India Internet Sector - Credit Suisse | PLUS

DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, LEGAL ENTITY DISCLOSURE AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse 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.

12 January 2017 Asia Pacific/India Equity Research

Technology

India Internet Sector Research Analysts

Anantha Narayan

91 22 6777 3730

[email protected]

Nitin Jain

91 22 6777 3851

[email protected]

THEME

E-commerce 2.0

Figure 1: India e-commerce roadmap

Source: Credit Suisse research

■ E-commerce 1.0: Exuberance, peaked in CY15. CY14 and CY15 were quite eventful years for the Indian internet sector as far as funding was concerned. 2015 e-commerce GMV (gross merchandise value) grew 3x and valuations grew at a faster pace than GMV. The focus was on expansion and user acquisition, and logistics, employee costs and geo presence were far from optimal.

■ E-commerce 2.0: A reality check. GMV was flat in 2016, with funding down to half that of 2015 levels and there have been instances of markdowns in valuation. This was brought about by a challenging funding environment. Regulations have also been tightened. GMV is no longer the holy grail and the focus is now on user monetisation, customer experience and unit economics. Indian e-commerce companies have taken several initiatives, including controlling logistics costs, rationalising discounts and shifting the portfolio mix in favour of high-margin categories. Amazon continues to invest aggressively, however.

■ E-commerce 3.0: The way forward. Structural factors (a large aspirational population, low offline organised retail penetration, a better and cheaper internet, and increasing smartphone penetration) are intact for Indian e-commerce firms but the past 12-18 months have been a reality check, which we believe is good and important for the sector's long-term profitable growth. Sustained profitability is still at least 2-3 years away and any potential new entrant (such as Alibaba and Rakuten) may change the dynamics again. We do not expect any large player to go public in the next 12-18 months. While the setbacks of the past 12 months and changes in strategy do make previous expectations of a US$60 bn market by 2020 seem challenging, this is not an improbable size. We believe the e-commerce sector can return to growth after a flat 2016. Fintech and logistics can maintain strong momentum, although Unified Payment Interface (UPI) could be a potential threat to payment models.

Internet 1.0: Exuberance (until CY15)

GMV up from US$1.7 bn to 11 bn over 2013-15Valuation grew faster than GMV; funding at its peakAbsence of unit economics

Internet 2.0: Reality check (now)

CY16 GMV nearly flat YoY; funding down tohalf of CY15 levelsFocus shift from GMV to user monetisation & customer satisfactionLaying foundation for sustainable profits: cost optimisation, lower discounts, higher commissions, customer loyalty, better margin product mixBetter alignment with regulationsContinued aggression from Amazon, however

Internet 3.0: The way forward

Structural factors favourableE-tailing should be back to growth in 2017Conservatively, the e-tailing (B2C) marketcan have US$60 bn GMV by 2020More focus on profitability though it could be still 2-3 years awayPublic listing unlikely for the larger players for the next 12-18 months

12 January 2017

India Internet Sector 2

Focus charts

Figure 2: Both funding and GMV grew at a steep

pace for Indian e-commerce in 2015

Figure 3: The funding activity has been soft over the

past several months

Source: IAMAI, Your Story, Credit Suisse estimates Source: Trak.in, Credit Suisse estimates

Figure 4: GMV is likely to be nearly flat in 2016, as

companies adjust their business models

Figure 5: Apparel/fashion, etc. are faster growing

categories and also have better take rates

Source: Company data, IAMAI, Euromonitor, Credit Suisse estimates Source: IAMAI, Euromonitor, Technopak, Credit Suisse research

Figure 6: The industry is now looking back to

growth—festival season GMV* was strong in 2016

Figure 7: Fintech remains an exciting segment;

players, such as Paytm, are witnessing rapid growth

* combined GMV of the e-tailing players Source: RedSeer Consulting. Source: Credit Suisse research

Figure 8: US$60 bn is challenging but not an improbable market size by 2020

Source: Credit Suisse estimates, TRAI, IAMAI, RedSeer Consulting

0

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2010 2011 2012 2013 2014 2015

India e-tailing GMV (US$ mn) Total investment in Indian start-ups (US$ mn)

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Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16

Funding activity in the internet space (US$ mn) No of deals [RHS]

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2010 2011 2012 2013 2014 2015 2016E

India e-tailing GMV (US$ mn) GMV share in 2016

0%

20%

40%

60%

80%

100%

120%

2015 2016

Electronics and accessories

Apparel

Other fashion

Home furnishing

Books

Arrows besides the boxesabove reflect the direction of change in the GMV share

0.0

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1.0

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2014 2015 2016

GMV of products sold in the festive season sale (typically October) [US$ bn]

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200

May-14 Mar-15 Aug-15 Jan-16 Dec-16

Paytm's wallet userbase (mn)

Total population:

1.3 bn

Internet users: 372

mn

Online buyers: > 75 mn

Spend per

online buyer: ~US$150

Total population:

1.4 bn

Internet users: >550

mn

Online buyers:

>200 mn

2016

Spend per

online buyer: >US$250

2020

GMV

US$11-12 bnGMV

US$50-60 bn

12 January 2017


E-commerce 2.0

E-commerce 1.0: Exuberance peaked in CY15

CY14 and CY15 were quite eventful years for the Indian internet sector. 2015 GMV rose

3x YoY driven by aggressive marketing and there were several large funding rounds such

as Flipkart's US$1 bn one, followed by a couple of US$700 mn funding rounds over the

next six months. Valuations, too, were increasing at a pace higher than GMV with Flipkart

being valued at US$15 bn—valuations, in some cases, doubled in successive rounds of

funding within a gap of a few months.

The focus of companies was on user acquisition and geographical expansion. In this

process, several inefficiencies crept in, such as a high employee base, inefficient logistics

and non-viable geographic expansion in some instances.

E-commerce 2.0: Reality check

After two years of exponential growth, followed by a funding crunch, the sector has had a

reality check. 2016 funding was 55% lower in value (although 15% higher in the number of

deals), GMV was flat and there had been instances of markdowns in valuation by

investors. Business models have had to be rejigged to adhere to regulations. GMV is no

longer the holy grail, with the focus now on metrics such as the net promoter score, user

monetisation and customer experience.

Indian e-commerce firms have taken several initiatives including increasing the

commission rates (at the overall portfolio level), controlling the logistics costs (particularly

returns), rationalising discounts and shifting the portfolio mix in favour of high-margin

categories to curtail losses. The industry overall appears to be moving in the right

direction, with the focus now on unit economics and enhancing the customer life time

value (CLTV)-customer acquisition cost (CAC) ratio.

As the likes of Flipkart and Snapdeal work on transforming their business to make it

sustainable, Amazon continues to invest aggressively and is relatively immune from the

subdued private funding environment.

E-commerce 3.0: The way forward

Structural factors (a large young aspiring population, low offline retail penetration, a better

and cheaper internet and increasing smartphone penetration) remain intact for Indian

internet firms. In that context, the past 12-18 months has been a reality check for the

industry, which we believe is good and important for the sector's long-term profitable growth.

While there is more focus on profitability now, we believe that sustained profitability is still

2-3 years away, as a lot of ground still needs to be covered in terms of logistics, user

penetration and user loyalty. With the likes of Amazon and Uber aggressively investing in

their India operations, and with Rakuten and Alibaba exploring the market, this intense

competitive scenario is unlikely to change materially from current levels. However, there is

scope for further consolidation in different segments of the market. Some, such as logistics

and payments, have done well in 2016 and continue to be very attractive. UPI could be a

risk for the payments segment, however.

We believe that the e-commerce sector can return to growth after a flat 2016. While the

setbacks of the past 12 months and changes in strategy do make previous expectations of

a US$60 bn market by 2020 seem challenging, this is not an improbable size. We believe

that IPOs for the larger companies are unlikely in the next 12-18 months.

