IAG Case Study Contest - Case Discussion (002)

Nomura Investment BankingCase Study CompetitionIndia Analytics Group

September 2015

STRICTLY PRIVATE AND CONFIDENTIAL

Copyright © 2015 Nomura This document is the sole property of Nomura. No part of this document may be reproduced in any form or by any means – electronic, mechanical, photocopying, recording or otherwise – without the prior written permission of Nomura.

Nomura Investment Banking Case Study Contest

India Analytics Group

September 2015

STRICTLY PRIVATE AND CONFIDENTIAL

Copyright © 2015 Nomura This document is the sole property of Nomura. No part of this document may be reproduced in any form or by any means – electronic, mechanical, photocopying, recording or otherwise – without the prior written permission of Nomura.

Golduin Retail Case Study

1

1. Company Overview

Golduin Retail is an online retailer founded by John Doe, a former partner at a large consulting firm specializing in consumer/retail. In 2009, John started Golduin as a specialized online market for high-end apparel and accessories. The company now primarily targets the “Globals, Climbers and Strivers” population in China and India alongside catering to its home geography, the United States. Buoyed by the growth of its target segments, and the relative immunity of most of its operating geographies to the after-effects of the Sub-Prime crisis, Golduin grew at a fast clip (CAGR of 59% from 2010-2015) and soon expanded into electronics and appliances. It has since developed a strong presence in the emerging markets of Asia, capturing market shares1 of 10.5% and 2.6% in India and China respectively. Today, it has $1.2bn in revenue and ranks amongst the top 10 global e-commerce players, in terms of GMV. Golduin is headquartered in Dallas, TX, with regional offices in Shanghai, Bengaluru, Manila and Jakarta. The company employs 7,000 people across the globe and has in-house IT support. It also employs an entire department of data analysts devoted to tracking customer behavior on their portal via clickstream data. In terms of online presence, the company has a website backed by robust cloud support, across 6 different languages2. On starting up, Golduin won seed funding from Zartell Investments, a US-based fund known for its conservative investment policies. Zartell also participated in subsequent rounds of funding, and also brought another investor, Bereth Capital, on-board in Series A financing. As Golduin expanded its footprint in Asia, it also got significant participation from investors focused on the Asia-Pacific region, specifically from funds with dedicated consumer/retail portfolios. All these investors hold equity shares with voting rights, as well as seats on the Board of Directors of the company (refer Appendix 8(e)). As of June 30th 2015, the ownership pattern of the company is as follows:

1 Market shares as of 30th June 2015. 2 Languages include English, Cantonese, Mandarin, Hindi, Tamil and Telugu.

Zartell, 33%

Bereth, 22%

John, 35%

Blue Hill, 3%

Hetfield, 3% Orome, 4%

Shareholding (pre-IPO)

2

a) Growth Path

United States

Golduin formulated a differentiating strategy that focused on customer satisfaction, and enhancing customer experience. The strategy primarily centered on a high-end product portfolio, specializing in the premium and luxury segments. This was instrumental in its gaining share in the target market. Despite having a dedicated customer base, the higher cost of running an inventory-based model led to consistent losses, prompting John to switch to a marketplace-based model. Also, John re-aligned his strategy to gradually shift focus towards the East, targeting emerging markets like India and China. As of June 30th 2015, Golduin is amongst top 20 players by GMV in the US market, and has 1.5% market share by GMV. China

Golduin entered China in October 2011 through the acquisition of Tarthe Retail, an electronics portal catering to the commoditized electronics and appliances market, for $85m. This deal facilitated the creation of a local presence and Golduin got a foothold in the burgeoning Chinese market, along with access to a 40,000 strong vendor base. Its second acquisition in China was in June 2014, when it acquired Manzel, an e-tailer focusing on sports and fitness enthusiasts. The player was an established brand in the market and was acquired for $360m inclusive of hefty premium. Its successful integration has contributed to Golduin’s portfolio and vendor base in sports apparel and the fledgling wearables market. Golduin now enjoys a top-5 market position in China, with a 2.6% market share by GMV. India

