect YouTube, telco apps and broadcaster apps to garner the biggest share (in the same order) of these ad revenues; as per FICCI-EY, over 260mn users watched video content through telecom operators’ data bundles in 2019.

While we forecast subscription revenue growth to be faster vs. ad, we expect ad to retain the larger share within digital video at 56% by FY25E (vs. 62% in FY20). For context, in China, advertisement contributed 46%-47% of digital video revenues in 2018, while subscription contributed around 30%.

Overall, we forecast the digital video market in India to grow more than 3x to US$3.7bn by FY25E, or a 28% FY20E-25E CAGR. For the exclusive use of [email protected] 85e9115b1cb54911824c3a94390f6cbd

27 July 2020 73 Goldman Sachs India Internet

Exhibit 86: We expect digital video revenues in India to grow more Exhibit 87: We expect OTT to garner almost one-third share of than 3x over the next five years video advertisement revenues by FY25E Digital video revenues in India (in US$ bn) Split of video advertisement revenue in India

46% 46% 46% 44% 42% 13% 23% 38% 29%

31% $3.7 bn $3.2 bn $2.6 bn video Digital video 17% $2.0 bn ce 87% Television $1.5 bn 77% on 71% $1.1 bn $0.7 bn $0.5 bn

FY18 FY19 FY20 FY21E FY22E FY23E FY24E FY25E

Subscription Advertisement Subscription as % of total FY19 FY22E FY25E

INR USD of 75; FY20 indicates year ended March 2020 and so on. Source: FICCI-EY, Goldman Sachs Global Investment Research

Source: FICCI-EY, Goldman Sachs Global Investment Research

Snapshot of competition in digital video The number of platforms within India’s video OTT ecosystem continues to grow, with more than 30 players competing for a share of the market; this includes global platforms (such as YouTube, Amazon, Netflix, Disney, etc.), local broadcaster-led platforms (Zee5, Voot, etc.), telcos (Airtel, Jio, Vodafone), and content creators (Eros, Balaji, etc.).

As per Comscore, YouTube is the biggest online video platform in India, with 360mn unique visitors in March 2020, more than 2.5x that of the next biggest platform (Times Internet- and Tencent-owned MX Player). While Disney+ Hotstar had 131mn unique visitors in the same month, as per Disney, the number of paid subscribers in India for the platform was about 8mn. Given huge libraries of freely available content on platforms, we expect pricing for subscription OTT platforms to remain under pressure as they look to grow their subscriber base. For the exclusive use of [email protected] 85e9115b1cb54911824c3a94390f6cbd

27 July 2020 74 Goldman Sachs India Internet

Exhibit 88: India OTT app ecosystem sees competition from a number of different platforms India video OTT apps overview

Android app downloads for six months ended May 2020 140 mn

Rs299* Orange bars represent broadcaster apps, 120 mn that offer some content for free. Free Blue bars represent telco apps, and are 100 mn free for their respective subscriber bases.

Grey boxes above the bars represent price 80 mn Free per month for cheapest monthly plans.

60 mn

Rs99 Rs129 40 mn Rs99 Rs199 Rs299 Rs33** Free 20 mn Free

0 mn Disney+ MX Player Jio (TV + Zee5 Amazon Voot Netflix SonyLIV ALTBalaji Airtel Vodafone + Hotstar Cinema) Xstream Idea Sports     News        Live TV        Originals         Movies            TV Shows           

Unique visitors in mn (March 2020, Comscore) Language preference for online video in India, per Google YouTube 360 MX Player 141 Hotstar 131 Regional 30% Jio TV 84

Amazon 65 Hindi 54% Zee5 60 Netflix 40 English 16% SonyLiv 29

For the exclusive use of [email protected] Voot 25

*For Hotstar, price shown is for Hotstar Premium; Hotstar VIP plan is available for Rs399 per year. **For ALTBalaji, minimum plan duration is three months. Sports and news represent Live; Originials represent content created by the particular platforms. Amazon is a sum of website and app. Prices retrieved in June 2020.

Source: SimilarWeb, Company data, Data compiled by Goldman Sachs Global Investment Research, Google, Comscore

Digital music: To remain an ad-driven market As per FICCI-EY, 180-200mn consumers in India used online audio streaming in 2019

(almost half the number of users on video streaming), but paying subscribers are less 85e9115b1cb54911824c3a94390f6cbd than 1% of this number, with a subscription revenue base of Rs1bn (US$13mn) in 2019. Most telecom operators in India and other audio streaming platforms provide free (ad-supported) music streaming, and we expect this segment to be largely advertisement driven; advertisement contributed c.90% of music streaming revenues in FY20, and we expect this ratio to be broadly stable in the medium term. Overall, we expect music streaming in India to be a US$540mn industry by FY25E, growing at a 22% FY20E-25E CAGR.

27 July 2020 75 Goldman Sachs India Internet

Exhibit 89: Telecom apps are the most popular music apps in India Exhibit 90: We expect music streaming revenues in India to grow Downloads of music steaming apps in India (in mn), and subscription 2.5x over the next five years price (Rs) per month Music streaming revenues in India (US$ mn)

70 $539 mn

60 $444 mn 50 $365 mn Rs129 40 $299 mn $243 mn 30 $199 mn $167 mn Rs99 Rs99 Rs99 Rs99 Rs99 Rs99 20

10

0 FY19 FY20 FY21E FY22E FY23E FY24E FY25E JioSaavn Wynk Gaana Spotify YouTube Amazon Apple Music (Airtel) Music Music Subscription Advertisement

Blue bars indicate apps that support ad-supported versions. Data retrieved in June 2020. INR USD of 75; FY19 indicates year ended March 2019, and so on.

Downloads for six months ended May 2020 for Android. Source: FICCI-EY, Goldman Sachs Global Investment Research Source: Company data, SimilarWeb

The economics of streaming and profit pool A quick look at margins for listed streaming players globally suggest EBITDA margins at the low end of 1% (for Spotify, CY20E) to 32% at the high end (for IQIYI, CY20E). For OTT platforms across Goldman Sachs’ coverage, we see an average EBITDA margin of c.20% in 2022E. We assume a similar margin profile for India OTT platforms in a steady state, resulting in an EBITDA pool of US$0.9 bn for the industry by FY25E, or a potential net income pool of US$0.6bn. Assuming a 30x P/E multiple, in line with global internet peers, we arrive at a market valuation of US$19bn for India’s entertainment industry by FY24E (March 2024). For the exclusive use of [email protected] 85e9115b1cb54911824c3a94390f6cbd

27 July 2020 76 Goldman Sachs India Internet Online gaming: 4x GTV growth over next five years

$1 bn $4 bn 32% $0.5 bn $15 bn (FY20 GTV) (FY25E GTV) (FY20-25E CAGR) (FY25E net income) (FY24E valuation)

Online gaming has been one of the fastest-growing segments within India internet, with revenues having doubled over the last two years to US$900 mn by 2019 (per FICCI-EY). We expect this elevated growth trend to continue and the segment to reach US$4.0 bn in revenues by FY25E, growing at an FY20-25E CAGR of 32% (Exhibit 94). In our view, this growth will be driven by: (1) deeper penetration of mobile payment ecosystems (mainly UPI and wallets); (2) higher smartphone adoption (600 mn+ by FY25E from 450mn now, per GSe); and (3) COVID-19 leading to behavioral changes (increased sampling of mobile gaming due to restrictions on physical social gatherings).

Mobile-led gaming; monetization low Similar to video OTT, 90%+ of online gaming in India is mobile-led (Exhibit 92). Low home broadband penetration (less than 6% households, 2019) has meant India never saw any material pick up in PC/console gaming (a trend also seen in Indonesia). On the other hand, availability of low-priced smartphones (starting from US$50, with ASPs of US$150) has meant that India now has 450mn smartphone users (c.50% device penetration) and this, coupled with inexpensive data prices (c.US$0.2 per GB), has resulted in rapid adoption of online gaming, in our view (c.300mn gamers, 2019).

Exhibit 91: Gaming accounts for 6% of the time spent online by Exhibit 92: Mobile the dominant platform for online gaming in India Indian consumers Split of gaming revenue by device (2020E) India - split of time spent on mobile (2019)

<10% Games 6% Others 6% 52% News etc. 8% For the exclusive use of [email protected] Social media Retail 42% PC/Others 10% 90%+ Mobile

48% Entertainment 28%

India Global average (Newzoo)

Source: FICCI-EY Global data is a Newzoo estimate for 2020. India data is a GS estimate for 2020.

85e9115b1cb54911824c3a94390f6cbd Source: Newzoo, Goldman Sachs Global Investment Research

According to data provider App Annie, 5.6bn mobile game apps were downloaded in India in 2019, the highest globally (13% of global downloads), however revenues in India were <1% of global revenues. Online gaming revenue in India relative to consumption expenditure (at 0.06% as of 2019) is among the lowest in the world, given low income levels, and presence of other inexpensive modes of entertainment, including television, and access to ad-supported (free) online videos/music. However, we expect

27 July 2020 77 Goldman Sachs India Internet

this proportion to go up to 0.16% by FY25E (Exhibit 93). We note that the current size of India’s gaming industry is similar to that China had in the year 2006 (the current size of China’s gaming industry is US$37 bn, as per Newzoo).

Exhibit 93: Online gaming penetration in the India market is among the lowest in the world; we expect 3x rise in this penetration by FY25E Online gaming as % of consumer expenditure (by market, 2019)

0.70% 0.71%

0.64%

0.3% global average; 0.2% global median 0.31% 0.25% 0.22% 0.19% 0.16% 0.14% 0.14% 0.10% 0.06%

India Indonesia Germany Brazil Thailand USA Russia Taiwan Japan South China India (FY20) Korea (FY25E)

FY20 is year ended March 20; FY25 year ended March 2025.

Source: Newzoo, Goldman Sachs Global Investment Research, Euromonitor

Real money games increasing in popularity Indian consumers have not yet gotten used to paying for games for entertainment purposes only. However, games which have the potential of winning real prize money (transaction gaming) are gradually changing this. Transaction gaming has been led by fantasy sports (+118% YoY in 2019 as per FICCI-EY), with cricket being the most popular. In fantasy sports, gamers create their teams from a selection of actual sports players, which then accrue points based on the performance of selected players in the match. Apart from cricket, other sporting leagues have started in India over the past few

For the exclusive use of [email protected] years including football, kabaddi and hockey, helping expand the popularity of fantasy sports. Other transaction-based games include rummy, poker, and other card games. While most forms of gambling in India are considered an illegal activity, various High Courts and the Supreme Court have ruled that fantasy sport is a game of skill (not a game of chance), and thus legal in the country. We expect transaction gaming to grow at a 31% FY20-25E CAGR, making up 68% of total online gaming in India by F25E (Exhibit 96).

As per FICCI-EY, for casual games, about two-third of revenues come from in-app 85e9115b1cb54911824c3a94390f6cbd purchases, with the remainder from advertisements, and we expect this ratio to move in favour of in-app purchases over the next five years (Exhibit 96). We note that e-Sports remains a very small category within India gaming, and we do not include the category in our analysis.

The improving payment ecosystem has played an important role in the rise in paid gaming users, in our view. Gaming platforms have tie ups with various payment

27 July 2020 78 Goldman Sachs India Internet

vendors, including wallets, UPI-based apps, telcos, and credit/debit cards, which has helped reduce the friction on payments. We believe this ecosystem could see further improvement with the potential launch of WhatsApp Pay (Economic Times, April 29); we note that WhatsApp has more than 400mn users in India as of 2019.