2015 GMV rose 3x, valuations outpaced GMV, inefficiencies

crept in

2016 funding down 55%, with the focus on

profitability and customer satisfaction

Amazon continues to invested aggressively

Structural drivers are intact but profitability is at least 2-3 years away

Challenges exist in reaching a US$60 bn

market by 2020 but this is not improbable

12 January 2017


Figure 9: India's e-commerce landscape

Source: Company, Credit Suisse

Fashion>> Furniture>> Grocery>> Jewellery>> Health>>

Cosmetics>>

Music streaming

Real estate

Payments and recharge

Financial marketplace Search/Advertising

Deal/discounts

Others

E-tailing

Horizontal players (B2C) C2C+B2C

Classifieds

Local O2O

Vertical players (B2C)

Jobs Local search Food (incl ordering)

Vehicles

Ecommerce logistics

Others

Online cabs Travel

12 January 2017


E-commerce 1.0: Exuberance peaked in CY15 CY14 and CY15 were eventful years for the Indian internet sector. Overall, 2015 GMV

growth for the e-commerce sector saw the fastest pace in the past five years, despite a

higher base. Funding activity, too, peaked in 2015. Investor optimism was high as well—

valuations doubled in many successive rounds of funding within a gap of just a few

months. There were several large funding rounds such as Flipkart's US$1 bn one,

followed by a couple of US$700 mn funding rounds over the next six months, valuing the

company at US$15 bn. Snapdeal raised over US$600 mn in 2014 and followed it with

another US$500 mn round in mid-2015, while Paytm raised US$680 mn in Sep-15 from

Alibaba and Ant Financials (Alipay). Ola also raised over US$1.1 bn between Oct-14 and

Nov-15, in three rounds of funding.

Figure 10: 2015 GMV grew at its fastest pace in the

past five years, despite a higher base

Figure 11: Funding for Indian e-commerce start-ups

also peaked in 2015

Source: IAMAI, Credit Suisse Research Source: Your Story

Figure 12: Horizontal e-commerce, fintech and online cabs had a significant share of funding in 2015

Note: Amounts in mn; Source: Trak.in, Credit Suisse estimates

0

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2010 2011 2012 2013 2014 2015

India e-tailing GMV (US$ mn)

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2014 2015

Total investment in Indian start-ups (US$ bn) No of deals [RHS]

Classifieds, $330, 5%Education Tech, $66, 1%

Fin-Tech, $1,196, 18%

Food Tech, $369, 6%

Horizontal e-commerce, $1,424, 21%Hyperlocal

commerce/Grocery, $329, 5%

Logistics, $363, 5%

Online travel/hotel, $348, 5%

Online taxi, $1,206, 18%

Vertical e-commerce (Fashion), $415, 6%

Vertical e-commerce (others), $385, 6%

Hyperlocal services, $111, 2%

Others, $166, 2%

2015 GMV was 3x YoY, funding nearly doubled

12 January 2017


Figure 13: 2015 witnessed several large funding rounds; Chinese companies

too ventured into India through investments in Paytm, Snapdeal and Ola

Date Company Investors Amount (in USD, mn)

Jul-15 Flipkart.com Steadview Capital, Qatar Investment Authority, Baillie

Gifford, Greenoaks Capital, T. Rowe Price Associates

and existing investors

700

Sep-15 Paytm Alibaba Group, Ant Financial 680

Aug-15 Snapdeal Alibaba, Foxconn, Softbank and other existing

investors

500

Nov-15 Ola cabs Baillie Gifford, Falcon Edge Capital, Tiger Global,

SoftBank Group, DST Global, Didi Kuaidi

500

Apr-15 Ola cabs DST Global, GIC, Falcon Edge, Steadview Capital,

Tiger Global, Accel Partners & others

400

Sep-15 Ola Cabs Falcon Edge Capital, Tiger Global, Softbank 225

Jun-15 Ecom Express Warburg Pincus 137

Nov-15 Grofers Softbank, Tiger Global, Sequoia Capital, Yuri Milner 120

Mar-15 Foodpanda Rocket Internet AG & others 110

Source: VC Circle, Credit Suisse research . Note: The investor list may not be comprehensive.

GMV primarily drove valuations

For a long time, GMV was the most widely tracked key performance indicator for e-

commerce companies—not only internally, but for investors as well. Companies expanded

GMV without focusing much on unit economics. This led to an increase in discounting and

marketing activities aided by a healthy funding environment. Both Flipkart and Snapdeal

had very aggressive GMV targets. At one point, Flipkart was aiming for US$10 bn GMV by

the end of 2016 and Snapdeal was targeting to beat Flipkart on GMV.

Rapid expansion in GMV brought in greater investor interest. Indeed, many of the large

funding rounds were directly negotiated by investors with the companies. As a result,

valuations were increasing at a pace higher than GMV. For example, between May-14 and

Jul-15, Flipkart's valuation increased by close to 7x, while the GMV run-rate went up 2x—

with greater investor demand bringing in a higher valuation. Similarly for Snapdeal,

valuations increased by close to 6x between May-14 and Aug-15, in line with GMV.

"The one thing I am very, very clear about right now is that I think we're going to be No. 1

(in terms of GMV) by March 2016 … I think we're going to beat Flipkart by then." – Kunal

Bahl (Founder, Snapdeal), August 2015

Valuations were increasing at a pace

higher than GMV

12 January 2017


Figure 14: Greater investor demand drove higher

valuations for Flipkart

Figure 15: Between May-14 and Jul-15, Flipkart's

valuation grew 7x and the GMV run-rate by 2x

Source: VCCircle, Crunch Base, Credit Suisse Research Source: VCCircle, Crunch Base, Credit Suisse Research

Figure 16: For Snapdeal, the large funding rounds

during 2014-15 led to a spike in valuation= = =

Figure 17: Between May-14 and Feb-16, Snapdeal's

valuation grew 6x, slightly faster than GMV

Source: VCCircle, Crunch Base, Credit Suisse Source: VCCircle, Crunch Base, Credit Suisse

Expansion, user acquisition were the primary agenda

As the focus was clearly on scaling up, the companies invested significantly in expanding

operations geographically as well as in getting an increasing number of users onto the

platform. Customer acquisition was largely driven by a low pricing strategy, which led to

commoditisation in business models. Indeed, many of these users turned out to have low

platform loyalty (in many cases, the buyer looks for the cheapest price across the

platforms before making the purchase).

Given the intense competition, the CAC was also high—it typically includes spends on

advertising and incentives to get customers onto the platform. While this helped

companies to scale up operations, it added to the cash burn as well. Due to low customer

loyalty and high discounting, the CLTV to CAC ratio was sub-optimal.

Rapid geographical expansion, expanding user bases and app popularity (helping traffic

share) helped the companies get successive funding rounds at better valuations. O2O e-

commerce firms were the best examples of this.

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Aug-12 Jul-13 Oct-13 May-14 Jul-14 Dec-14 Jul-15 2016

GMV runrate [RHS] Valuation

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Funding (US$ mn) Valuation (US$ mn) [RHS]

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May-14 Oct-14 Aug-15 Feb-16

GMV runrate [RHS] Valuation

O2O e-commerce firms were guilty of this

strategy

12 January 2017


The O2O bubble

O2O emerged in India with start-ups such as Zomato, Ola and Meru and has expanded

rapidly in the past few years. Funding activity peaked in 2014-15 with several large rounds

of funding—in many cases, for companies operating in similar domains. This was partly

also driven by the strong growth of the O2O market in China, which is often used as an

analogy for the India e-commerce market. Startups, such as Grofers, Peppertap, TinyOwl,

and Housing.com received multi-million dollar fundings in 2015, eventually leading to the

rise of an O2O bubble.

In many segments, there was an intense competition—too many players were chasing the

same segments (for example food-tech and grocery) with broadly similar offerings.

Another challenge for the hyperlocal start-ups is that every locality is like a new market for

them and sometimes they compete with a different set of players in different locations.

Customer acquisition costs were high and in many cases, exceeded the lifetime value of

the customers. Also, in the race to scale up rapidly, operational processes were not robust

for these companies. Rapid expansion to quickly scale up was led by easy funding during

2014-15, increasing the overall overheads for these companies. High logistics costs and

smaller order sizes also impacted the unit economics, particularly for food-tech

companies.