Golduin always considered India to be a priority market, due to its rapidly increasing Internet and smartphone penetration, and the growth in per capita disposable income. It made an entry into India in March 2012, with the acquisition of KingsKross Tech, a portal that offered a virtual 3-D fitting room and recommendation system to its members, in addition to a portfolio of designer wear. The deal, worth $57m, was in line with Golduin’s prior strategy of providing high-quality user experience. Additionally, it also gained 10,000 vendors for its portal in India, which was launched in 3 different regional languages. Another acquisition was completed in March 2013, when Golduin bought out Sion Retail, a B2C marketplace for apparel and accessories, in a deal worth $115m. This move increased its vendor base in India to 50,000 and gave it a solid platform to compete with established players. The high growth potential of the market has led John to affirm his commitment to the Indian growth story (market share 10.5% by GMV).

b) Current Situation

Golduin turned profitable in 2014, although it still has high levels of cash burn. It needs further funding to expand its operations and achieve its long term goals. None of the investors are keen on the idea of taking on further leverage, as it could impose restrictive covenants on the cash flow.

3

Additionally, both Zartell Investments and Bereth Capital have decided to re-align their respective portfolios, and want to partially exit their holdings in the company. This has provided Golduin an opportunity to address some of its current issues in a single move. After much deliberation, Golduin has decided that going public is the best way forward. The Board of Directors and the Corporate Finance department have decided to extend a “Request for Proposal” to a group of renowned investment banks, inviting pitches about possible valuations and marketing avenues for Golduin. This process will decide which bank gets the mandate for the IPO.

2. Operational Overview

Golduin Retail operates a marketplace model with emphasis on B2C i.e. the company provides a platform for its vendors and customers to interact in a controlled ecosystem. Third party services add value to the platform by facilitating interaction between the participants. These third party services include logistics and the payment services provider. However, Golduin only adopted the marketplace model in 2011. Prior to that, it operated through an inventory-based model wherein the company bought and stocked products from its vendors before selling to customers, leading to greater control over the product. While it allowed the group to respond effectively to customer inquiries and ensured better post purchase experience, it involved higher capital requirements for tying down inventory, higher risk due to inventory markdown and logistical complexities. The shift to a marketplace model has helped the company achieve profitability. The model brings together a large, fragmented base of buyers and sellers, allowing better price discovery. In addition to this, Golduin maintains a close check over the vendors for quality assurance. This is done by referring to the customer feedback forms and the results of “Lot Quality Assurance Sampling”. It is also trying to speed up deliveries with the introduction of fulfillment centers, in which the company stocks the fastest selling products in its own warehouses. Golduin earns an additional commission on this service that it provides to the vendors. There are 10 hubs all over its operating geographies dedicated to this service.

3. Functional Overview

Golduin generated $1.2bn in revenues from its operations across the globe in 2015. China remains the most critical market with a contribution of c.44%, which is expected to increase rapidly. US accounts for c.49%, and India contributes c.7%. However, Golduin continues to strive to expand in the emerging markets (refer appendix (a)). The primary streams of revenue include: Vendors

− The vendors that wish to display their goods on the portal are liable to pay a fixed annual registration fee to the company

− Vendors are also liable to pay a transaction fee proportionate to the value of orders received through the company’s portal

− Vendors may also use the company’s fulfillment centers for faster delivery to their customers. They are charged a small facilitation fee for this service