Exhibit 94: We expect online gaming revenue to grow 4x over the Exhibit 95: We expect growth in casual gaming to be higher than next five years that of transaction gaming India online gaming market size (US$ bn) FY20-25E CAGR for India online gaming

$4.0 bn 40%

34% $3.2 bn 32% 32%

27% $2.5 bn

$1.9 bn

$1.4 bn

$1.0 bn $0.7 bn

FY19 FY20 FY21E FY22E FY23E FY24E FY25E Online gaming Fantasy sports Others In app purchases Advertisement Transaction games Casual games Transaction gaming Casual gaming

INR USD of 75. FY19 is year ended March 2019, and so on. FY20 represents year ended March 2020.

Source: FICCI-EY, Goldman Sachs Global Investment Research Source: Goldman Sachs Global Investment Research

Exhibit 96: We expect transaction-based gaming to make up two-thirds of online gaming in India by FY25E Overview of gaming revenue split (inner circle shows FY20; outer circle FY25E); numbers in bold are FY25E market size

Online gaming Transaction gaming Casual gaming

25% 32% 32% 28% 33% 35% US$ US$ US$ 4bn 2.7bn 1.3bn 67% 65% 72% 68% 68% 75% For the exclusive use of [email protected]

Transaction based Casual Fantasy sports Others In app purchases Advertisement

INR USD of 75. FY25 is year ended March 2025.

Source: FICCI-EY, Goldman Sachs Global Investment Research

Indian gaming has the presence of both global (Tencent, Sea Ltd, Miniclip) and local

players (Nazara, Games 24x7, Dream11, Gametion). Even horizontal e-commerce 85e9115b1cb54911824c3a94390f6cbd platforms such as Amazon and Paytm have entered gaming, and we expect companies such as Reliance Industries to also foray into gaming in the near to medium term. In February 2020, the chairman of RIL mentioned that he expects gaming to be bigger than music, movies and TV shows put together (Economic Times, 25th February). Given the nascent stage the industry is currently in, we do not attempt to identify potential beneficiaries at this point.

27 July 2020 79 Goldman Sachs India Internet

Exhibit 97: Ludo King (Gametion) and PubG (Tencent) saw the most Exhibit 98: ...and also the highest number of downloads during the visitors in March 2020... last six months Unique visitors (in mn) for mobile apps (March 2020) App downloads (in mn) for six months ended June 2020

Ludo King PubG Mobile

PubG Mobile Ludo King

Google Play Games Garena Free Fire

Candy Crush Saga Carrom Pool

HAGO Candy Crush Saga

Subway Surfers Temple Run

Garena Free Fire Subway Surfers

8 Ball Pool HAGO

Carrom Disc Pool Google Play Games

0 102030405060 0 30 60 90 120 150 180

PubG Mobile includes PubG Mobile Lite PubG Mobile includes PubG Mobile Lite; Temple Run includes Temple Run 2

Source: comScore Source: SimilarWeb

From an economic standpoint, if we assume 25% take rates for transaction gaming, in line with current structure, we estimate the online gaming industry in India to have US$1.9 bn in revenues by FY25E (of which US$1.3 bn is from casual games); at a 35% EBITDA margin, that translates into an EBITDA pool of US$700 mn by FY25E (March 2025), or a net income pool of US$500 mn. Assuming 30x P/E, in line with global internet peers, we arrive at a market value of US$15 bn for the India online gaming segment by FY24E (March 2024).

Exhibit 99: Transaction gaming companies have their own tie up for payments outside of the pay store Flow chart of a fantasy sports app (transaction gaming) in India

Create your team

Select from various

For the exclusive use of [email protected] games available 85e9115b1cb54911824c3a94390f6cbd Pay from various payment options within the app; payment not routed through the Google Play Store

Source: iOS app screenshot of Dream11

27 July 2020 80 Goldman Sachs India Internet Advertising & classifieds: The most profitable vertical

$2.3 bn $5 bn 17% $1.2 bn $30 bn (FY20 revenue) (FY25E revenue) (FY20-25E CAGR) (FY25E net income) (FY24E valuation)

Digital advertising made up 24% of the US$11bn advertisement market in India in 2019, with the segment gaining on average c.270 bps share annually over the last five years (was 11% in 2014). Currently the third largest medium for ad spend, we expect digital to become the biggest ad category by FY23E (Exhibit 102), as advertisers continue to shift their ad budgets online, and away from print and also television to some extent. Globally, digital accounts for c.50% of all ad spends, and we expect India to inch up close to those levels by FY25E (Exhibit 100). Overall, we expect digital ads (including classifieds, e-commerce and entertainment/gaming) to have US$10bn of revenues by FY25E, growing at a 23% FY20E-25E CAGR; excluding e-commerce and entertainment, which were covered in earlier sections of this report, we expect a total size of US$5.1bn by FY25E (March 2025).

Exhibit 100: Digital ad spend ratio in India materially lower vs. other countries, and we expect this to rise over time Overview of global advertising market, and digital as % of total (2019)

1.2% Digital advertisement as % of total (2019) 70% 66% USA 57% 54% UK 1.0% 50% 45% Global average

24% Brazil 0.8% Japan

Australia

Canada nd as % of GDP nd as % China UK Australia US Russia India India France China 0.6% (FY25E)

Germany India

0.4% For the exclusive use of [email protected] Advertisement spe Advertisement Indonesia

Size of bubble indicates 0.2% total advertisement spend in 2019

0.0% 0.0% 0.2% 0.4% 0.6% 0.8% 1.0% 1.2% 1.4% 1.6% 1.8% 2.0% Advertisement as % of consumption expenditure

India digital ad spend excluding classifieds and SMEs spend on e-commerce; FY25 indicates year ended March 2025. 85e9115b1cb54911824c3a94390f6cbd

Source: GroupM, emarketer, Euromonitor, Goldman Sachs Global Investment Research

While social media and search are likely to be dominated by platforms such as Google and Facebook, we see opportunities for other internet platforms with high frequency traffic to be able to increase monetization through advertisements. Specifically, platforms such as RIL, Flipkart, Amazon, etc., could capture a meaningful share of e-commerce advertising, in our view. Over time, we also expect to see higher monetization through ads on platforms such as food delivery (from restaurants), online

27 July 2020 81 Goldman Sachs India Internet

travel platforms (from hotels and airlines), and entertainment apps, among others.

Exhibit 101: Digital already forms more than one-third of total ad Exhibit 102: We expect digital ad spend to overtake spend on spend for some sectors television by FY23E Digital ad spend as % of overall ad spend for different sectors in India Split of advertisement revenues in India (2019)

45% 45% 45% overall digital by FY25, GSe Digital 42% 40% 40%

38% 37% 35% 35% 35% Television 30% 30% 24% overall digital 25% 25% spend in 2019 23% 20% 20% 20% 19% 16% 15% 15% Print 10% 10% Others 4% 5% 5% 0% 0% BFSI Cons. Ecomm Telecom Media, Retail FMCG Auto Others FY15 FY16 FY17 FY18 FY19 FY20

durables etc. FY21E FY22E FY23E FY24E FY25E

Sector data as per DAN; overall 2019 data as per FICCI-EY; FY25 indicates year ended March Digital ad spend excluding classifieds and SMEs spend on e-commerce; FY indicates year ended 2025. March.

Source: DAN, FICCI-EY, Goldman Sachs Global Investment Research Source: FICCI-EY, FICCI-KPMG, Goldman Sachs Global Investment Research

Buckets of digital ad spend Social media, search and display: In India, this segment is dominated by Google and Facebook; these companies account for 70%-80% market share of India’s digital ad spend (2019, per KPMG), which we estimate comes largely from this segment. We forecast this segment to grow at an 18% CAGR (FY20E-25E) to reach US$3.7bn in revenues by FY25E (led by social media), with a potential net income pool of US$0.8bn.

Entertainment & gaming: We expect more than two-thirds of this segment to be driven by video (YouTube and OTT), with the remaining from music and gaming. We expect advertisement revenue to be the key driver of revenues for video/audio OTT platforms in India, with contribution from subscription to stay below 50% even by FY25E. We forecast this segment to grow at a 24% CAGR (FY20E-25E) to reach US$2.8bn in revenues by FY25E, with a potential net income pool of US$0.4bn. These

For the exclusive use of [email protected] numbers are already included in our estimates of video/audio/gaming in the previous two sections, so we exclude it here while sizing up TAM/profit pool for the digital advertising market.

E-commerce advertising: As per DAN, Rs21bn (US$280mn) was spent on e-commerce advertisement in India in 2019, translating into 0.9% of e-commerce GMV (GSe). In China, the advertisement revenue to GMV ratio ranges from 2% to 3.8% for platforms such as JD.com, Alibaba and PDD, whereas for Amazon this ratio was around 5% in 85e9115b1cb54911824c3a94390f6cbd 2019. We expect advertisement on e-commerce platforms in India to grow at a 48% CAGR over the next five years (FY20E-25E) to reach US$2.2bn by FY25E, translating into 2% of e-commerce GMV, with a potential net income pool of US$0.5bn. These numbers are already included in our estimates of e-commerce vertical in the previous sections, so we exclude it here while sizing up TAM/profit pool for the digital advertising market.

Classifieds: We forecast this segment to grow at a 14% CAGR (FY20E-25E) to reach

27 July 2020 82 Goldman Sachs India Internet

US$1.3bn in revenues by FY25E, with a potential net income pool of US$0.4bn. More details in the section below. We see recruitment and real estate to be the key drivers of growth in classifieds, and expect steady state profitability of about 40% EBITDA margin, highest among all internet segments. We expect Info Edge to have c.25% market share of India’s online classifieds space by FY25, broadly in line with its current market share.

Overall, we expect a potential net income pool of US$2.1bn for India’s digital advertisement industry by FY25E (March 2025). Excluding entertainment, gaming and e-commerce, which have already been accounted for in earlier sections, we estimate a potential profit pool of US$1.2bn by FY25E. At 25x P/E, in line with global advertisement peers, we arrive at a valuation of US$30bn for the Indian advertisement industry (excluding entertainment and e-commerce) by FY24E (March 2024).

Exhibit 103: Overall, we expect US$2.1bn net income from digital advertisement in FY25E (US$1.2bn excluding e-commerce and entertainment) India digital advertising revenue and net income split

Digital advertisement revenues (US$ bn) FY25E net income bridge for digial ad $10.1 bn 23%

Classifieds $1.3 bn 14% $2.1 bn $0.5 bn Ecommerce (SME) $8.2 bn Entertainment & gaming $1.1 bn $2.2 bn 48% Social media, search & display $6.6 bn $0.4 bn

$0.9 bn $1.6 bn $5.4 bn $0.4 bn $1.1 bn $2.8 bn 24% $4.4 bn $0.8 bn $2.4 bn $3.6 bn $0.7 bn $0.7 bn $0.8 bn $0.5 bn $1.9 bn $0.7 bn $1.5 bn $0.3 bn $1.2 bn $1.0 bn $3.7 bn 18% $3.1 bn $2.3 bn $2.6 bn $1.6 bn $2.0 bn

FY20 FY21E FY22E FY23E FY24E FY25E FY20-25E Social media, Classifieds Entertainment Ecommerce Total CAGR search & display

INR USD of 75; FY indicates year ending March.

Source: DAN, FICCI-EY, Goldman Sachs Global Investment Research

Spotlight on classifieds For the exclusive use of [email protected] We view online classifieds as one of the most attractive internet business models, with the industry being characterized by network effects, high barriers to entry and high operating leverage. Market leadership is usually hard to disrupt, and cash generation in the business is high. At a time when most India internet segments are charting a ‘path to profitability’, classifieds is generating robust cash flows, while also exhibiting revenue growth similar to segments such as online e-tail and online travel.