Figure 18: 2014-15 witnessed a sharp

jump in O2O start-ups …

Figure 19: … followed by several start-

ups shutting shop in 2016

Source: Inc42 Datalabs, Credit Suisse Source: Inc42 Datalabs, Credit Suisse

Several inefficiencies crept in while chasing growth

Given the focus was largely on scaling up and with the availability of funds, e-commerce

firms have been operating with inefficient cost structures. The key areas where

inefficiencies existed were logistics, employee costs and unviable geographical expansion.

Logistics is one of the largest cost items for e-commerce firms, ranging from 10-20% of the

GMV, depending on the category of goods. Given that the average commission for the

Indian e-commerce firms is 5-12%, in many cases, the net commission (commission less

the discount) is not sufficient enough to cover the delivery cost. Also, the delivery charges

in most transactions are heavily subsidised or in some cases, there are no charges at all.

High return rates (which are even higher in case of COD or cash on delivery transactions)

make matters even worse given the reverse logistics cost, which is typically borne by the

company (recently, there have been efforts to share it with the merchants). The "no

questions asked" return policies put increased burdens on companies as the cost was

0

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Number of O2O start-ups started

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120 Further development in 1H2016 in the O2O start-ups that got funding in 2015

Acquired/merged Active Shutdown

Logistics, employee costs and geographical presence were far from

optimal

12 January 2017


borne by the e-commerce companies in many cases—returns used to be as high as 20-

25% a couple of years ago.

E-commerce/internet companies were hiring aggressively from premier engineering/

management institutions, in anticipation of continued robust growth. Salaries offered were

also significantly higher than the general norm to attract better talent.

Also, many companies expanded operations in geographies that did not have enough

scale for the operations to become successful. For example, Zomato expanded its

international operations aggressively, Housing.com had operations in many cities across

the country. Some of the food delivery companies, too, expanded operations in localities

where scale could not be built up.

Figure 20: Losses burgeoned in FY16

Source: VC Circle, MCA. * Flipkart Pvt Ltd ** Amazon Seller Services ^ Jasper Infotech ^^ One97 Communications # Quikr India Private Limited ## Supermarket Groceries

-70,000

-60,000

-50,000

-40,000

-30,000

-20,000

-10,000

0

Flipkart* Amazon** Snapdeal^ Paytm^^ Quikr# BigBasket##

E-commerce companies losses (Rs mn)

FY15 FY16

12 January 2017


E-commerce 2.0: Reality check After witnessing two years of exponential growth, followed by a funding crunch, the sector

has had a reality check. GMV is no longer the holy grail and the focus has now shifted to

metrics such as the net promoter score, user monetisation and customer experience. Also,

there is a growing recognition of the fact that India is different from China and may not

necessarily mirror the early e-commerce trends and trajectory in China.

Indian e-commerce firms have pursued several initiatives including increasing the

commission rates (at an overall portfolio level), controlling the logistics costs (particularly

returns), rationalising discounts and shifting the portfolio mix in favour of high-margin

categories to curtail the losses and create a foundation for achieving profitability. The

industry overall appears to be moving in the right direction, with the focus on unit

economics and in ensuring that the CLTV to CAC ratio is attractive—fundamental to any

profitable business model. Regulations have so far been followed in letter but not in spirit.

However, with some more clarity on the rules, and some greater intent from the regulators,

e-commerce companies are now adjusting their business models as well.

As the likes of Flipkart, Snapdeal and Paytm work on transforming their businesses to

make them sustainable, Amazon continues to invest aggressively and is relatively immune

from the subdued private funding environment.

Funding drought after an eventful 2015

Since the beginning of 2016, there have hardly been any large deals in the sector, with the

largest announced deal so far being the US$200 mn fund-raising announced by Snapdeal

in Feb-16. There have also been talks about a US$300 mn fund-raising by PayTM (link).

Also, the early-stage startups have been finding it particularly difficult to move beyond

Series A funding. There have been early stage and smaller rounds of fundings

nonetheless—the number of deals is up 15% YoY for the first 11 months of 2016.

However, the overall value of funding for the first 11 months of CY16 is down 55% YoY.

Figure 21: Funding activity has been soft in the past

several months

Figure 22: The number of large deals (US$50 mn or

above) has also come down

Source: Trak.in, Credit Suisse Source: Trak.in, Credit Suisse

While existing investors have marked down their investments in some cases, there have not

been any material instances of downrounds (a subsequent round of funding at lower

valuations compared to the preceding round) though. Canvera (Info Edge's investee

company) raised funds in Nov-15 at nearly a third of its valuation a year ago. However, in the

latest round of funding by Info Edge, the company is valued at close to its earlier levels.

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Focus away from GMV to NPS, net revenue per

customer, etc.

2016 funding is 55% lower in value, though

15% higher in the number of deals

http://www.business-standard.com/article/companies/paytm-to-raise-300-million-valuation-pegged-at-5-billion-116082800572_1.html

12 January 2017


Funding soft in e-commerce/food tech/online taxi segments; decent interest in fintech/travel

Figure 23: Online travel, fintech and some niche areas such as education tech accounted for a larger share

of funding in 2016

Source: Trak.in, Credit Suisse estimates Source: Trak.in, Credit Suisse estimates

Among segments, online travel/hotel booking has witnessed healthy funding activity so far

in 2016, helped by the US$180 mn fund-raising by Makemytrip and two rounds of

US$100 mn and US$62 mn raised by Oyo Rooms. However, a fewer number of

companies have been funded in 2016 in this space compared to 2015. Fintech companies,

too, have witnessed decent interest so far in 2016 although the funding is down from 2015

levels in the absence of any mega funding round similar to the US$680 mn one for Paytm

last year. A couple of larger rounds this year were the US$90 mn funding of Mobikwik

(over two rounds) and the US$60 mn fund-raising by PayTM. There was another

rumoured round of US$300 mn in August 2016 (link), which is not included in the

calculations above.

Funding in the horizontal e-commerce space was significantly weak, after a good 2015.

The vertical e-commerce players, too, struggled to raised funds although the funding

environment has been relatively better in the fashion vertical. Logistics, food tech and taxi

are the other segments that have witnessed low funding activity levels.

The funding activity in the hyperlocal segment was also soft but not as bad as some of the

business closures in the past one year suggest.

Classifieds5% Education Tech

1%

Fin-Tech17%

Food Tech5%

Horizontal e-commerce

21%Hyperlocal

commerce/Grocery5%

Logistics5%

Online travel/hotel

5%

Online taxi18%

Vertical e-commerce (Fashion)

6%

Vertical e-commerce

(others)6%

Hyperlocal services

2% Others4%

2015 funding breakdown across segments

Classifieds8%

Education Tech6%

Fin-Tech15%

Food Tech5%


12%Hyperlocal

commerce/Grocery6%

Logistics4%

Online travel/hotel

16%

Online taxi1%


7%

Vertical e-commerce

(others)7%

Hyperlocal services

2%

Others11%

2016 (year to Nov) funding breakdown across segments

Particularly weak in horizontal/vertical e-

commerce, food-tech, online taxi

http://www.business-standard.com/article/companies/paytm-to-raise-300-million-valuation-pegged-at-5-billion-116082800572_1.html

12 January 2017


Figure 24: Funding activity has been particularly weak in horizontal/vertical (non-fashion) e-commerce, and

the food-tech, online taxi and logistics segments. There's been decent interest in online travel and fintech

Note: We have considered PayTM as part of the fintech segment for the above analysis; Source: Trak.in, Credit Suisse estimates

Valuations under greater scrutiny now

In recent months, the supply of capital has tightened, making some of the companies in

the hypercompetitive segments settle for lower valuations.

Companies, such as Housing.com, Jabong and Commonfloor, were sold at a valuation

lower than their last funding rounds. Myntra acquired Jabong at nearly one seventh of its

last announced valuation a couple of years back. Fabfurnish was sold at a distressed

valuation of US$3 mn to Future Group—the company had raised US$30 mn in three

rounds until 2014. Housing.com is valued at about US$70-75 mn in the recently

announced merger with PropTiger (it was valued at over US$200 mn in the earlier rounds

in 2014).

While companies such as Snapdeal, Hike, Shopclues and Bookmyshow managed to get

decent valuations in their funding rounds during 2016, we believe that valuations have

been subject to greater scrutiny and this could also be one of the reasons for a lower

number of large funding deals in recent times, in our view.