4

Advertisements − Vendors have the option of listing with the company as premium sellers. This enables

them to gain preferential visibility in search results − They are charged on the basis of the number of clicks received by each advertised

product

Customers − Customers can choose to sign up for premium services (same-day delivery, exclusive

launches) for a fixed annual subscription fee

Key Parameters

Particulars USA China India

No. of vendors 134,050 197,724 112,602

Annual registration fee charged to vendor ($) 300 120 100

Commission charged for Apparel & footwear products 11.28% 9.70% 8.43%

Commission charged for Consumer Appliances products 4.5% 4.5% 3.8%

Commission charged for Consumer Electronics products 5.0% 4.5% 4.5%

No. of active online buyers 2015 (in ‘000s) 4,400 6,490 3,696

Active annual online buyers who subscribe for membership 7.0% 5.8% 2.0%

Annual subscription fees charged to customer for membership ($) 77.6 50.7 22.6

Advertisement revenue per click ($) 0.48 0.15 0.1

No of clicks per year (m) 386.1 974.5 175.1

Fee charged to vendors for using fulfillment centers 2.0% 2.0% 2.0%

4. Management Outlook and Targets

Golduin ranks amongst the top 10 e-commerce companies globally. One of its biggest strengths is the marketplace model that allows it to reach customers and vendors even in geographies where it has no direct presence. The company has made investments in technology to make its portal more user-friendly, and intends to continue doing so in the future to enhance user experience. The company analyzes browsing and buying patterns using analytics engines, in order to provide better recommendations and customize its offerings. It has achieved high ratings in customer satisfaction surveys across all of its operating geographies.

5

Over the years the Golduin has developed an association with leading brands across geographies. Long term relationships with these brands give the company the privilege of launching and listing products exclusively on its platform. The success of these launches further has reinforced vendors’ trust in Golduin. Additionally, Golduin is also targeting upcoming brands to help them reach a broader audience and thus participate in their growth. Future target and outlook

The company aims to capitalize on the rapid growth potential in emerging markets, particularly

India and China, by increasing market share The company is targeting revenues of $4.0bn in the next 5 years The management is partial to the idea of using inorganic expansion to gain leadership in new

or existing markets

Risks

The company’s short spanning operating history makes it difficult to evaluate growth prospects; historical growth may not be entirely indicative of future performance

The company faces intense competition from online retailers and brick-and-mortar stores in all operating geographies, which may lead to pricing pressures and lower margins

5. Global Industry Outlook

E-commerce has developed into a mainstream retail channel, now accounting for c.6.5% of total retail sales in the world. It is further expected to rise to c.10% by 2016. More than 12% of the world’s 100,000 highest-traffic websites are e-commerce. Increased penetration of mobile phones has given a boost to online shopping; the sale from mobile phones is expected to rise to 40% of total e-commerce transactions by the end of 2015. Major challenges to the industry that could affect growth include lack of governing structure, integration of distinct technologies and cyber security.

China

Internet users in China are likely to reach c. 804m by 2019, up by 26% over 2014 The top 3 e-commerce players dominate the Chinese market, together accounting for 60% of

the market share by value The apparel and footwear segment was reported to have a market size of $319.2bn as of

2014, with e-retail accounting for 14.5%. E-retail in this segment is expected to grow at a CAGR of 24% through 2019

The consumer appliances market was reported to be worth $103.0bn ($22.8bn e-retail) while the consumer electronics market was estimated at $169.0bn ($32.5bn e-retail) in 2014

E-retail of consumer appliances is expected to grow at CAGR of 13% and consumer electronics at CAGR of 15% through 2019

India

6

The top 3 players in e-commerce hold a combined market share of 53% by value The apparel and footwear e-retailing segment has a market size of $1.7bn, and is expected to

grow at CAGR of 39% through 2019 Consumer durables segment (including both appliances and electronics) has a market size of

$39.9bn with e-retail accounting for 2.3% E-retail in consumer appliances and consumer electronics is expected to grow at a CAGR of

6.3% and 2.7% respectively through 2019 By 2025, the country is expected to become fifth largest consumer durables market in the

world

United States

USA is the second largest ecommerce market by retail sales and is expected to maintain this position through 2019

The country had one of the highest internet user penetration of over 85% of the total population in 2014

The dominance of the top 3 players is much less evident, with them accounting for 29% market share by value; this points to a more oligopolistic and competitive market

The apparel and footwear segment has a market size of $328.4bn with e-retail accounting for 11.5%. E-retail in in the segment is expected to grow at CAGR of 9% through 2019