The online classifieds market in India is worth c.US$700mn (revenues, as of FY20, GSe), growing at a

>20% CAGR over the past three years. However, due to COVID-related disruption hurting verticals such as 85e9115b1cb54911824c3a94390f6cbd recruitment and real estate, we expect the online classifieds growth rate to decelerate; we forecast a 14% revenue CAGR (FY20E-25E) and expect the industry to reach US$1.3bn in revenues by FY25E.

While segments like recruitment and matrimony are more mature, with medium to high levels of online penetration and monetization, we think other segments like real estate and autos are still in their nascent stages. We expect higher revenue growth rates (25%-30% in the medium term) for segments with low

27 July 2020 83 Goldman Sachs India Internet

online penetration, but low near-term profitability, and lower revenue growth rates for segments with high penetration. At 40% steady state EBITDA margins, we expect an EBITDA/net income pool of US$0.5bn/US$0.4bn for the online classifieds segment by FY25E.

Exhibit 104: We expect the online classifieds market in India to reach US$1.3bn by FY25E, growing at a 14% FY20E-25E CAGR India’s online classifieds market revenues (US$ mn)

FY20: US$700 mn FY25E: US$1.3 bn

Recruitment Recruitment, , $151 mn $282 mn General & 14% CAGR others, $312 General & mn others, $571 Real Estate, mn Real Estate, $84 mn $217 mn

Matrimony, Matrimony, $100 mn $135 mn Autos, $54 Autos, $137 mn mn

FY19-25E CAGR 13% 21% 6% 20% 13%

Naukri.com 99acres Bharat Matrimony Cartrade Quikr

Key players Indeed Magicbricks Shaadi.com Cars24 Olx

Housing.com Jeevansathi CarDekho

INR USD of 75; FY indicates year ending March.

Source: Company data, Goldman Sachs Global Investment Research

Exhibit 105: Over time, leadership in online classifieds Exhibit 106: Market leaders in online classifieds are highly becomes self-perpetuating profitable Probability of losing leadership (probability density), years EBITDA margin for select vertical classifieds market leaders (FY20

For the exclusive use of [email protected] or latest available)

12% Horizontal classifieds 77% Vertical classifieds 10% 70% 68% 68% 60% 8% 53% 54%

6%

4%

2% Probability leadership of losing Probability 85e9115b1cb54911824c3a94390f6cbd

0% 024681012 Years SEEK (ANZ) REA Carsales Autotrader Rightmove Scout24 Info Edge (Australia) (online ad) (real estate) (recruitment)

Based on analysis done by our global team, looking at 300 properties across 28 countries. FY20 is March 2020.

Source: Google Trends, Goldman Sachs Global Investment Research Source: Company data

27 July 2020 84 Goldman Sachs India Internet Education: Profitable with high growth potential

$0.7 bn $4.6 bn 45% $1 bn $30 bn (FY20 revenue) (FY25E revenue) (FY20-25E CAGR) (FY25E net income) (FY24E valuation)

Based on our discussion with edtech (education technology) platforms, and various industry sources, we estimate India’s edtech industry had a revenue pool of about US$700 mn in FY20, split roughly at 80:20 between K-12 (grades 1 to 12) and Post-K12; for Post-K12, we consider only test preparation and not higher education such as distance MBA, etc.

Education is one of the few sectors within the India internet space where price competition is relatively low, with the segment already profitable, per our estimate. In addition, we believe edtech is likely to be one of the biggest beneficiaries of COVID-19, and we expect c.100% YoY revenue growth in FY21.

Indian consumers spent US$75 bn on education in 2019 (4.6% of consumption expenditure, per Euromonitor), and based on NSSO data, we estimate US$35-40 bn of this was spent on school education (c.300 mn students). Based on the same data, we estimate c.30% of students take private tuition (80-90 mn students), which would translate into US$13-15 bn of annual spend towards after-school tutoring (AST) in India. Online, at about US$600 mn (for K-12), is about 4% of India’s total AST spend in FY20; we note that c.7% (or US$7 bn) of US$104 bn in AST spend in China was online in 2019.

We expect spend in this category to grow at a 47% CAGR in India to reach US$3.9 bn by FY25 driven by increased awareness of online education, translating into 17% of total AST spend. Our China Education analysts forecast 23% of AST spend in China to be online in 2025.

In addition, we forecast US$650 mn in Post-K12 (36% FY20-25E CAGR) revenues for For the exclusive use of [email protected] edtech firms in India by FY25 driven by higher online penetration in lower tier towns and cities. Overall, we see a US$4.6 bn revenue pool for edtech by FY25, growing at 45% FY20-25E CAGR.

Within K-12, online education can take the form of asynchronous (prerecorded) learning, something that has been the key focus area for Byju’s, or synchronous (live-tutoring), similar to the model adopted by Vedantu. However, we believe it is difficult to build scale with the latter. In the test prep segment, we note Unacademy as one of the bigger 85e9115b1cb54911824c3a94390f6cbd players, with 200k paid subs as of May-June 2020.

We have already started seeing some consolidation in the India edtech space, with Unacademy recently acquiring PrepLadder for US$50 mn, and press reports suggesting Byju’s has made a US$300 mn offer to acquire WhiteHat Jr, another player in the K-12 segment. Additionally, the same press report also mentioned Byju’s is looking to acquire Doubtnut for up to US$150mn, to expand its reach in lower-tier cities. We expect

27 July 2020 85 Goldman Sachs India Internet

consolidation to be a recurring theme as platforms look to build varied capabilities.

Byju’s recently mentioned that its business is already profitable, and we forecast steady-state EBITDA margins of 30% for the India edtech industry by FY25, translating into 21-22% net income margins, or a net income pool of US$1 bn. At 30x normalized P/E multiple, in line with global internet peers, we estimate total potential value of the India edtech sector at US$30 bn by FY24 (March 2024).

Exhibit 107: Spend on education in India is among the highest globally Education as a proportion of consumption expenditure (2019)

5.6%

4.6%

4.1% 3.7%

World average 2.7%

2.3% 2.2% 2.0%

1.2% 1.0% 0.7%

China India Brazil Indonesia UK USA Japan Thailand Germany Russia

For the exclusive use of [email protected] 85e9115b1cb54911824c3a94390f6cbd

27 July 2020 86 Goldman Sachs India Internet Fintech: Large TAM but monetization elusive

$213 bn $19 bn $2.5 bn $0.5 bn $20 bn (FY25E P2M digital (FY25E digital (FY25E revenue) (FY25E net income) (FY24E valuation) payments) lending)

We forecast fintech in India to be a US$2.5bn revenue pool by FY25, split 20%-60%-20% between payments, lending and insurance. While we expect digital payment platforms to process more than US$200bn of merchant payments annually by FY25E (c.US$900 bn including P2P), the revenue (commission) pool for payment platforms is likely to remain small given the dominance of UPI, a zero-commission payment network.

In addition, given high competition, we see zero to negative profits for the foreseeable future in digital payments in India. We believe lending and other financial services such as insurance will be the key drivers of profitability for fintech companies. Platforms are likely to leverage data gathered from payments, and use that to offer financial services products, not just to consumers but also to merchants and SMEs. We forecast US$500 mn of net income for India fintech by FY25E (80%-20% split between lending and other financial services). At 30x P/E multiple for lending/insurance (in line with global internet peers), and 10x EV/Sales for payments, we forecast about US$20 bn in market value for India fintech companies in 4-5 years.

Exhibit 108: India has received almost US$10 bn in fintech funding over the last 5 years Overview of fintech investments in India

Fintech funding in India (US$ bn) Split of funding by sector (2019)

$3.7 bn

Others 19% $2.4 bn

$1.9 bn Lending For the exclusive use of [email protected] $1.6 bn 11% Payments 56% Insurance 14% $0.5 bn $0.2 bn $0.0 bn

2013 2014 2015 2016 2017 2018 2019

INR : USD of 75.

85e9115b1cb54911824c3a94390f6cbd Source: Accenture and CB Insights data sourced from Economic Times, 4th March 2020

27 July 2020 87 Goldman Sachs India Internet

Exhibit 109: Indian consumers prefer use of cash for transactions Exhibit 110: India’s credit card penetration is low, but c.60% of the Point of Sale by payment method (2019) population has debit cards Credit vs debit card penetration (2019)

100% 60% India 4% 90% Debit card penetration 59% Indo 7% 80% Credit card penetration 133% Germany 8% 70% 171% Russia 25% 60% 112% France 32% 50% 94% Thailand 32% 40% 164% Brazil 73% 30% 169% Australia 77% 20% 158% UK 88% 10% 537% China 99% 0% 170% USA 212% Indo India Thailand Russia Brazil UK China South USA Korea 305% South Korea 214% 406% Japan 271% Cash Credit card Debit card Digital wallet Others

Indo is Indonesia Indo is Indonesia

Source: Worldpay (FIS) Source: Euromonitor, Reserve Bank of India

Payments: The customer acquisition funnel Digital (mobile) payments in India, at US$270 bn7 in 2019 (including P2P8) have grown more than 100x since 2015, led by wallets earlier, and more recently, UPI. Together, mobile payments are now 2.7x/1.7x of cards (debit + credit) in terms of volumes/value (Exhibit 111 and Exhibit 112); however excluding P2P (60-70% of UPI transactions), we estimate digital payments at c.US$50 bn in 2019, and 1x/0.3x vs cards in terms of volume/value.

Mobile wallets, which are mostly closed loop instruments (i.e. do not permit wallet-to-wallet transfer between two separate operators/companies), allowed, to begin with, consumers to store a certain amount of money, which could then be used for P2P (peer-to-peer) transfers, bill payments, and small-ticket-sized online transactions (food delivery, ride-hailing, movie tickets, etc.). Over time, mobile wallet platforms built offline capabilities by tying up with merchants, enabling payments with the help of a QR code. Since its launch in 2016, UPI has rapidly scaled up, and is now 3x/10x vs mobile

For the exclusive use of [email protected] wallets in terms of volumes/value (in 2019, Exhibit 115); however, 60-70% of UPI transactions are P2P transfers; excluding P2P, we estimate mobile wallets and UPI had broadly similar transaction value in 2019. We note that existing mobile wallet platforms have now integrated UPI as a payment option (Paytm, Airtel, Mobikwik), while new UPI platforms have also emerged (Google Pay, PhonePe, etc.) in recent years. 85e9115b1cb54911824c3a94390f6cbd

7 UPI and mobile wallets, data as per RBI. 8 Peer-to-peer.

27 July 2020 88 Goldman Sachs India Internet

Exhibit 111: Mobile payment transactions are almost 3x of that Exhibit 112: Digital wallets and UPI have overtaken cards even in through cards value terms Monthly transactions through cards (debit + credit) vs digital (UPI + Monthly transaction value through cards (debit + credit) vs digital (UPI + wallets), in million wallets), in US$ bn

1,800 1,800 $35 bn $35 bn

1,600 1,600 Mobile wallet + UPI $30 bn Mobile wallet + UPI $30 bn 1,400 Cards 1,400 Cards $25 bn $25 bn 1,200 1,200

1,000 1,000 $20 bn $20 bn

800 800 $15 bn $15 bn 600 600 $10 bn $10 bn 400 400 $5 bn $5 bn 200 200

0 0 $0 bn $0 bn Jan-17 Jan-14 Jan-15 Jan-16 Jan-18 Jan-19 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Jan-19 Jan-20 Jan-20 Sep-18 Sep-15 Sep-14 Sep-16 Sep-17 Sep-19 Sep-14 Sep-15 Sep-16 Sep-17 Sep-18 Sep-19 May-14 May-15 May-16 May-17 May-18 May-19 May-14 May-15 May-16 May-17 May-18 May-19

Includes P2P transactions. INR USD of 75. Includes P2P transactions.