0 200 400 600 800 1,000 1,200 1,400 1,600

Online travel/hotel

Fin-Tech


Classifieds


Vertical e-commerce (others)

Hyperlocal commerce/Grocery

Education Tech

Food Tech

Logistics

B2B marketplace

Hyperlocal services

Online housing rental

Online health

Online taxi

Funding by segments (US$ mn)

2016 - till Nov 2015

Jabong and Commonfloor are

examples with valuations lower than

the previous round

12 January 2017


Figure 25: Snapdeal, Shopclues and Bookmyshow obtained decent valuations in their latest rounds;

Commonfloor and Jabong were sold out at lower valuation

Source: VC Circle, Credit Suisse Research

Mark-downs of Flipkart's valuations

Although Flipkart has not raised any fresh money since July 2015, there have been

several instances of markdowns being booked by its investors – in the range of 30-90%.

During the past one year (Jan-Dec 2016), the performance of Chinese internet stocks was

mixed: Tencent and Alibaba were up 24% and 8%, respectively, while Baidu, JD.com and

Vipshop were down 21%, 13% and 28%, respectively. This could have partly influenced

the markdown by investors. It is also possible that the next round of funding, whenever it

happens, could be influenced by these markdowns. But these could be just conservative

accounting norms followed by these investors.

Similar markdowns have also been witnessed in other parts of the world. For example,

Fidelity had marked down its investment in Snapchat by 25% in November 2015. Similarly,

BlackRock marked down the value of its investments in Dropbox by 24%.

Figure 26: The share price performances of Chinese internet companies were

mixed in 2016

Source: Thomson Reuters. The columns in the dark shade denote Chinese internet companies.

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

Snapdeal Shopclues

0

100

200

300

400

500

600

JabongCommonfloor Bookmyshow

-40%

-30%

-20%

-10%

0%

10%

20%

30%

Flipkart's valuation has been marked-down by

existing investors , but it could be cautious

accounting

12 January 2017


As a result, the focus is now shifting from GMV to

operational metrics

"Our GMV run rate continues to be healthy and above $2.5 bn" (at the same time, last

year, Snapdeal had claimed a GMV run-rate of over US$5 bn). "We are significantly

focused on delivering the best experience, growing our net revenue which has increased

three times in the last 12 months". – Snapdeal (June-2016).

Figure 27: After two years of exponential growth, the GMV is likely to be nearly flat in 2016

Source: Company data, IAMAI, Euromonitor, Credit Suisse estimates

GMV has always been an ambiguous metric to depend upon—many companies report

GMV without netting off the discounts and returns. In addition, GMV can be increased by

selling higher-value but lower-margin items.

However, since end-2015, there were signs of rational competitive behaviour by

companies, driven by changing investor expectations (see our note dated December 2015

"Rationality setting-in?". As per our estimates, 2016 GMV is likely to be nearly flat.

Snapdeal's GMV would have nearly halved (not necessarily amounting to a

commensurate decline in the net revenue—as per management, the net revenue has

actually increased), while Flipkart may exit 2016 with broadly similar GMV as 2015.

Amazon, on the other hand, has continued its aggressive approach and may exit 2016

with significant growth in GMV.

Focus now shifting to operational metrics, that could result in profitable growth

Discussions on GMV in the public domain are rare now. Indeed, in the annual festival

sales this year (in October 2016), companies rarely spoke about GMV (which was the

much-touted metric last year). Management teams are now focusing on metrics such as

revenue per customer (function of number of orders per year, value per order and

commission), net promoter score (a measure of customer satisfaction) and overall user

monetisation (including alternative sources such as advertising as well as new service

offerings such as hyperlocal services).

Although the e-commerce firms continue to burn money in their operations, there have

been some measures in the past one year to optimise the operations, curtail the burn and

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

2010 2011 2012 2013 2014 2015 2016E

India e-tailing GMV (US$ mn)

GMV sharein 2016

2016 aggregate GMV is probably flat vs. 2015

Focus is on higher commissions, lower

logistics, lower discounts and high-

margin categories

https://plus.credit-suisse.com/u/k0KRko

12 January 2017


to chalk out a long-term path to profitability. Indian e-commerce firms have taken several

initiatives including increasing the commission rates (at the overall portfolio level),

controlling the logistics costs (particularly returns), rationalising the discounts and shifting

the portfolio mix in favour of high-margin categories.

Shift in the category mix

While books were the dominant category in the very early days of Indian e-commerce

(given the standardised nature of the product), electronics quickly became the top

category for most horizontal e-commerce companies. This was also a category that had

standardised products which made it easier for consumers to buy online, and price

discounts were significant incentives given easy price comparisons across different

channels. As Indian e-commerce started becoming larger, other categories started

growing, especially apparel and other fashion products (including personal care). The

growth of vertically focused companies drove growth in other categories as well.

E-commerce companies have also started reducing their focus somewhat on electronics

given the difficulty in making money in that category. Price comparisons are easy and

competition is intense. On the other hand, apparel, especially private labels, can have high

margins. Unbranded apparel and other fashion accessories, too, have higher margins

relative to traditional electronics products. The average commission rate charged by

Flipkart and Amazon India is ~15% for apparel, about 11% for other fashion products

(although lower for health and beauty products) and high single digits on home

furnishings. These are the faster growing categories for the Indian e-commerce firms and

in the past 12 months, there has been increasing focus to increase the share of such

products in the overall GMV mix.

Moreover, not all the private brands have similar margins. Myntra and Jabong have

rationalised several of their non-performing and low-margin brands for better overall

margins.

Figure 28: Apparel/fashion, home furnishings, etc. are faster growing categories and also have better

commission rates (relative to the current average)

Source: Credit Suisse Research

0%

20%

40%

60%

80%

100%

120%

2015 2016


Apparel

Other fashion

Home furnishing

Books

Arrows besides the boxes above reflect the direction of change in the GMV share

0% 5% 10% 15% 20%


Apparel

Other fashion

Home furnishing

Books

Others

Average Commission rates across categories

Shift away from low-margin electronics to

fashion

12 January 2017


Change in user demographics may shift the mix towards high margin categories

There is an ongoing shift in user demographics. According to an A.T. Kearney and Google

survey, women account for 20% of online shopping spend and their share of online

shopping has been increasing rapidly. A.T. Kearney and Google expect women's share of

online spending to move up to 42% by 2020.

More importantly, the survey indicates that 50% of the women that are not yet shopping

online are likely to start with the lifestyle category, 36% prefer consumer electronics and

34% prefer personal care. This is in significant contrast to prospective male buyers, 64%

of whom would like to start online shopping with consumer electronics. We believe that

this would be true for existing women shoppers as well. The fact that women's share of

online spending is likely to go up and that they prefer the non-electronics categories,

should help the shift in the share of online spending from traditional electronics/mobiles to

fashion/personal care.

Figure 29: Women's share in e-tailing spend is

rising …- - - - -

Figure 30: … and women's preference for non-

electronics category should help the GMV mix shift

Source: A.T. Kearney and Google study Source: A.T. Kearney and Google study

Getting to an attractive CLTV-CAC ratio

"There are 50-60 mn consumers buying online today. Given the large base, it makes

sense to ensure you are selling more to the same customers as that opportunity is big

enough compared to three years back." – Binny Bansal (Co-founder and CEO, Flipkart) -

June-2016

There is clearly more focus on unit economics which should lead to an attractive CLTV) to

CAC ratio. The CAC for the ecommerce company depends on its marketing spends for all

types—search, print as well as digital. The objective is to get the prospective user onto the

platform and incentivise them to buy more. This cost needs to recovered from these same

customers over a period of time—through profitable repeat orders.

Even in the case of customers who have stayed on the platform for a reasonably long

period of time and make repeat purchases, low gross margins have elongated the cost

recovery for the e-commerce companies.