Consumer durables segment has a market size of $162.7bn with e-retail accounting for 27% E-retail in consumer appliances is expected to grow at a CAGR of 19% and consumer

electronics at CAGR of 2.5% through 2019

6. Deliverables The deliverables will be divided into 2 phases: Phase 1 – Executive Summary:

− The executive summary must be a PowerPoint Presentation limited to 4 slides, excluding cover, contents and appendix

− Executive summary should include an equity story; any preliminary analysis to support the same may also be included

− Teams must also identify comparable companies that they would use for valuing the company, with a brief rationale. This list of companies is by no means binding; other companies can be used while performing actual valuations in Phase 2

Phase 2 – Pitch Book:

− Teams are required to submit a complete presentation not exceeding 25 slides (excluding cover, contents and appendix), based on the deliverables outlined

− Teams should provide all back-up, including any Excel sheets etc. − Valuation – detailed valuation using relevant methods − Deal structuring and offering size – According to the pre-IPO shareholding pattern and

the list of constraints provided (refer to Appendix (f)), analyse and suggest the combination of primary and secondary components of the offering

− Use of proceeds – The Company is open to the idea of pursuing inorganic growth using the proceeds from the offering. However, other uses for the proceeds have also been identified. Suggest possible acquisition targets for Golduin, and clarify with a brief rationale (detailed financial modeling not mandatory). Also suggest any other uses the proceeds may be put to.

7

− Listing location – The management is amenable to list the company in any location around the world. However, it must be noted that visibility in key geographies and access to liquid capital markets remain strong motives for a public listing.

8

7. Financials3

Notes:-

1. Acquisitions were made in March 2013 (India) and June 2014 (China) worth $115m and $360m respectively

2. Cost of goods sold (COGS) comprises of costs associated with payment processing, site operations and customer support

3. Selling, general and administrative expenses (SG&A) include employee salaries, expenses related to technology and fulfillment centers (24m) and unique subscription expenses (31m)

4. The effective tax rate for the company in 2015 was 30.3%

5. All numbers are rounded up and can be different to actual due to the decimal differences

3 Company follows IFRS conventions

Income Statement

(All figures in $m, FYE June 30) FY13 FY14 FY15 Net revenue 487 750 1,210 COGS 117 173 254 Gross Profit 370 578 956 SG&A 339 530 879 D&A 28 28 36 Income from operations 3 20 42 Interest expense 11 22 27 Pre-tax income (8) (2) 15 Income taxes 0 0 3 Net income (8) (2) 11

9

Notes:-

1. Acquisitions were made in March 2013 (India) and June 2014 (China) worth $115m and $360m respectively

2. The receivable days for the company has not increased more than 2 weeks on average since 2011 i.e. when the company changed its business model to a marketplace type, thus as a whole the cash conversion cycle has been reduced

3. With the acquisitions, the company had consolidated assets of Sion Retail in India and that of Manzel in China. Since the business model has changed since 2011, few of the warehouses have been converted into fulfillment centers and further fresh investments in the latter (refer PPE schedule)

4. Intangible assets include software licenses, trademarks, copyrights related to the website

5. Goodwill was accorded as and when the acquisitions took place

6. Other assets include investments in securities held to maturity whereas other current assets include short term investments whose maturities are greater than 1 year

7. Short term debt includes short term borrowings and current maturities of long term debt: debt was raised and repaid partially between 2013-15 for inorganic as well as organic growth, debt was raised in the US for acquisitions since cost of debt was relatively lower as compared to India and China

a. The company plans to retire its debt as follows:

2016 - $184m

2017 - $250m

2018 - $78m

2019 - $71m

2020 - $67m

8. The company got funding of $56m (2010), $65m (2011) and $500m (2012) from private investors

9. All numbers are rounded up and can be different to actual due to the decimal differences

Balance Sheet

(All figures in $m, FYE June 30) FY13 FY14 FY15AssetsCash & short term investments 261 252 389Receivables 9 10 20Inventories 3 2 1Other current assets 2 4 6Total current assets 276 268 417