Source: Reserve Bank of India, National Payments Corporation of India Source: RBI, NPCI

Digital payments now cover more than 10mn merchants in India, more than 2x the number of merchants that accept cards (Exhibit 113), but lower than the total number of merchants in India of c.30 mn (Economic Times, June 25). For merchants, the digital payments adoption results in low set-up costs - no upfront/recurring payments needed, unlike that for PoS (Point-of-Sale) machines.

Exhibit 113: Merchants accepting digital payments more than 2x of those accepting cards, but lower than total merchant base in India India PoS terminals (accepting cards) vs merchants accepting digital (mobile) payments

c.30 mn

10 mn+

For the exclusive use of [email protected] 5.0 mn 1.8 mn 1.5 mn

2016 2019 2016-17 2019 Merchants & retailers in India Number of POS terminals Merchants accepting digital payments

Source: KPMG, Economic Times, RBI

India’s low credit card penetration (4% of population, 2019) but high debit card

penetration (60% of population) is likely to help growth of digital payments, as the 85e9115b1cb54911824c3a94390f6cbd presence of bank accounts/debit cards is necessary for digital payments to grow - UPI/mobile wallets need an underlying bank account for transfer of money. An RBI committee9 has set a target of 10x growth in digital payments in India over the next three years (starting FY20), with the focus on low value, high volume transactions. As

9 Report of the High Level Committee on Deepening of Digital Payments.

27 July 2020 89 Goldman Sachs India Internet

per the committee, this can be achieved through a combination of expansion of acceptance infrastructure, correction of cost structures, and reduction of cost to consumer, among other things. The committee estimates there are about 100mn digital payment users in India, which it targets to increase 3x over the next three years.

The reliance on cash in India remains high, even for online transactions; for companies within India internet, cash-on-delivery accounts for 30-50% of all transactions (pre-COVID-19). We see a lot of potential for growth of digital payments, especially in small ticket size purchases of less than US$10. As a result of COVID-19, consumer facing internet companies in India (in sectors such as e-commerce, food delivery, ride-hailing, etc.) had stopped accepting cash-on-delivery, which we believe could help reset the penetration of digital transactions to a higher level once things normalize.

Exhibit 114: Despite multiple available payment options, cash on delivery quite dominant in India Overview of various payment options available on a food delivery app (Swiggy) in India

Pay later option: Link phone number Wallets: Multiple one time and then options. Can store pay with one-click c.20% of money in wallet (no every subsequent transactions interest earned), link time; Interest free phone number one- for 15 days. High time, and then on convenience subsequently pay with one click. High on convenience

Pay by cards: Can save cards, but requires two-factor authentication: Net Banking: Enter CVV first and Choose from c.20% of then OTP received multiple banks, transactions by SMS. Relatively enter bank (incl. net low on credentials (login id banking) convenience and passwork) in the subsequent page, and authorize payment. Low on convenience. UPI: Link UPI ID once (multiple options); Click on ID c.20% of to pay, but exit the transactions app to Food cards authenticate the transaction with UPI pin. More

For the exclusive use of [email protected] convenient than cards, but less than Pay later, c.40% of wallets transactions Cash on delivery

Pre-COVID stats

Source: Swiggy iOS app, Goldman Sachs Global Investment Research

85e9115b1cb54911824c3a94390f6cbd What is UPI? UPI takes away the need for keeping money in a mobile wallet (mobile wallets do not pay interest), and enables direct transfer/payment from the consumers’ bank account (where the money continues to earn interest); UPI is also inter-operable - allows transfer of money between two different UPI platforms, for example between Paytm and Google Pay. However, unlike wallets, UPI requires a two-factor

27 July 2020 90 Goldman Sachs India Internet

authentication, which in our view somewhat increases the customer friction, especially for very low-ticket items.

A significant proportion (almost two-thirds) of transactions on UPI in 2019 were P2P (Peer-to-Peer) transfers; however, this share has been improving in the favour of P2M (Peer-to-Merchant) transactions, which used to be about 20% as of 2018, and we estimate is now >30%. As per Razorpay, UPI accounted for 38% of non-cash transactions on its network in 2019, vs 46% for cards. Recently, NPCI rolled out an AutoPay feature on UPI for transactions up to Rs2,000, which we believe could help increase UPI’s merchant adoption further.

While the average ticket size for UPI transactions is about US$22, if we exclude P2P transfers, the average ticket size is US$7-9, not significantly different vs that of wallets. As penetration of mobile payments rises, we expect ticket sizes to compress for this medium, and expect consumers to continue preferring card payments for larger ticket-size purchases.

Exhibit 115: Launch of UPI has resulted in significant uptake of Exhibit 116: Mobile wallets and UPI typically used for smaller digital payments ticket items Monthly transactions (in mn) for mobile wallets vs UPI Average value per transaction in February 2020

1,400 1,400 US$44 1,200 UPI 1,200 Mobile wallets 1,000 1,000

800 800 US$24 600 600 US$22

400 400

200 200 US$8 US$5 0 0 Jan-17 Jan-14 Jan-15 Jan-16 Jan-18 Jan-19 Jan-20 Sep-18 Sep-15 Sep-14 Sep-16 Sep-17 Sep-19

May-14 May-15 May-16 May-17 May-18 May-19 Credit card Debit card UPI UPI (merchant) Mobile wallet

Includes P2P payments. INR USD of 75.

Source: RBI, NPCI Source: RBI, NPCI, Press report (Economic Times)

UPI was introduced by NPCI (National Payments Council of India), an organization for operating retail payments and settlement systems; NPCI is an initiative by the RBI (Reserve Bank of India) and the IBA For the exclusive use of [email protected] (Indian Banks’ Association). As per NPCI, there are currently 21 third party apps that facilitate UPI (including Amazon Pay, Google Pay, WhatsApp), and 150+ participating banks, including Airtel, Paytm and Jio. In addition, the RBI lists 40 platforms with authorizations to operate prepaid payment instruments. As per press reports, UPI had 117mn users as of May 2020. We expect UPI and digital payments to get another significant uplift if UPI were to launch on JioPhones, which we estimate has more than 100mn subscribers as of 2019, and if WhatsApp, which has more than 400mn users in India, were to scale up its payments business. 85e9115b1cb54911824c3a94390f6cbd However, unlike wallets, where MDRs (Merchant Discount Rate - commissions) are not regulated, UPI has zero MDR, essentially resulting in zero revenues despite c.US$20 bn in monthly processed transactions (including P2P).

27 July 2020 91 Goldman Sachs India Internet

Exhibit 117: There are more than 20 UPI-based apps in India Third Party apps on UPI and their respective acquiring banks

# Third Party App Acquiring Bank # Third Party App Acquiring Bank 1 Amazon Pay Axis Bank 13 MudraPay Yes Bank 2 Bajaj Finserv Axis Bank 14 Omegaon Yes Bank 3 CoinTab Federal Bank 15 PayBee IDFC Bank 4 Cred Axis Bank 16 Phonepe Yes Bank 5 My FAStag IndusInd Bank 17 Realme PaySa HDFC Bank 6 Angel Broking Yes Bank 18 Samsung Pay Axis Bank 7 Google Pay Axis/ICICI/HDFC/SBI 19 TrueCaller ICICI/ Bank of Baroda 8 JustDial HDFC Bank 20 Ultracash IDFC Bank 9 Khalijeb Kotak Mahindra Bank 21 WhatsApp ICICI Bank 10 MakeMyTrip ICICI Bank 22 Airtel Airtel Payments Bank 11 Mi Pay ICICI Bank 23 Paytm Paytm Payments Bank 12 MobiKwik HDFC Bank 24 Jio Jio Payments Bank

Airtel, Paytm and Jio are issuers as well as Payment Service Providers. WhatsApp Live for limited users. Data retrieved on 19th July 2020. List not exhaustive. Acquiring bank refers to the bank supporting the UPI network.

Source: National Payments Corporation of India

Competition: Three-player race; all eyes on WhatsApp’s entry In the last few years, we have seen non-fintech companies enter the payments space in their effort to “close the loop” with the consumer (completing transaction from origination to payment). Competition in India payments ranges from telcos to e-commerce companies to traditional fintech platforms to tech companies to banks, among others (Exhibit 119).

However, within UPI, three platforms, viz. Google Pay, PhonePe (owned by Flipkart/Walmart) and Paytm, together account for 90% of the volumes. While Google Pay and PhonePe had 44%/37% market share of all UPI transactions (including P2P) in

For the exclusive use of [email protected] May 2020, as per Paytm it had the highest market share of merchant payments at 54% (2019, for payments made by scanning QR codes). Paytm has about 15mn merchants on its network, the highest in the industry, but the platform’s DAU (Daily Active Users) and downloads have lagged that of Google Pay and PhonePe in recent months (Exhibit 118).

As we have seen in the case of China, we believe platforms with top-of-the-funnel traffic either through social media or e-commerce could establish dominance in payments, 85e9115b1cb54911824c3a94390f6cbd with the likely candidates in the case of India being WhatsApp, Amazon, Flipkart and Google, in our view. As noted earlier, WhatsApp has more than 400mn Monthly Active Users in India (180mn DAUs with about 45 minutes time spent, per SimilarWeb), and the platform scaling up payments could significantly expand the reach of UPI, in our view. Currently, WhatsApp payments are restricted to one million users in India, with the platform awaiting regulatory approvals. As per a recent press report, WhatsApp Pay is now in compliance with regulations, and a full scale launch could potentially be

27 July 2020 92 Goldman Sachs India Internet

imminent. With its dominant organic traffic through social/chat, we believe WhatsApp has the potential to become a market leader in digital payments in India.

Exhibit 118: Google has a lead on UPI, but as per Paytm, it has the highest market share in merchant payments Overview of competition in India payments

Transacting users (May 2020) UPI transactions share (in mn) 117 mn 1,247 1,235 92 115 Others 186 1,000 120 71 Paytm 75 mn 127 460 60 mn 454 PhonePe 50 mn 368

Google Pay 515 540 434

UPI total Google Pay Phone Pe Paytm Mar 20 Apr 20 May 20

Merchants Registered users Merchant transaction market 15 mn share (per Paytm) 210 mn

10 mn

Others 200 mn 46% Paytm 54%

Paytm Phonepe Paytm Phonepe

Daily active users (mn) App downloads (last 6 months) 18 95 mn Google Pay 16 77 mn 72 mn 14

12 Phonepe

10 Paytm

For the exclusive use of [email protected] 8

6 Jan 20 Feb 20 Mar 20 Apr 20 May 20 Jun 20 Google Pay Phone Pe Paytm

App downloads for six months ended June 2020. App downloads and DAU for Android users from SimilarWeb. Data as of May 2020 or latest available.