The ecommerce platforms have turned their attention to both parts of the equation—the

cost of acquiring the customer as well as the CLTV. As per TAM Media Research

estimates, the marketing spends of the Indian e-commerce players such as Flipkart,

0%

20%

40%

60%

80%

100%

120%

2015 2020

Share in e-tailing spend

Men Women 0% 20% 40% 60% 80%

Consumer electronics

Lifestyle

Books and media

Lifestyle

Consumer electronics

Personal care

Category preference for new online buyers

Men

Women

Women shoppers are expected to rise from

20% of online spend to 42% by 2020

50% of women prefer lifestyle shopping, 64%

of men electronics

The 2016 marketing spends of Flipkart and Snapdeal appear to be

lower

Amazon Prime, Snapdeal Gold can help

improve CLTV

12 January 2017


Snapdeal and Shopclues were lower in 2016 (though Amazon continues to invest

aggressively in marketing)—and this excludes discounts. On the CLTV side, there have

been initiatives to develop user loyalty and stimulate more transactions from existing

buyers. For example, Amazon has launched its Prime services in India (at a very

affordable price point). Flipkart already had Flipkart First, which did not receive much

traction, and has now been complemented by F-assured. Snapdeal also has a similar

offering—Snapdeal Gold. Interestingly, while Amazon is charging for the Prime

membership (that also serves the purpose of developing user loyalty), F-assured and

Snapdeal Gold services are available to all users (for Snapdeal Gold, the only condition is

that one needs to prepay).

Amazon's recent push into fast-moving consumer goods is part of its broader strategy to

encourage frequent online buying patterns, particularly among its prime members.

Figure 31: Amazon has launched its Prime offering in India to build customer

loyalty, Flipkart and Snapdeal have similar offerings available to everyone

Amazon Prime F Assured Snapdeal Gold

Delivery cost Free Free Free

Minimum order value None Rs.500 None

Delivery time 1-2 days 2-4 days Next day

Returns Regular Regular Within 14 days (regular 7 days)

Value add Amazon Video, early access

window for deals

Additional quality checks Additional quality checks

Membership fee Free for the first 2 months, Rs499

for the first year versus the full

price of Rs999.

Free Free. Valid only on prepaid

orders.

Source: Company websites, Credit Suisse Research

User monetisation through a wider portfolio of offerings

Another way to improve the CLTV is by widening the portfolio of offerings on the

platform—by launching new categories of products or services. Fashion as a category is

being pursued aggressively by nearly all the e-commerce platforms. Snapdeal plans to

invest US$100 mn to expand its fashion portfolio and Amazon has also been making some

significant investments. Flipkart has made two large acquisitions in the fashion segment—

Myntra and Jabong—and claims to have a 70% share in the overall online fashion market

now. However, Myntra and Jabong continue to operate as independent platforms.

Grocery is another category that is being targeted now. E-commerce firms have already

tried their luck once in grocery (at that time, it was pretty competitive due to the presence

of several start-ups) and are now having a fresh look (as competitive intensity has

somewhat reduced).

Services is another area where the horizontal e-commerce firms may look to expand.

Snapdeal has already tied up with Urbanclap for home services and Freecharge is an

integrated part of the platform. Paytm has a broad range of services. Amazon, too, has

Amazon Now (for hyperlocal grocery), but users need to download a separate Amazon

Now app and this service is slowly being rolled out in different cities.

Quikr and Justdial among the online classifieds platforms have been trying to venture into

multiple services and evolve into a one-stop horizontal platform.

Increase in commission rates; commission rates still below what Amazon charges in the US

Both Flipkart and Amazon have increased commission rates somewhat in the past year

(although they have brought down commission rates in some categories as well).

Snapdeal, too, has made some changes to its commission rates. Flipkart and Amazon

India's commission rates or the take rates that the ecommerce platforms charge from the

Fashion, grocery are some new focus areas

Indian platforms charge less than Amazon US,

except for apparel

12 January 2017


vendors are still significantly below what Amazon charges in the US, except for categories,

such as apparel.

Figure 32: Flipkart and Amazon (India)'s commission rates are still significantly lower than the rates

charged by Amazon; commission rates are comparable in the 'clothing' segment

Source: Company websites, wisesellr.com, Credit Suisse estimates

Signs of some rationality in pricing

The level of discounting from ecommerce firms had reached very high levels in the quest

to increase the user base and GMV. More recently, there have been some signs of

rationality in discounting in e-commerce as well as the hyper-competitive taxi aggregation

segments. This was one of the reasons behind the moderation in GMV growth in 2016.

Besides a tighter funding environment and focus on lower cash-burn, government

regulations regarding marketplaces could also be one of the factors influencing

discounting decisions.

Similar to earlier years, the discounting activity picked up in the Oct-Dec quarter (which is

a quarter with shopping festivals in India). Our understanding from industry sources is that

the overall discounts were lower this year.

Cost structures are being optimised; logistics is a

key element

Until a year ago, given that the focus was largely on scaling up, e-commerce firms were

operating under an inefficient cost structure. Logistics is one of the largest cost items for e-

commerce firms, ranging from 10-20% of GMV, depending on the category and value of

the goods being delivered. Given that the average commission for Indian e-commerce

firms is 5-12%, in many cases, the net commission (commission less the discount) is not

sufficient to cover even the delivery cost. Also, the delivery charges in most transactions

are heavily subsidised or in some cases, there are no charges at all. High return rates

(which are even higher for COD transactions) make matters even worse, given that the

reverse logistics cost is typically borne by the company (recently, there have been efforts

to share it with the merchants). Returns used to be as high as 20-25% a couple of years

ago.

0% 5% 10% 15% 20% 25%

Automotive

Baby care & toys

Books & Media

Clothing

Computers

Electric appliances

Fashion and accessories

Footwear & accessories

Grocery

Health & beauty

Home & kitchen

Jewellery

Luggage and travel

Mobiles/tablets

Commission rates charged to the merchants on the platform

Amazon US Amazon India Flipkart

12 January 2017


However, there have been several measures taken by the companies to control these

costs, ranging from controlling return rates, optimising the logistics functions to take

advantage of the economies of scale and judiciously using 3PL players. In recent

meetings, we learnt that some of the companies have managed to bring down their

logistics costs per item delivered by as much as 50%.

Initiatives to control return rates

Historically, e-commerce firms in India have followed a no-questions return policy in order

to attract a larger number of shoppers (many of whom were experiencing online shopping

for the first time and hence needed some assurance). However, in many cases, the

returns were for not for any valid reason. Ahead of the festival season this year, both

Flipkart and Amazon cancelled the options for the customers to return the product if the

reason was just a "change of mind". Further, in categories such as computers and

cameras, defective or damaged products were made eligible only for replacements and

could not be returned. Fashion is one category where the return rates have been higher,

due to the non-standardised nature of the product (issues relating to size, quality of

material, etc.).

Economies of scale help; third-party logistics (3PL) players also getting efficient)

As the e-commerce companies mature, they are optimising logistics costs, using better

processes and achieving higher utilisation. Amazon already has highly efficient logistics

operations in the US and is transferring what it has learned to the Indian market (although

regulatory factors here mean that the US model cannot be easily replicated). 3PL players

have also been getting more efficient, having been in the business for a reasonable time

now.

Managing customer experience through better

control over merchants and logistics

“Everyone at Flipkart now has net promoter score (NPS) and customer satisfaction as their

most important metrics. NPS breaks down into what product selection is available, how

fast it is available, whether it is available all the time, and at what price. And of course, the

other big focus is on execution. Ecommerce is a business where you’re selling products

every day. So you need the execution rigor to make sure that every day, we are providing

the best customer experience” – Binny Bansal, Co-founder and CEO, Flipkart (Aug-16)

While Amazon has always been known for its superior customer experience (which has

also been a key reason for its quick rise in India), the breakneck pace of growth in the past

2-3 years has impacted the customer experience of Indian heritage firms that were

relatively new to the game. Tightening regulations requiring a marketplace model rather

than an inventory one also caused some changes to be made that impacted the customer

experience. Indian heritage e-commerce firms have also been raising their standards

through better control over their merchants and the logistics.

Logistics: One of the priority areas of investment

Over the past three years, Amazon has made significant investments in infrastructure.

Amazon has 27 fulfilment centres with a storage capacity of 7.5 mn cu ft by the end of

2016.