Net property, plant and equipment 384 368 379Intangible assets 143 345 328Goodwill 35 116 116Other assets 29 29 34Total assets 867 1,126 1,274

Liabilities and shareholders equityShort term debt 79 150 184Accounts payable 19 27 40Other current liabilities 5 8 12Total current liabilities 103 185 236

Long term debt 201 380 466Total liabilities 303 564 702

Shareholder's equity 564 561 572Total liabilities and shareholder's equity 867 1,140 1,288

10

8. Appendix

GMV breakdown by geography

(% of total GMV) China India USA Electronics 31% 25% 20% Appliances 19% 19% 25% Apparel and Footwear 50% 56% 55%

a) Revenue Breakdown

Revenues from commissions4

Other revenues5

4 Includes commissions from vendors 5 Other revenues sources include subscription fees, advertisement revenues, fixed fees from vendors

China

(All figures in $m, FYE June 30) FY13 FY14 FY15Consumer Electronics 30 41 59Comsumer Appliances 18 25 36Apparel 84 122 177Footwear 14 20 27Total 146 208 299

India

(All figures in $m, FYE June 30) FY13 FY14 FY15Consumer Electronics 4 4 8Comsumer Appliances 3 4 5Apparel 13 18 28Footwear 3 4 6Total 22 31 46

US

(All figures in $m, FYE June 30) FY13 FY14 FY15Consumer Electronics 20 27 37Comsumer Appliances 19 28 41Apparel 75 119 193Footwear 18 28 35Total 131 202 306

(All figures in $m, FYE June 30) FY13 FY14 FY15China 58 108 231India 9 20 37US 121 181 292Total 188 310 560

11

b) Schedule for PPE6

c) SG&A breakdown

d) Schedule for Intangible assets

e) Funding rounds7

f) Constraints for offering structure

Zartell Investments and Bereth Capital must divest a 10% stake each John’s stake in Golduin must not fall beyond 26% Free float post-offering must not exceed 40%

6 The company sold some warehouses as it converted from an inventory based model to a marketplace model. Some of those warehouses were converted into fulfillment centers 7 Stake bought refers to the funds injected into the company

(All figures in $m, FYE June 30) FY13 FY14 FY15Beginning Intangibles 72 143 345Acquisitions 74 209 0Amortization 4 7 17Total 143 345 328

(All figures in $m, FYE June 30) FY13 FY14 FY15General & Administrative expenses 317 495 823Unique subscription expenses 13 20 31Fulfillment centres 10 15 24SG&A 339 530 879

(All figures in $m, FYE June 30) FY13 FY14 FY15Beginning PPE 484 384 368Capital investment in the year 20 25 30Sale of assets6 (120) (90) 0Depreciation (25) (21) (18)Acquisitions 25 70 0Total 384 368 379

Time Period Funding Round Investor Stake Bought Stake Bought7 ($m)Jan-10 Seed Funding Zartell 10% 15

Zartell 10%Bereth 5%Bereth 5%Blue Hill 3%Hetfield 3%Zartell 13%Bereth 12%Orome 4%

Nov-12

Sep-11

Dec-10

500

65

41Series A

Series B

Series C

12

Disclaimer The information provided in the Nomura Case Study Investment Banking Case Study Contest (“Contest”) are fictional and provided for illustration purposes only and should not be relied upon for any other purpose. Participating in this Contest does not amount to a job or internship offer or create an obligation on Nomura Services India Private Limited or its affiliates (“Nomura) to provide a job or internship offer to participants in any manner whatsoever. No representations, warranties or undertaking (express or implied) are made and no liability is accepted by Nomura Services India Private Limited and its Affiliates (“Nomura”). The Contest is Nomura’s proprietary information and no part of this presentation may be (i) copied, reproduced, photocopied, or duplicated in any form, by any means, or (ii) redistributed without Nomura’s prior express written consent.