Source: SimilarWeb, Press reports (incl. Techcrunch, Business Standard, Economic Times, etc.), compiled by Goldman Sachs Global Investment Research

85e9115b1cb54911824c3a94390f6cbd

27 July 2020 93 Goldman Sachs India Internet

Exhibit 119: Mobile payments in India has players from various verticals A representative list of mobile wallet/UPI platforms in India, and their respective sectors (list not exhaustive) Search & Fintech Ecommerce Banks Ride hailing Telcos social media

Paytm Amazon Pay Freecharge Google Pay Ola Money Airtel Money (Axis Bank) Mobikwik PhonePe WhatsApp Jio Money (Flipkart) PayZapp Pay PayU (HDFC Bank)

Source: Company data, Goldman Sachs Global Investment Research

Case study: What has happened to payments in China? As per Worldpay, digital/mobile wallets account for 71% of e-commerce transactions in China, and 48% of the transactions at point of sale (2019).

China has moved from a country where consumers largely relied on cash, to cashless and even cardless transactions, with consumers paying, borrowing and investing, all through their smartphones. Growth in payments in China was initially brought on by the proliferation of online shopping – Alipay, the payment arm of Alibaba, was first launched in 2004 by Alibaba as an internet payment service for the Group’s e-commerce platforms (Alipay is owned by Ant Financial, a partially owned Alibaba affiliate). Others soon caught up, especially with the arrival of smartphones and the proliferation of social media and online-to-offline services like travel agencies, ride hailing and food delivery apps. Tencent, which owns the popular messenger app WeChat, launched a payment function in the WeChat app in 2011, and quickly became one of the largest payment players given its ‘top-of-the-funnel’ traffic.

Frequency of use and time spent on WeChat is much higher than what e-commerce platforms can potentially have, which helped WeChat Pay gain market share despite an existing dominant player in payments in the form of Alipay. WeChat’s payments became popular due to P2P transfers to begin with

For the exclusive use of [email protected] (something we can see playing out for WhatsApp in India), and then over time partnering with merchants for transactions; we note WeChat Pay has more than 50mn merchants on the platform, implying 73% penetration into the 63mn registered individual businesses owners in China. Our analysts value Tencent’s Fintech business at US$99 bn, with payments/lending/wealth management forming 37%/22%/38% of the value. 85e9115b1cb54911824c3a94390f6cbd

27 July 2020 94 Goldman Sachs India Internet

Exhibit 120: Our analysts value Tencent’s fintech business at Exhibit 121: Payments drive one-third of fintech profits for US$99 bn Tencent as MDRs in China are in the range of 40-50 bps for Split of GS valuation for Tencent’s fintech business merchant payments, but zero in India for UPI Net profit split of Tencent’s fintech business (2021E)

Wealth Payments Payments, $37 Wealth management, 33% bn, 37% management $37 bn, 38% 41%

Insurance, $3 bn, 3% Insurance Lending Lending, $22 bn, 2% 22% 24%

Source: Goldman Sachs Global Investment Research Source: Goldman Sachs Global Investment Research

The market size and economics of Payments We forecast merchant transactions on digital (mobile) platforms will reach c.US$213bn by FY25 (4x vs FY20), implying 9%/22% of consumer/retail expenditure in FY25 (vs 3%/8% in FY20, Exhibit 124). For context, our Indonesia internet team forecasts digital payments to be 9%/31% of consumer/retail expenditure by 2025, while for China, digital payments were already 59% of total retail spend in 2018.

However, we see the revenue pool for payment companies to be less than US$500 mn by FY25E, as we expect more than 80% of digital payments in India to be driven by UPI, a zero-commission mode of payment.

In an investor call we organized with Mobikwik earlier in 2020, the company said that mobile wallet MDRs (merchant discount rates) are about 1.5% in India. While wallets get about 150-170 bps from merchants, the cost of adding funds is about 120bps, leaving For the exclusive use of [email protected] about 30bps for the wallet companies.

Assuming an MDR of 150bps on wallets, we get to revenues of US$500 mn by FY25E for India’s digital payments sector. In addition, in a potential scenario where MDRs for UPI were allowed again, assuming 15bps of commission, we get to an additional c.US$300 mn of revenue pool from UPI by FY25E.

We note that mobile payments are characterized by high competition and high spend on 85e9115b1cb54911824c3a94390f6cbd promotions/cash backs etc. Thus, we expect profits from this business to be zero or negative for the foreseeable future. As such, we look to value the payments segment on EV/Sales; we note that global payments companies trade at a multiple of around 10x EV/Sales currently. Applying the same multiple to India payments revenue of US$500 mn in FY25E, we get to a potential value for payments in India at US$5 bn by FY24E (March 2024).

27 July 2020 95 Goldman Sachs India Internet

In any case, we think direct profits from payments are not likely to be the key objective of payment platforms. Platforms are likely to use data garnered from payments for marketing/advertising, or to sell customers other financial services products like lending, insurance, etc. Payments are only likely to act as an acquisition tool.

Exhibit 122: UPI has zero commissions, and takes away the need to pre-load money in the wallet Value chain of cards vs wallets vs UPI

Card payment

Card network Acquiring Consumer Issuing bank (Visa/Rupay/ Merchant Bank Mastercard)

20 bps debit; c.20 bps c.20 bps 120 bps credit

50-60 bps fee for debit cards; 150-200 bps for credit cards

Mobile wallets

Consumer Wallet platform (Paytm/Mobikwik, etc.) Merchant

Merchants charged Money loaded commission of c.150 bps by wallet, of which a large Merchant’s wallet and through cards, net the linked bank banking, UPI, cash part goes towards account through offline recovering the consumer ’load’ fee

Unified Payments Interface (UPI)

Consumer UPI application Merchant

No need to pre load money Linked to Linked to Zero commission for the in wallet consumer’s merchant’s merchant bank account bank account

For the exclusive use of [email protected] Source: Goldman Sachs Global Investment Research

85e9115b1cb54911824c3a94390f6cbd

27 July 2020 96 Goldman Sachs India Internet

Exhibit 123: We expect digital payments to grow by 4x over the Exhibit 124: We expect digital payments to make up 9% of next five years consumer expenditure by FY25 Merchant (P2M) transactions on digital payments in India (US$ bn) Cards (debit + credit) and digital (UPI + wallet) merchant payments as % of consumer expenditure

$213 bn 14.4% 13.7% 13.0% 12.4% $171 bn 11.8% Digital 10.8% Cards $136 bn 9.4% Wallets 8.2% 8.5% UPI $105 bn 7.5% 6.3% 6.6% 5.6% $77 bn 4.9% 4.6% $55 bn 3.3% $33 bn 2.1% $16 bn 1.2% 0.2% 0.5%

FY18 FY19 FY20 FY21E FY22E FY23E FY24E FY25E FY16 FY17 FY18 FY19 FY20 FY21E FY22E FY23E FY24E FY25E

INR USD of 75. FY represents year ended March. FY represents year ended March.

Source: NPCI, RBI, Goldman Sachs Global Investment Research Source: RBI, NPCI, Goldman Sachs Global Investment Research, Euromonitor

Lending: Nascent but key to monetization We expect mobile payments platforms to expand their presence in lending, most likely through tie-ups with banks and NBFCs; such credit can potentially be extended to both merchants and consumers, in our view. With payments acting as a customer acquisition tool, internet platforms are likely to offer ‘digital credit cards’ to consumers, while using technologies such as Machine Learning, and leveraging alternative data (purchase and payment patterns) to bring down costs and assess credit-worthiness of potential borrowers.

The business model We believe fintech lenders are likely to try and build full-stack platforms, from lead generation (through their e-commerce business) to credit assessment (through payments and other transaction data) to disbursal. However, given the size of the lending market (annual consumer loan disbursal of >US$60 bn in India), we see scope For the exclusive use of [email protected] for multiple players to co-exist. We expect fintech companies to play a role in segments where penetration of formal financial channels remains low; in our view, these could be consumers with relatively low credit scores who have short-term credit needs for smaller ticket-sized loans.

In segments where ticket-sizes are high, and/or which require physical touchpoints (mortgage, education loans, etc.), we believe fulfillment will continue to be offline

driven, but lead generation could gradually move online. During our internet conference 85e9115b1cb54911824c3a94390f6cbd in 2019, Etechaces mentioned that Paisabazaar, which helps in loan origination (online), will disburse US$1.5 bn of loans in 2019. We note that for Mobikwik, c.30% of its 2019 revenues came from financial services, mostly lending.

Digital lending could take various shapes and forms including P2P lending, MSME financing, PoS lending for consumers, Pay Later credit, among others. Google Pay is looking to foray into SME lending by the end of 2020 in partnership with banks, while its

27 July 2020 97 Goldman Sachs India Internet

consumer loan product is already live (Economic Times, 25 June). As per FICCI, demand for debt by Indian MSMEs (which contribute 38% to India’s GDP) is around US$1 trillion, of which only about 16% is catered to by the formal sector. Recently, Airtel Payments Bank also announced services for MSMEs including salary accounts with benefit such as insurance cover, free withdrawals and deposits, etc.

Similar to payments, a potential foray by WhatsApp + RIL could help accelerate the growth of digital lending in our view. As per press reports, WhatsApp has listed lending, through partnership with banks, as one of its objectives in its recently filed Memorandum of Understanding (MoU) with regulators in India. Recently, WhatsApp mentioned it will be supporting multiple pilot programs over the next 18 months to test solutions related to distribution of financial products in India.

The market size Based on Euromonitor data, we estimate c.US$50-60 bn of short-term personal loan disbursements in India annually, of which about US$14 bn is card-based lending. India has 57mn credit cards (April 2020), with 30-40mn unique users, per our estimate. While we expect the credit card business to cater to the top 50mn Indian consumers by income levels, we see scope for penetration of fintech firms in consumer segments not served by formal credit. As per companies in our Financials Tour 2020, just about 50mn Indian consumers have been extended formal credit (by banks) over the last 5 years.

Analysis by our Financials team shows fintech firms accounted for c.40% of personal loan origination in 3QCY19 (2.7mn loans), more than twice that of private banks. With more than 650mn smartphones in India by FY25, we expect c.450mn Indian consumers to use digital payments (4x current number), of which we estimate about 6% (c.30 mn) consumers can potentially avail of digital credit. This is the segment largely outside the 50mn consumers who we expect to have credit cards by FY25, but a part of the 80mn consumer segment which our consumer team expects will have income levels greater than US$9k per year (educated urban mass).

For the exclusive use of [email protected] If we assume an average ticket size of US$300 per loan, in line with levels prevalent today for digital loans, we get to US$8 bn of annual consumer loan disbursal via digital by FY25. In addition, if we assume 10% of MSMEs in India avail digital loans, we get to about 7mn merchants availing of loans from fintech firms. At an average ticket size of US$1,500 for MSME loans, we arrive at annual disbursal of US$11 bn to the MSME sector by fintech platforms.

Revenue models for fintech firms can include origination fee, interest income or income in the form of convenience fee, etc. We assume 1-2% origination fee, and c.8%/5% net 85e9115b1cb54911824c3a94390f6cbd interest margins for fintech lenders within consumer/MSME, resulting in a revenue pool of US$1.4 bn by FY25E. Assuming 40% cost-to-income ratio, and 2.5% provision ratio, we get to a total net income pool of US$400 mn for fintech lenders by FY25.

At present, we see more than 100 platforms competing in India’s fintech lending space, and find it difficult to take a view on potential beneficiaries. However, we believe platforms with strong access to consumer data - dominant search, social media

27 July 2020 98 Goldman Sachs India Internet

and e-commerce platforms - are best positioned to leverage this opportunity.

Insurance: An incremental revenue opportunity Policybazaar, India’s largest online insurance portal, mentioned in June 2019 that it does about 6mn transactions on its platform annually (a recent Economic Times report said the number is now 1 mn a month), with US$700-750 mn of expected premiums through its platform in 2019. It also mentioned it has c.90% market share of online insurance sold via platforms, and that its revenues have consistently been growing at 70-80% YoY; other platforms such as Paytm, PhonePe, Airtel also offer insurance through their apps. Recently, Amazon also forayed into insurance distribution in India by tying up with Acko to sell auto insurance on the Amazon Pay platform.