Flipkart, too, has been strengthening its logistics. Earlier, Flipkart reduced the handling of

logistics by Ekart from 85% to 60% to have more flexibility. However, it has reversed the

decision since then. Ekart is back to handling 75-80% of shipments to provide a better

customer experience.

Snapdeal, too, has changed its philosophy from being a pure marketplace to owning the

infrastructure as well. Snapdeal opened six logistics hubs (owned by its 100% subsidiary

Companies have seen up to a 50% reduction in logistics costs per

item

During this festive season, companies

needed valid reasons for cancellation

The breakneck growth impacted customer experience—this is

now a focus area

12 January 2017


Vulcan) during the year with a total capacity of 1 mn sq ft to deliver the products faster—it

seems to have invested US$300 mn in logistics and in the supply chain in the past couple

of years. This took the total logistics hubs count to 10. Snapdeal also has third-party

warehouse centres operated for its SD+ fulfilment (similar to Fulfilled by Amazon) and

says that it delivers 80% of its orders through SD+ fulfilment. Snapdeal claims that its

delivery time is down from seven days to 2-4 days and the money is refunded in 24 hours.

Paytm, on the other hand, has a fully partner-driven logistics model (with no logistics

infrastructure of its own). But then, its e-commerce business is much smaller than those of

Flipkart and Snapdeal, and its focus seems to be more on the payments side.

The 'supply side' prominence in increasing

The relationship between the e-commerce companies and sellers on the platform has

largely been a smooth one so far with the e-commerce companies making it attractive for

sellers to transact. As long as growth in GMV was the primary focus for the e-commerce

companies, terms were largely favourable to the sellers in terms of commission rates and

policies on logistics and returns. However, as there is an increasing focus on profitability,

sellers are being forced to share some of the cost burden as well. Sellers have been

complaining about issues such as the high proportion of returns and the burden on them to

bear the logistics costs for such returns and about pending payments.

Sellers' associations, such as the All India Online Vendors' Association (AIOVA), have

become more active as well. For example, it recently met with up with the Commerce and

Industries minister (after running a Twitter campaign) to discuss non payments from an

e-commerce platform, AskMeBazaar. AIOVA has also written to the Prime Minister's Office

asking for regulations safeguarding sellers from frequent policy changes by e-commerce

companies. In another instance, it approached the Department of Industrial Policy and

Promotion regarding cashback offers by Paytm which they thought benefited some sellers

selectively and influenced customer behaviour accordingly. The association has used

these examples to lobby for a regulatory body to be set up.

eSeller Suraksha is another such association. It had recently asked its members (about

1,000 in number) to "strike" for one day and they stopped sales on the Flipkart platform.

This was to protest over Flipkart's new commission structure and return policy.

The relationships with sellers become increasingly important now given the tighter

regulatory scrutiny on marketplaces (with foreign investments). Some of these have been

hugely dependent on one or two sellers (which allowed a quasi-inventory model) but new

regulations mandate that such marketplaces cannot obtain more than 25% of revenue

from any one single merchant. For example, as per a Livemint article (dated April 2016),

Flipkart derived 35-40% of its GMV from one seller (WS Retail). Similarly, Cloudtail (a JV

between Amazon and Catamaran Ventures) accounted for about 40% of Amazon's GMV

(as per a Livemint article dated Oct-15). There is an urgent need for these marketplaces to

broadbase their vendor base.

Additionally, the e-commerce companies' expansion into smaller cities and broadbasing of

revenue away from electronics will necessitate signing on several more sellers.

Penetration into smaller cities and new

categories necessitates a deeper seller base …

… which can also

cause conflicts between sellers and e-commerce companies

12 January 2017


Figure 33: With the number of sellers growing rapidly on the platforms, they are

gaining increasing importance

Source: Company data, Credit Suisse research

Tighter control over merchants

In a marketplace model, given that a significant part of the GMV contribution comes from

third-party merchants, e-commerce firms need to have a reasonable control over the

merchants to ensure a good customer experience. The key problem areas on the

merchant side have been: (1) product quality (including genuineness); (2) standardised

packaging; and (3) timeliness of delivery.

Investments in fulfilment centres address the latter two problems as it helps e-commerce

companies to have better control over the supply chain. On product quality, the companies

claim to have a better control now—many of the products on the marketplace now have

genuineness assured by the e-commerce firms.

Flipkart has come up with an innovative approach by introducing three ratings for its

sellers—gold, silver and bronze—which are assigned based on the sellers' quarterly

performance for parameters such as product quality, cancellations and product returns.

Based on the rating, Flipkart will offer benefits to its sellers—such as a 20% discount on

the forward shipping fees to sellers rated under Gold category.

Employee retention has been a challenge, some

instability at top management in recent times

While attrition at the junior level has always been high in e-commerce start-ups (according

to some estimates, it is close to 50-60% for smaller companies), employee turnover,

particularly at the higher level, is one of the softer factors that many Indian internet

companies are struggling with in recent times. While a good idea, capital and robust

technology are enough to start off a new venture but to grow it to a certain level, a larger

management team with significant experience in various processes will be required to

continue to scale up the business. And even as the larger companies hire personnel with

significant international experience, turnover has risen as well.

For example, the chief product officers of Flipkart and Snapdeal resigned earlier this year

and the CFO of Flipkart (Sanjay Baweja) resigned recently barely within a year of joining

the company. Many of the senior-level resignations have been due to entrepreneurial

ambitions. However, at the same time, there have also been issues with the way

entrepreneurs run large companies. For example, Punit Soni, who joined from Google as

300,000

200,000

35,000-50,000 50,000

500,000

300,000

140,000

~100,000

0

100,000

200,000

300,000

400,000

500,000

600,000

Shopclues Snapdeal Amazon Flipkart

No. of merchants on the platform

2015 2016

12 January 2017


Flipkart's chief product officer (and was considered a big hire by the Indian e-commerce

sector), referred to the inability of the Indian ecosystem to retain international talent during

an interview after his resignation from Flipkart. The erstwhile chief product officer of

Snapdeal has recently joined Facebook. Amazon, too, has witnessed a couple of senior

management departures recently. Its head of HR, Kinjal Chaudhary and Director

Operations – Amazon Logistics, Projesh Kuncu, have quit. The latter has joined Quikr.

Amazon, however, remains immune from the funding

squeeze

Amazon started relatively late in India. It commenced operations in 2013 while Flipkart and

Snapdeal started in 2007 and 2010, respectively. However, it has been extremely focused

on becoming successful in India, given its lacklustre presence in China, and its founder

and CEO Jeff Bezos' visits to India, investment announcements and India's mention in

each of the recent investor interactions underline this.

Extremely localised approach

And as many other successful multinationals in India have done, Amazon has localised its

presence in India in many ways, rather than replicate its strategies from the US. It has

followed its competitors in strategies that are largely unique to India such as cash-on-

delivery and motorcycle delivery. It is also gradually fulfilling regulatory requirements such

as a marketplace model rather than an inventory-led one. Also, its advertisement

campaigns, especially the "aur dhikao" (show me more) appeals to the Indian buyers'

psychology. The company had even an "aur dhikao" button on its website to press for

more options. The publicity around Jeff Bezos's India visits has also had a local touch,

whether it be photographs of him on a typical Indian truck or of him in traditional Indian

attire. Amazon is also looking to bid for IPL's media rights (IPL is a widely followed cricket

league in India), as per news reports.

Amazon has recently launched its Prime Video services in India and has tied up with

several local production houses for content.

Initiatives for the last-mile customer reach—Project 'Udaan':

As an example, Amazon has tied up with Vakrangee to leverage its Kendras (Vakrangee's

outlets in both rural and urban areas to facilitate banking) for increasing its buyer base

(currently over 1,000 outlets but plans to increase this to 20,000 by the next year). It has

also tied up with the Rajasthan state government (under an e-governance initiative

'e-Mitra' that specialises in providing the last-mile solution for government services) and

ConnectIndia. The outlets, under this initiative, are paid a certain commission on the value

of the merchandise sold (typically 4-6% in the case of Vakrangee tie-up). The customers

can also collect their orders at the centres itself.