As per Entrackr, Policybazaar had revenues of Rs3.1 bn (US$41 mn) in FY19. Based on our estimated growth for the industry in FY20, and taking into account the market share of Policybazaar, we estimate India’s online insurance had revenues of about US$100 mn in FY20. We forecast a 38% CAGR over FY20-25 for online insurance revenues in India, reaching revenues of US$500 mn by FY25E. Our 38% growth forecast for insurance is higher than our 31% forecast for P2M digital payments, and is a function of low levels of insurance penetration in India (<5%). As per PolicyBazaar, online insurance is a 25-30% EBITDA margin business in the steady state, which we expect can result in a net profit pool of US$100 mn by FY25E for the sector. For the exclusive use of [email protected] 85e9115b1cb54911824c3a94390f6cbd

27 July 2020 99 Goldman Sachs India Internet Profiles of private internet companies

Exhibit 125: Profiles of a number of private internet companies in India Consumer facing internet companies (including e-commerce logistics) with last round valuations >US$500 mn in the private market (Note: List not exhaustive)

Last round Cumulative Company Sector Focus Details valuation funds raised

Fintech, US$8.5 bn of merchant GMV in 3QCY19. US$450 mn US$16 bn Paytm ecommerce & Payments & fintech of revenues in FY19. c.15 mn merchants. >200 mn US$3.5 bn (2H2019) ticketing registered users

US$650 mn+ annualized revenues in April 2020; 3mn+ US$10.5 bn Byju’s Edtech K-12 paid users. Per company, it has 90%+ market share in US$1.5 bn (1H2020) K12 segment

US$951 mn revenues in FY19 - 64% in India. Present US$10 bn Oyo Online travel Hotels across China, US, UK, Indonesia, etc. 1 mn+ rooms US$3.2 bn (2H2019) under management

Present in 250+ cities across India, Australia, New US$6.5 bn Ola O2O Ride hailing Zealand and UK. 28 million weekly rides during year US$3.8 bn (2H2019) ending March 2019

40mn orders per month (pre-COVID). Per Swiggy, 55% US$3.5 bn Swiggy Food Food delivery US$1.7 bn market share in food delivery. 500 cities, 250k riders (1H2020)

Food delivery, US$394 mn FY20 revenues, with US$1.5 bn in food US$3.25 bn Zomato Food dining out & US$900 mn delivery GMV. 500+ cities in India, with 200k+ riders (1H2020) supplies

Horizontal US$130 mn revenues in FY19; <5% market share in US$2.9 bn Paytm Mall Ecommerce c.US$800 mn ecommerce ecomerce in 2019, per Eurimonitor (2H2019)

17.5k+ pin codes across 2300+ cities. 300k sellers; 1 US$1.6 bn Delhivery Logistics Ecommerce c.US$800 mn mn shipments per day. 85+ fulfilment centers (1H2019)

400k policies sold every month; 40% market share in Insurance and US$1.5 bn Policybazaar Fintech online sales (per company). Also has a lending c.US$500 mn lending (1H2020) business called PaisaBazaar

Annualized revenue of US$260 mn (Sept 2019). 25- US$1.2 bn Nykaa Ecommerce Beauty & fashion 30% revenue market share of the online market, per c.US$60 mn (1H2020) Nykaa

80mn+ users as of 2020; US$100 mn+ revenues in US$1.1 bn Dream11 Online gaming Fantasy sports US$100 mn year ended March 19 (1H2019)

Home salon, US$155 mn of annualized GTV as of Oct 2019. 20k US$850 mn Urbanclap Home Services US$140 mn repairs, etc. professionals on the platform across 14 cities in India (2H2019)

10 restaurant brands across 350 kitchens. Annualized c.US$700 mn Rebel Foods Food Cloud Kitchens revenues of US$100 mn pre-COVID. Presence in 35 c.US$300 mn (1H2020) Indian cities

For the exclusive use of [email protected] 26 cities in India. Monthly sales of US$64 mn in Jan US$650 mn Grofers Ecommerce Grocery 2020; 36% from private labels. About 1800 SKUs on US$600 mn (2H2019) the platform

2 million unique students who attended live classes in US$600 mn Vedantu Edtech K-12 last three months; 1 mn paid subscribers on platform, US$200 mn (2H2020) per ET

Annualized GMV of US$334 mn as of Sept 2019; ships US$575 mn Meesho Ecommerce Social commerce 180k orders per day. Network of 22k supplers across US$190 mn (2H2019) 700+ Indian towns

200k paid subs (June 2020); 5 mn monthly users for US$510 mn Unacademy Edtech Test preparation c.US$200 mn free classes (1H2020) 85e9115b1cb54911824c3a94390f6cbd

Horizontal US$140 mn annual revenues in FY19; higher focus on US$2.3 bn Snapdeal* Ecommerce US$1.8 bn ecommerce fashion, home goods and general merchandise (1H2017)

We do not cover any of the private companies listed under ‘Company’ above. ‘Last round valuation’ (implied valuations from the latest funding round) data from company wherever available (Meesho, Swiggy), or else from press reports. *Snapdeal latest valuation data not available, and valuation from 2017 as per Economic Times. ‘Cumulative funds’ raised shows total funds raised so far (company data where available, or else from Crunchbase). ‘Details’ either from the company or press reports and data is for 2019 or latest available run rate numbers.

Source: Company data, Press reports (Economic Times, Livemint, Entrackr, Financial Express, Inc42, YourStory), Data compiled by Goldman Sachs Global Investment Research

27 July 2020 100 Goldman Sachs India Internet Appendix: Global valuations, etc.

Exhibit 126: Global internet valuation sheet

Country/ Current Target Upside/ Mkt Cap EV EV/EBITDA (X) P/E (X) EV/Sales (X) EBITDA margin 2019-22E CAGR Global internet Ticker Rating Region Price Price Downside (US$ mn) (US$ mn) 2021E 2022E 2021E 2022E 2021E 2022E 2020E 2021E Sales EBITDA PAT Info Edge INED.BO India Sell Rs 3,166 2,260.0 -29% 5,183 4,999 71.3 55.1 83.6 64.8 21.9 18.5 29% 31% 11% 15% 15% 58.com WUBA China Neutral $ 55.1 66.60 21% 8,314 6,794 7.8 6.0 12.5 10.9 2.5 2.2 21% 28% 12% 15% -12% REA Group REA.AX Australia Buy A$ 107.3 118.00 10% 10,036 10,118 23.0 NM 41.5 NM 14.8 58% 60% 5% 6% 6% SEEK SEK.AX Australia Neutral A$ 22.0 20.20 -8% 5,380 6,415 16.5 NM 51.2 NM 4.6 26% 27% 12% 6% -7% Zillow ZG US Neutral $ 65.4 58.00 -11% 14,479 14,570 NM NM NM NM 2.1 1.3 -2% 0% 61% 35% NM CarGurus CARG US Buy $ 25.2 36.00 43% 2,881 2,775 25.5 18.6 71.0 48.9 4.4 3.7 13% 17% 8% 24% 14% Scout24 G24n.DE Europe Buy ¼ 74.3 75.2 1% 9,256 10,116 23.5 20.5 45.8 40.5 22.5 20.1 60% 62% -11% -6% -7%

Classifieds Auto Trader AUTOA.L Europe Buy £ 527.4 581.0 10% 6,528 6,910 20.6 18.2 26.3 23.2 15.2 14.0 68% 70% 2% 2% 2% Rightmove RMV.L Europe Buy £ 572.0 607.0 6% 6,633 6,601 22.5 20.2 29.0 26.2 18.2 16.9 68% 75% 2% 1% 1% Headhunter Group HHR Russia Buy $ 19.9 29.6 49% 1,002 1,051 13.7 10.1 19.8 14.5 7.2 5.8 48% 51% 19% 22% 31% Schibsted SBSTA.OL Europe Not Rated Nkr 320.0 8,259 8,783 17.9 14.2 43.0 32.5 3.7 3.4 15% 21% 7% 13% 16% Median 21.6 18.4 42.3 29.3 7.2 5.8 29% 31% 8% 13% 4%

MakeMyTrip MMYT India Buy $ 16.2 23.0 42% 1,739 1,536 NM 19.9 NM 70.0 2.4 1.7 -20% 0% 8% NM NM Expedia EXPE US Sell $ 84 65.0 -22% 12,231 13,792 8.3 6.3 NM NM 1.3 1.2 2% 15% 0% -3% -48% Booking Holdings BKNG US Neutral $ 1,701.3 1,500.0 -12% 70,178 68,502 14.5 11.7 23.1 19.3 5.3 4.5 22% 35% 0% -3% -9% TripAdvisor TRIP US Sell $ 20.0 14.0 -30% 2,735 2,416 9.3 6.8 87.8 32.1 2.2 1.9 -4% 25% -7% -7% -12% Trivago TRVG US Neutral $ 1.7 1.45 -13% 597 467 6.3 3.9 27.2 15.6 0.7 0.7 -5% 11% -11% 6% 25% Travel Ctrip/Trip.com TCOM China Neutral $ 27.1 25.0 -8% 17,436 22,078 24.0 14.9 23.5 13.6 4.1 3.4 -3% 17% 8% 6% 9% Tongcheng-Elong 0780.HK China Buy HK$ 13.4 16.9 26% 3,659 3,340 8.0 5.4 12.6 9.5 2.3 1.8 20% 26% 20% 18% 22% Median 8.8 6.8 23.5 17.4 2.3 1.8 -3% 17% 0% 2% 0%

Uber UBER US Buy $ 31.2 44.00 41% 58,630 42,936 NM 25.0 NM NM 2.0 1.6 -16% 3% 26% NM NM Lyft LYFT US Buy $ 30.4 36.00 18% 11,093 8,719 19.9 8.7 NM NM 1.6 1.2 -19% 7% 25% NM NM Meituan Dianping 3690.HK China Buy HK$ 190.7 191.00 0% 147,161 137,452 43.5 22.6 63.2 33.1 5.6 3.9 4% 13% 36% 78% 90% Grubhub GRUB US Not Rated $ 68.9 6,339 6,527 57.3 39.9 NM NM 3.4 3.0 4% 6% 18% -4% NM Just Eat Takeaway TKWY.AS Europe Not Rated ¼ 89.8 15,528 15,543 35.4 24.5 68.3 41.1 5.1 4.3 12% 14% 96% 246% NM

Food & mobility Median 39.5 24.5 65.8 37.1 3.4 3.0 4% 7% 26% 78% 90%

Amazon AMZN US Buy* $ 3,008.9 3,800.00 26% 1,525,938 1,534,122 22.9 18.4 69.6 50.5 3.6 3.1 12% 15% 21% 23% 38% eBay EBAY US Neutral $ 55.1 56.00 2% 39,576 43,687 8.2 7.2 16.8 15.8 3.5 3.4 37% 37% 6% 10% 11% MercadoLibre MELI Latam Buy $ 989.0 1,162.00 17% 49,163 47,131 NM NM NM NM 13.9 10.4 0% 0% 25% NM NM Momo.com 8454.TW Taiwan Neutral NT$ 668.0 590.00 -12% 3,177 3,050 21.1 16.0 37.8 29.3 1.0 0.8 5% 5% 32% 33% 32%

For the exclusive use of [email protected] use the exclusive For VIPShop VIPS China Neutral $ 20.4 16.20 -21% 13,985 13,102 8.9 7.5 14.5 13.2 0.9 0.8 9% 9% 6% 17% 16% Alibaba BABA China Buy* $ 249.0 276.00 11% 665,857 653,834 17.3 13.1 21.1 16.8 5.6 4.6 30% 31% 28% 31% 32% JD.com JD China Buy $ 60.9 71.00 17% 95,332 87,301 20.8 14.3 32.0 23.6 0.7 0.6 3% 3% 21% 34% 39% Ecommerce Pinduoduo PDD China Neutral $ 79.0 66.60 -16% 91,782 85,899 38.5 18.3 40.2 25.1 7.5 5.7 -13% 17% 52% NM NM Dada Nexus DADA China Neutral $ 22.9 22.00 -4% 5,093 4,927 NM 50.1 NM 74.9 3.5 2.3 -16% -6% 69% NM NM Median 20.8 15.2 32.0 24.4 3.5 3.1 5% 9% 25% 27% 32%

* denotes stock is on Conviction List. Metrics are for calendar years. Prices as of July 24, 2020.