Seller initiatives

It has had initiatives such as "chai carts" (tea carts)—a mobile initiative to reach out to

sellers and sign them up. The "Amazon Tatkal" (quick) programme helps sellers register

and start selling in an hour.

Expanding the portfolio of offerings

Also, Amazon is fast filling the missing pieces in its product portfolio. For example, in

smartphones (the single-largest revenue generator for e-commerce firms), Amazon had

struck important exclusive partnerships with key smartphone brands such as Motorola,

Xiaomi and OnePlus via Cloudtail. Flipkart earlier had a significant lead in this category,

which may have reduced with Amazon's tie-ups. The Moto and Xiaomi deals were

particularly significant as Flipkart earlier had exclusivity with these brands.

Amazon has committed US$5 bn for India, vs.

the US$3 bn and US$1.6 bn raised by

Flipkart and Snapdeal, respectively

Partnerships for assisted e-shopping

and last-mile logistics

12 January 2017


Amazon is also trying to scale up its fashion vertical, which is significantly smaller than that

of Flipkart (including its recent acquisition of Myntra and Jabong). Fashion is also among

the fastest growing categories in e-commerce. Amazon recently hired Gautam Kotamraju,

the former Chief Creative Officer of Myntra, to help build its private-label fashion offerings.

It has already launched its fashion brand "Symbol" and is selling it through Cloudtail

(Amazon's JV with Catameran). Amazon has already a similar strategy for its private label

electronic accessories under the brand name " AmazonBasics".

In an aggressive investment mode in the past one year

At the time, its peers were trying to curtail their growing cash burns, while Amazon

continued with its aggressive investment in India. Over the past one year, Amazon has

increased its logistics infrastructure, brought on board several merchants and has been

working on garnering customer loyalty (the launch of Amazon prime membership and also

the recently launched Amazon Prime video). It has committed US$5 bn for the India

business versus about US$3 bn and US$1.6 bn raised by Flipkart and Snapdeal,

respectively. As per estimates from TAM Media Research, Amazon was significantly

ahead of Flipkart in terms of ad spends during the festive season. The overall focus has

been on customer experience. Our personal observation suggests that there seems to be

an evolving loyal Amazon user base in India.

All these initiatives reflect in better traction for Amazon. Usage metrics for Amazon have

improved significantly (both web visits as well as app downloads) and it appears to have a

noticeable lead over Flipkart and Snapdeal. There have been market share gains for

Amazon at the expense of both Flipkart and Snapdeal over the last few quarters.

Figure 34: Amazon has invested a lot in its infrastructure and expanded its seller base in the past one year


35,000-50,000

140,000

2015 2016

No. of sellers

21

27

2015 2016

No. of fulfilment centers

5

7.5

2015 2016

Storage capacity (mn cubic feet)

Amazon is now #1 in app downloads and

website visits

12 January 2017


Figure 35: Amazon has taken the lead over its peers over the past year

Source: Hindustan Times, Similar Web, App Annie, Credit Suisse Estimates. Note: Data for Snapdeal is only up to Sep 2016.

More clarity on regulations and greater intent on

compliance

E-commerce FDI: While it requires adjustments to the business model, it provides more clarity

There have been two recent regulatory changes/clarifications related to e-commerce. First,

the government has clarified that 100% FDI (foreign direct investment) will be allowed in

an e-commerce company as long as the company adopts a marketplace model but with no

single seller accounting for more than 25% of GMV. While companies with FDI were

always required to follow the marketplace model, newspaper reports (such as Live Mint)

have suggested that a single related entity has contributed 40-50% or more of GMV to

Flipkart (WS Retail) and Amazon (Cloudtail) earlier.

The second regulatory clarification relates to discounts. The government stated that “e-

commerce entities providing a marketplace will not directly or indirectly influence the sale

price of goods or services and shall maintain a level playing field.” While there can be

some grey area around the interpretation of this clause, the intention is to reduce

significant discounts and protect the offline retailers.

More intent on compliance

While on the one hand, companies are trying to offer better customer experience through

tighter control over the supply chain and logistics, which is better possible in an inventory

model, the new set of regulations require them to move to the marketplace model.

Technically, the e-commerce firms were always required to operate as marketplaces;

however, it appears that this rule was seldom followed in spirit. Both Amazon and Flipkart

have their largest seller (Cloudtail and WS Retail, respectively) accounting for over 25% of

the GMV.

With relatively more clarity on the rules, there have been some initiatives to follow the

rules in spirit, to some extent. For example, news reports (such as Live Mint) suggest that

Amazon India's largest merchant Cloudtail has almost stopped selling mobile phones to

comply with the foreign investment norms that prevent a single seller from accounting for

more than 25% of a marketplace's total sales. Similarly, Flipkart is trying to broaden its

large merchant base (with its focus on its top 100 sellers and brands) to ensure that no

single merchant has over a 25% share of GMV. At the same time, it can better manage

the customer experience through just a few large merchants (it is relatively easier to

standardise the customer experience with a few large merchants as compared to multiple

smaller merchants).

Key changes are on the adoption of a

marketplace model and on discounts

12 January 2017


Vertical players, such as Yepme, Fabfurnish and Zivame, are trying to convert into single-

brand retailers (the rules allow 100% FDI in the single-brand retail format).

Although the pricing seems to have become more rational recently, the recent festival

season witnessed significant discounting, as high as 50-70% in some categories. This

could attract attention from the regulators.

Cab aggregators too feeling the heat

The other internet-related segment impacted by the regulatory framework is taxi

aggregation. Players, such as Uber and Ola, have prospered on the back of heavy

discounting and incentives, and this has impacted traditional intra-city taxis. The taxi

aggregators have so far been able to operate without any major regulations. There have

been no floor or cap fares and the cabs empanelled do not need to have a taxi licence.

While predatory pricing has been one issue, there have also been questions on surge

pricing being charged by these companies and on the transparency of pricing. Also, there

have been some incidences that have raised questions on security (as Ola and Uber claim

to be just the platforms and the responsibility for the cab lies with the cab owner/driver).

Different states have come up with their own version of proposed policies. For example,

the Maharashtra government's draft proposals suggest price tags for permits of Rs0.26

mn, deposits of Rs5 mn per 1,000 vehicles, and price floors and caps. Other states too

have similar provisions. These provisions, if implemented, could make the aggregation

model more challenging.

Regulators may insist on licensing and fare

control

12 January 2017


E-commerce 3.0: The way forward Even if India were not to follow the exact trajectory of China as far as e-commerce is

concerned, it is unarguable that e-commerce is bound to be significant in India over the

next few years and there will be at least some companies that emerge as large winners. In

that context, the past 12-18 months have been a reality check for the industry, which we

believe is good and important for the long-term profitable growth of the sector and sets the

right tone for the next phase of the Indian e-commerce market's evolution. We believe that

the better companies will emerge more mature and prudent, with better capital allocation

strategies and greater focus on unit economics.

The structural factors (a large percentage of the young population that is aspirational, lack

of significant reach of offline organised retail, increasing and cheaper internet reach and

speed, better smartphone penetration, etc.) remain intact for the Indian internet firms. We

believe that e-commerce sector can return to growth after a flat 2016, although the

demonetisation exercise would have had some negative near-term impact.

While there is more focus on profitability now, we believe that sustained profitability is still

a couple of years away, given that a lot of ground still needs to be covered in terms of

logistics, user penetration and user loyalty.

With the likes of Amazon and Uber aggressively investing in their India operations, and to

a lesser extent, as new companies such as Rakuten and Alibaba explore the market, the

intense competitive scenario is unlikely to change materially from current levels. However,

there is scope for further consolidation in different segments of the market. Some of the

segments such as logistics and payments have done well in 2016 and continue to be very

attractive.

The experience with the Chinese e-commerce firms reflects that profitability has not

necessarily been a pre-condition for public listing. However, we believe that the larger

Indian e-commerce firms are unlikely to go public in the next 12-18 months.

Industry looking at growth after a lull

After a subdued first nine months of 2016, both Flipkart and Snapdeal are looking to grow

once again. In the 2016 festive sale (1-6 October), over US$1 bn worth of GMV was

generated as per estimates from RedSeer Consulting. This was much higher than the

US$0.7 bn GMV generated in the festive season sale in the previous year. Flipkart

claimed to have sold 15.5 mn units during this period, while Amazon and Snapdeal claim

to have sold 15 mn and 11 mn units, respectively. Most companies we met recently

claimed 60-80% growth during this festive season (versus the previous years').