Source: Datastream, Company data, Goldman Sachs Global Investment Research

85e9115b1cb54911824c3a94390f6cbd

27 July 2020 101 Goldman Sachs India Internet

Exhibit 127: Global internet valuation sheet (continued)

Country/ Current Target Upside/ Mkt Cap EV EV/EBITDA (X) P/E (X) EV/Sales (X) EBITDA margin 2019-22E CAGR Global internet Ticker Rating Region Price Price Downside (US$ mn) (US$ mn) 2021E 2022E 2021E 2022E 2021E 2022E 2020E 2021E Sales EBITDA PAT Zynga ZNGA US Buy $ 9.6 10.90 14% 9,096 8,159 15.1 12.7 77.4 58.7 2.9 2.6 23% 24% 26% 29% 62% Take Two TTWO US Buy $ 156.0 178.00 14% 17,849 15,962 17.5 14.1 25.4 21.6 4.3 3.4 24% 24% 17% 13% 12% Electronic Arts EA US Neutral $ 135.2 148.00 9% 39,490 34,844 14.8 12.8 23.5 20.4 5.9 5.4 36% 36% 8% 11% -18% Ubisoft UBIP.PA Europe Neutral ¼ 71.0 70.00 -1% 9,253 9,624 17.8 15.0 26.0 24.9 3.4 3.5 16% 20% 13% 73% 69% NCSOFT 036570.KS Korea Neutral W 802,000 860,000 7% 14,655 14,413 9.1 10.0 14.6 16.9 5.0 5.4 38% 48% 24% 40% 40% Netmarble 251270.KS Korea Sell W 124,500 58,000 -53% 8,885 8,023 22.0 24.3 42.9 49.6 3.7 3.8 13% 15% 5% 3% 10%

Gaming Pearl Abyss 263750.KQ Korea Buy W 189,200 310,000 64% 2,051 1,997 8.9 5.5 13.8 9.0 4.3 3.3 34% 42% 10% 28% 17% Tencent 0700.HK China Buy HK$ 528.0 542.00 3% 654,736 667,763 23.0 18.3 30.1 24.3 7.9 6.5 39% 32% 23% 13% 26% NetEase NTES China Buy $ 448.3 470.00 5% 61,062 54,003 13.6 11.0 21.6 19.1 4.7 4.1 31% 29% 15% 14% 12% Sea Ltd SE ASEAN Buy* $ 107.1 120.00 12% 61,942 58,390 55.4 16.9 75.1 22.9 7.3 4.6 -1% 15% 64% NM NM Median 17.5 14.1 25.4 22.9 4.7 4.1 31% 29% 15% 14% 17%

Netflix NFLX US Buy* $ 480.5 600.00 25% 223,052 234,406 34.8 NM 52.5 NM 7.7 19% 22% 25% 49% 52% Spotify SPOT US Buy $ 268.7 280.00 4% 52,795 49,841 NM NM NM NM 4.3 3.5 1% 3% 22% 54% NM Warner Music Grou WMG US Neutral $ 28.3 33.00 16% 14,453 16,921 20.3 15.3 43.0 26.9 3.3 3.0 14% 17% 9% 22% 33% iQIYI IQ China Neutral $ 20.4 20.00 -2% 14,972 15,629 9.9 7.5 NM 95.8 2.9 2.5 32% 34% 15% 23% NM Tencent Music TME China Buy $ 15.6 14.00 -10% 26,171 23,968 23.5 18.3 29.4 24.3 4.4 3.7 16% 18% 21% 15% 16% Huya HUYA China Buy $ 22.5 21.00 -7% 5,304 4,176 13.8 9.7 21.6 16.7 2.1 1.9 10% 13% 24% 60% 45% Entertainment Bilibili BILI China Buy $ 40.1 41.00 2% 13,211 12,498 NM 25.9 NM 81.9 6.0 4.8 -6% 8% 39% NM NM Median 20.3 15.3 36.2 26.9 4.3 3.2 14% 17% 22% 36% 39%

SNAP SNAP US Buy $ 22.2 28.00 26% 37,439 36,937 NM 35.0 NM NM 11.2 8.2 -6% 12% 38%NMNM Twitter TWTR US Buy $ 37.5 48.00 28% 30,901 27,550 19.2 15.0 NM 78.2 6.3 5.0 27% 31% 17% 14% -35% Alphabet GOOGL US Buy* $ 1,508.2 1,775.00 18% 1,044,084 939,177 14.7 12.1 26.1 22.2 4.3 3.7 28% 28% 16% 16% 11% Facebook FB US Buy $ 230.7 265.00 15% 661,676 627,469 14.5 11.8 26.1 22.0 6.4 5.5 42% 42% 17% 17% 17% Mail.ru MAILRq.L Russia Neutral $ 26.6 28.40 7% 5,822 6,056 11.8 9.8 45.2 29.9 3.6 3.0 27% 29% 18% 11% -2% Baidu BIDU China Buy $ 119.0 145.00 22% 41,369 29,054 6.3 4.1 15.1 10.3 1.6 1.4 19% 22% 12% 28% 17% Weibo WB China Neutral $ 33.7 41.00 22% 7,655 6,201 6.9 4.8 12.4 10.1 3.2 3.0 34% 39% 6% 10% 6% Social & advertising Median 11.8 10.8 21.0 22.0 3.9 3.3 27% 29% 17% 16% 11%

New Oriental EDU China Buy* $ 138.1 149.00 8% 22,023 18,931 17.8 12.4 28.7 21.8 3.6 2.8 17% 19% 26% 37% 30% TAL TAL China Buy $ 75.7 75.00 -1% 45,239 43,363 35.2 23.1 51.6 35.2 6.9 5.2 15% 19% 38% 66% 83% GSX Techedu GSX China Neutral $ 81.2 57.00 -30% 19,380 19,406 NM 52.9 NM 66.4 12.4 8.4 11% 13% 97% 107% 97% OneConnect OCFT China Neutral $ 23.8 12.20 -49% 8,235 8,624 NM NM NM NM 11.2 8.0 -48% -16% 48% NM NM Etsy ETSY US Buy $ 101.6 130.00 28% 12,616 12,912 33.6 25.1 73.7 50.5 9.2 7.4 25% 26% 29% 37% 39% ANGI Homeservice ANGI US Buy $ 14.6 17.80 22% 7,338 7,326 49.1 30.9 NM 50.9 4.1 3.2 14% 15% 19% 28% 61%

For the exclusive use of [email protected] use the exclusive For Match Group MTCH US Neutral $ 90.4 86.00 -5% 26,268 27,406 26.9 21.9 42.4 33.7 10.6 9.3 36% 40% 13% 17% 11%

Education & others Yelp YELP US Buy $ 23.8 26.00 9% 1,701 1,288 9.1 7.3 NM NM 1.4 1.3 8% 14% 0% -9% NM Median 30.2 23.1 47.0 42.9 8.1 6.3 15% 17% 27% 37% 50%

* denotes stock is on Conviction List. Metrics are for calendar years. Prices as of July 24, 2020.

Source: Datastream, Company data, Goldman Sachs Global Investment Research 85e9115b1cb54911824c3a94390f6cbd

27 July 2020 102 Goldman Sachs India Internet

Exhibit 128: Valuation methodology and target price of stocks mentioned in the ‘Companies with exposure to India Internet’ section

Country/ Current Target Upside/ Mkt Cap Valuation Ticker Rating Risks to our thesis Region methodology Price Price Downside (US$ mn)

Competition, margin pressures from investment, valuation, Amazon AMZN US Buy* $ 3,009 3,800 26% 1,525,938 SOTP-based regulatory challenges.

Equal-weighted blend Revenue impact from potential product changes mandated by Alphabet GOOGL US Buy* $ 1,508 1,775.0 18% 1,044,084 of DCF, EV/EBITDA regulators, weaker-than-expected cost discipline, competition, and P/E and dilutive M&A

Equal-weighted blend Worsening macro, user fatigue, impact from privacy concerns Facebook FB US Buy $ 231 265 15% 661,676 of DCF, EV/EBITDA and potential for regulation and P/E

Impact of COVID-19; slowdown in economic activity, a more intense pricing environment, macro/fx volatility; inability to use Risk-reward relative Walmart WMT US Buy $ 131 137.0 4% 371,934 expense leverage to offset investments in e-commerce/pricing; P/E framework pressure from wage/ transportation costs; impact from tariffs; greater than expected EPS dilution from Flipkart

Lower-than-expected refining/chemical margins, lower-than- Reliance Industries RELI.BO India Buy* Rs 2,146 2,325 8% 184,833 SOTP expected ARPU, project delays, higher-than-expected future capex, and higher-than-expected competition in Retail

Risks related to the investment case for the listed assets (Tencent, Mail.ru and Trip.com), execution risk, increased Prosus PRX.AS Europe Buy* € 82 114.0 39% 155,308 SOTP competition from global tech players and new entrants, a global internet stock de-rating, change in regulation, capital allocation of its parent company Naspers, and FX risks.

Sustained macro slowdown, higher NPLs in unsecured loan book HDFC Bank HDBK.BO India Buy* Rs 1,119 1,253 12% 81,428 P/E framework + SOTP and agri loans, as well as regulatory risks especially in the payments business

1) Competition from global peers; 2) macroeconomic and geopolitical risks and exchange rate volatility; 3) execution in new Sea Ltd. SE ASEAN Buy* $ 107 120.0 12% 61,942 SOTP markets e.g. LATAM/India; 4) inability to derive synergies from all three businesses

Elevated competition in India, headwinds in Africa, regulatory Bharti Airtel BRTI.BO India Buy Rs 560 618 10% 40,803 DCF hurdles and spectrum auctions.

Lower than expected growth, sharp spike in JPY, failure of Maruti Suzuki MRTI.BO India Buy Rs 6,001 6,644.0 11% 24,222 EV/EBITDA launches, sharp spike in commodity prices

Faster recovery in recruitment and real estate, faster shift to Info Edge INED.BO India Sell Rs 3,166 2,260 -29% 5,183 DCF online, consolidation in the classifieds space, upside to Zomato from new initiatives, consolidation, etc.

1) Higher-than-expected growth in delivery; 2) Slower recovery P/E (50%) and DCF for food aggregators; 3) Better-than-expected cost control; (4) Jubilant Food JUBI.BO India Sell Rs 1,725 936.0 -46% 2,964 (50%) Faster-than-expected new store adds; and (5) Faster recovery in dine-in sales

DCF (42.5%);

For the exclusive use of [email protected] EV/EBITDA (42.5%); Weaker-than-expected travel demand, competition, inability to MakeMyTrip MMYT India Buy $ 16 23 42% 1,739 M&A - EV/EBITDA raise funds (if required), and pressure on take rates based (15%)

1) Continued cost pressure and higher competition and 2) Pricing Blue Dart BLDT.BO India Buy Rs 2,223 2,950.0 33% 705 DCF pressure due to unfavorable mix

* denotes stock is on Conviction List. Prices as of July 24, 2020.

Source: Datastream, Goldman Sachs Global Investment Research 85e9115b1cb54911824c3a94390f6cbd

27 July 2020 103 Goldman Sachs India Internet Disclosure Appendix

Reg AC

We, Manish Adukia, CFA, Heather Bellini, CFA, Piyush Mubayi, Nikhil Bhandari and Vinit Joshi, hereby certify that all of the views expressed in this report accurately reflect our personal views about the subject company or companies and its or their securities. We also certify that no part of our compensation was, is or will be, directly or indirectly, related to the specific recommendations or views expressed in this report. Unless otherwise stated, the individuals listed on the cover page of this report are analysts in Goldman Sachs’ Global Investment Research division. GS Factor Profile The Goldman Sachs Factor Profile provides investment context for a stock by comparing key attributes to the market (i.e. our coverage universe) and its sector peers. The four key attributes depicted are: Growth, Financial Returns, Multiple (e.g. valuation) and Integrated (a composite of Growth, Financial Returns and Multiple). Growth, Financial Returns and Multiple are calculated by using normalized ranks for specific metrics for each stock. The normalized ranks for the metrics are then averaged and converted into percentiles for the relevant attribute. The precise calculation of each metric may vary depending on the fiscal year, industry and region, but the standard approach is as follows: Growth is based on a stock’s forward-looking sales growth, EBITDA growth and EPS growth (for financial stocks, only EPS and sales growth), with a higher percentile indicating a higher growth company. Financial Returns is based on a stock’s forward-looking ROE, ROCE and CROCI (for financial stocks, only ROE), with a higher percentile indicating a company with higher financial returns. Multiple is based on a stock’s forward-looking P/E, P/B, price/dividend (P/D), EV/EBITDA, EV/FCF and EV/Debt Adjusted Cash Flow (DACF) (for financial stocks, only P/E, P/B and P/D), with a higher percentile indicating a stock trading at a higher multiple. The Integrated percentile is calculated as the average of the Growth percentile, Financial Returns percentile and (100% - Multiple percentile). Financial Returns and Multiple use the Goldman Sachs analyst forecasts at the fiscal year-end at least three quarters in the future. Growth uses inputs for the fiscal year at least seven quarters in the future compared with the year at least three quarters in the future (on a per-share basis for all metrics). For a more detailed description of how we calculate the GS Factor Profile, please contact your GS representative. M&A Rank Across our global coverage, we examine stocks using an M&A framework, considering both qualitative factors and quantitative factors (which may vary across sectors and regions) to incorporate the potential that certain companies could be acquired. We then assign a M&A rank as a means of scoring companies under our rated coverage from 1 to 3, with 1 representing high (30%-50%) probability of the company becoming an acquisition target, 2 representing medium (15%-30%) probability and 3 representing low (0%-15%) probability. For companies ranked 1 or 2, in line with our standard departmental guidelines we incorporate an M&A component into our target price. M&A rank of 3 is considered immaterial and therefore does not factor into our price target, and may or may not be discussed in research. Quantum Quantum is Goldman Sachs’ proprietary database providing access to detailed financial statement histories, forecasts and ratios. It can be used for in-depth analysis of a single company, or to make comparisons between companies in different sectors and markets. Disclosures Logos disclosure Third-party brands used in this report are the property of their respective owners, and are used here for informational purposes only. The use of such brands should not be viewed as an endorsement, affiliation or sponsorship by or for Goldman Sachs or any of its products/services. FA Disclosures Goldman Sachs and/or one of its affiliates is acting as a financial advisor in connection with an announced strategic matter involving the following company or one of its affiliates: Reliance Industries Limited Goldman Sachs and/or one of its affiliates is acting as a financial advisor in connection with an announced strategic matter involving the following

For the exclusive use of [email protected] company or one of its affiliates: Bharti Airtel Limited The rating(s) for Jubilant Foodworks is/are relative to the other companies in its/their coverage universe: Aditya Birla Fashion and Retail, Asian Paints (India), Avenue Supermarts Ltd., Britannia Industries Ltd., Colgate Palmolive (India), Dabur India, Emami Ltd., Godrej Consumer Products Ltd., Hindustan Unilever, ITC, Jubilant Foodworks, Marico, Nestle India, Page Industries Ltd., Titan Co., United Breweries Ltd., United Spirits The rating(s) for Blue Dart Express Ltd. is/are relative to the other companies in its/their coverage universe: Adani Port and SEZ, Bharat Heavy Electricals, Blue Dart Express Ltd., Coal India Ltd., Container Corp. of India, Crompton Greaves Consumer Elec, Cummins India, Gujarat Pipavav Port Ltd., Havells India, InterGlobe Aviation Ltd., Larsen & Toubro, NTPC Ltd., Power Grid, Spicejet Ltd., Tata Power, Thermax, Voltas

The rating(s) for Bharti Airtel, Info Edge India Ltd. and MakeMyTrip Ltd. is/are relative to the other companies in 85e9115b1cb54911824c3a94390f6cbd its/their coverage universe: Bharti Airtel, Bharti Infratel Ltd., Dish TV India, Info Edge India Ltd., MakeMyTrip Ltd., PVR Ltd., Vodafone Idea Ltd., Zee Entertainment Enterprises The rating(s) for Alphabet Inc. and Facebook Inc. is/are relative to the other companies in its/their coverage universe: Adobe Systems Inc., Akamai Technologies Inc., Alphabet Inc., Anaplan Inc., Atlassian Corp., Autodesk Inc., Citrix Systems Inc., Cloudflare Inc., CrowdStrike Holdings, Docusign Inc., Dropbox Inc., Dynatrace Inc., Elastic NV, Facebook Inc., Microsoft Corp., MongoDB Inc., Okta Inc., Oracle Corp., Ping Identity Holding, RingCentral, Salesforce.com Inc., Slack Technologies Inc., SolarWinds Corp., Twilio, VMware Inc., Workday Inc., Zoom Video Communications Inc.

27 July 2020 104 Goldman Sachs India Internet

The rating(s) for Sea Ltd. is/are relative to the other companies in its/their coverage universe: 58.com Inc., Alibaba Group (ADR), Alibaba Group (H), Baidu.com Inc., Bilibili Inc., Dada Nexus Ltd., Huya Inc., JD.com Inc. (ADR), JD.com Inc. (H), JOYY Inc., Kingsoft Cloud, Kingsoft Corp., MOMO.COM Inc., Meituan Dianping, NetEase Inc. (ADR), NetEase Inc. (H), OneConnect Financial, PChome Online Inc., Pinduoduo Inc., SINA Corp., Sea Ltd., Singapore Post, Sogou Inc., Tencent Holdings, Tencent Music Entertainment Group, Tongcheng-Elong Holdings, Trip.com Group, Uxin Ltd., Vipshop Holdings, Weibo Corp., Xiaomi Corp., iQIYI Inc. The rating(s) for Maruti Suzuki India is/are relative to the other companies in its/their coverage universe: Amara Raja Batteries Ltd., Ashok Leyland, Astra International, Bajaj Auto, Bosch Ltd., Eicher Motors, Exide Industries, Hero MotoCorp, Jardine Cycle & Carriage, Mahindra & Mahindra, Maruti Suzuki India, Motherson Sumi Systems, PT United Tractors, TVS Motor, Tata Motors The rating(s) for HDFC Bank is/are relative to the other companies in its/their coverage universe: Aavas Financiers Ltd., Axis Bank, Bajaj Finance, Bandhan Bank Ltd., Bank of Baroda, HDFC Bank, Housing Development Finance Corp., ICICI Bank, IDFC Bank Ltd., IndusInd Bank, Kotak Mahindra Bank, L&T Finance Holdings, LIC Housing Finance, Mahindra & Mahindra Financial Svcs, PNB Housing Finance Ltd., Punjab National Bank, Shriram Transport Finance, State Bank of India, Yes Bank The rating(s) for Amazon.com Inc. is/are relative to the other companies in its/their coverage universe: Amazon.com Inc., Booking Holdings Inc., CarGurus Inc., Cars.com Inc., Carvana Co., Criteo SA, Etsy Inc., Eventbrite Inc., Expedia Group, GrubHub Inc., Lemonade Inc., LendingClub Corp., Lyft Inc., Netflix Inc., PayPal Holdings, Peloton Interactive Inc., Pinterest Inc., Redfin Corp., Snap Inc., Spotify Technology S.A., Stitch Fix Inc., TripAdvisor Inc., Trivago N.V., TrueCar, Twitter Inc., Uber Technologies Inc., Vroom Inc., Warner Music Group, Wayfair Inc., Zillow Group, eBay Inc. The rating(s) for Prosus N.V is/are relative to the other companies in its/their coverage universe: Adevinta ASA, Ascential Plc, Atresmedia, Auto Trader Group, Daily Mail and General Trust, Emerald Holding Inc., ITV Plc, Informa, JCDecaux, Lagardere, Learning Technologies Group, M6 - Metropole Television, Mediaset, Mediaset Espana, Modern Times Group, Naspers Ltd., Pearson, ProSiebenSat.1, Prosus N.V, Publicis, RELX Plc, RTL Group, Rightmove Plc, Schibsted ASA, Scout24 AG, Stroeer SE & Co., TF1, Vivendi, WPP Plc, Wolters Kluwer The rating(s) for Walmart Inc. is/are relative to the other companies in its/their coverage universe: Advance Auto Parts Inc., Albertsons Cos., AutoZone Inc., BJ’s Wholesale Club Holdings, Bed Bath & Beyond Inc., Best Buy Co., Big Lots Inc., Container Store Group, Costco Wholesale, Dick’s Sporting Goods, Dollar General Corp., Dollar Tree Stores Inc., Five Below Inc., Floor & Decor Holdings, Genuine Parts Co., Grocery Outlet Holding, Home Depot Inc., Kroger Co., Lowe’s Cos., Michaels Cos., National Vision Holdings, O’Reilly Automotive Inc., Ollie’s Bargain Outlet Inc., RH, Sprouts Farmers Market Inc., Target Corp., Tractor Supply Co., Ulta Beauty Inc., Walmart Inc., Williams-Sonoma Inc. The rating(s) for Reliance Industries and Reliance Industries (GDR) is/are relative to the other companies in its/their coverage universe: Bangchak Corp PCL, Bharat Petroleum, GS Holdings, Hindustan Petroleum, Indian Oil Corp., Reliance Industries, Reliance Industries (GDR), S-Oil Corp., SK Innovation, Thai Oil Company-specific regulatory disclosures Compendium report: please see disclosures at https://www.gs.com/research/hedge.html. Disclosures applicable to the companies included in this compendium can be found in the latest relevant published research Distribution of ratings/investment banking relationships Goldman Sachs Investment Research global Equity coverage universe

Rating Distribution Investment Banking Relationships Buy Hold Sell Buy Hold Sell Global 47% 36% 17% 65% 58% 54%

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27 July 2020 105 Goldman Sachs India Internet

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27 July 2020 106 Goldman Sachs India Internet

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27 July 2020 107 MINDCRAFT: OUR THEMATIC DEEP DIVES

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