More importantly, this growth in GMV came from relatively lower spend on marketing. As

per a study by TAM Media research, Amazon spent the most on advertising this year,

while Flipkart claims to have spent only a third of what key competitors spent this year.

The past 12-18 months have been a reality

check …

… which is good for the health of the sector in

the longer run

After a subdued year, Diwali 2016 was 60-80%

higher vs. Diwali 2015

The demonetisation exercise would have had some near-term

impact

12 January 2017


Figure 36: Good growth in GMV during the 2016 festive sale season

Source: RedSeer Consulting

Some impact from the demonetisation exercise, but things will gradually normalise

The recent demonetisation exercise by the government (the scrapping of old Rs500/1,000

currency notes) has had significant impact on the ecommerce companies' November sales

after a good October month. GMV was down about 50% from October as per media

sources such as Economic Times (typically, the GMV should have been down 20-30%

MoM post the festive period). The cash on delivery transactions were particularly impacted

(about 50-60% of total GMV can be attributed to COD) due to the lack of availability of the

new currency notes and return rates also increased on CoD transactions.

Things should gradually get back to normal, however. After aborting COD as a method of

payment for a couple of days, the e-commerce companies started accepting cash. Indeed,

Amazon says that its growth is back to its earlier rate (immediately preceding the

demonetisation exercise). The management indicated that its units or number of packages

being shipped is growing in triple digits YoY.

More judicious pricing likely but some threat of new

competition

"I think low price is something a customer always wants and there is always the

philosophy that either you want to offer customers the best price or you want to play smart.

For traditional companies or offline companies, the information is not transparent: one

location is different from another and hence it is hard for customers to compare, so may be

they can do things differently. But for online businesses, people easily check up your

prices, compare them and even complain about them. We receive a lot of such complaints

every day. We will keep a low price policy forever." – Shi Tao, Vice President, JD.com

Given e-commerce firms' relatively lower cost base and easier comparison of pricing,

discounts are always an integral part of the e-commerce strategy. While post the festival

sales, pricing has been rational, there is a risk that new competition from the players such

as Alibaba may again lead to price-led competition.

Alibaba

Alibaba has made some significant investments already in India through different entities.

The group is a significant investor in Paytm (US$680 mn so far, likely 40% ownership) and

has also invested in Snapdeal. There were also some rumours earlier of Alibaba in talks to

buy a stake in Flipkart.

The company had earlier indicated to the Indian press that it would enter the Indian e-

commerce business in 2016. A recent news article in the Economic Times quoted Paytm's

0.0

0.2

0.4

0.6

0.8

1.0

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2014 2015 2016

GMV of products sold in the festive season sale (typically October) [US$ bn]

Competition includes global online players &

offline ones creating an online presence

12 January 2017


founder (Vijay Shekhar Sharma) as stating that the fight for India's ecommerce market is

likely to be between Amazon and Alibaba.

While there are demographic similarities between India and China (India being 6-8 years

behind China on various metrics), in our view, India will be a very different market for

Alibaba. Unlike China, India is an open market with greater competition—hence Alibaba

will need to adapt, similar to what Amazon has successfully done in India.

Rakuten

Rakuten has had a software development and operations unit in India since 2014 and has

been looking to commence e-commerce operations in India. While the company's strategy

for the Indian e-commerce market has not been clear, it has appointed a CEO for the

Indian ecommerce business and has also been rumoured to have hired a few senior

executives from Amazon and Flipkart. The CEO was earlier the co-founder of Infibeam,

which has a small presence in Indian e-commerce. Interestingly, Rakuten has been

shutting down its Singapore, Malaysia and Indonesia marketplaces.

Large Indian corporate groups

The Tata group has an e-commerce platform called CliQ, selling products from both the

Tata group and third parties on this platform. While it is a late entrant to e-commerce in

India, it seeks to distinguish itself in two ways. First, it curates the items on its platform and

allows only the product companies to be sellers and not dealers or other intermediaries (it

plans to have a separate storefront for individual brands, with a focus on luxury brands).

Second, it aims to use the group's offline retail infrastructure to fulfil orders or a "CLiQ and

PiQ" strategy as it calls it.

The other large Indian corporate group that has made a foray into e-commerce is the

Aditya Birla group. It has done so through a platform called abof.com (Aditya Birla Online

Fashion). This is focused purely on fashion. Arvind Limited also has a smaller presence in

online fashion retail through nnnow.com.

There have been other traditionally offline businesses that are setting up online presence.

For example, the Future group has bought online furniture retailer FabFurnish this year.

Titan bought online jewellery company, Carat Lane. Reliance Fresh has also launched

Reliancefreshdirect.com to compete with online grocers such as BigBasket.

GST: Positive or negative? The jury is still out

Views are divided on the likely impact of GST on the e-commerce sector. It can smoothen

the inter-state movement of goods by road (which is a cheaper means of transport, as

compared to air transport). Also, e-commerce companies currently have a sub optimal

warehouse infrastructure to minimise the indirect tax burden on the inter-state transfer of

goods. GST can help in optimising the infrastructure and also reducing the overall

transportation time.

On the other hand, it could potentially create several complexities and constraints in the

operations of the e-commerce companies. For example, a provision suggests that the

e-commerce platform needs to deduct tax at source while making payments to the sellers

—this can deter sellers as many of them work on thin margins and also significantly

increase the compliance burden for the e-commerce players, as they work with multiple

merchants.

Fintech and logistics can maintain strong momentum

While most of the other segments of the Indian internet ecosystem had their challenges in

2016, parts of fintech have seen continued strong momentum. The number and value of

transactions through mobile wallets have been growing at over 30% and 100%,

respectively, and the mobile banking transactions, in volume and value, have grown at

GST eases movement of goods but could

create complexities in reporting

Wallet transactions growing at over 100%

in value terms

12 January 2017


over 150% and 250%, respectively (for the period April-October 2016). The number of

wallet users has already surpassed the number online banking users.

The demonetisation exercise has also helped these companies further, notably Paytm (the

impact is not reflected in the numbers discussed above as demonetisation took place in

November 2016). It is yet to be seen if the UPI (Unified Payment Interface) app (called

"BHIM") launched by NPCI (National Payment Corporation of India) can pose a threat to

wallets. While it directly connects bank accounts with a simple consumer interface, initial

performance has been hit by glitches and the ability to sign up merchants is yet to be

seen.

As discussed earlier, Fintech remains an attractive sector for investors as well—it has

been one of the top-3 sectors in terms of funding YTD (Jan-Nov 2016).

Figure 37: The volume and value of transactions with mobile wallets was up about over 30% and 100% YoY,

respectively in FY17 (till October)

Source: RBI, Credit Suisse estimates * seven months Source: RBI, Credit Suisse estimates * seven months

Figure 38: Mobile banking transactions too have witnessed rapid growth and that has continued in 2016

Source: RBI, Credit Suisse estimates * seven months Source: RBI, Credit Suisse estimates * seven months

Demonetisation and the government's push towards digital payments can be structurally positive

The recent demonetisation initiative has further accelerated the pace of growth for wallets.

For example, post the discontinuation of Rs500/1,000 currency notes by the government,

Paytm has witnessed over 7 mn transactions worth US$17-18 mn a day. It claims to have

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UPI can be a risk—its implementation with

sellers will be important

Big surge in wallet usage post

demonetisation

12 January 2017


added 5 mn new users within two weeks of the demonetisation and has served over 45

mn in a ten-day period alone. Offline transactions now contribute to 65% of the overall

transaction value for Paytm vs. 15% about six months back. Another large player in the

segment, Mobikwik, has stated that it has witnessed a 40% increase in its mobile

application downloads since demonetisation and user traffic has increased by 200%.

The wallet firms have been adapting to take advantage of these government initiatives.

For example, there is an aggressive push to onboard offline merchants, making it easier

for them to receive payments online, at very low fee or in some cases, free of cost. Also,

the wallet users can transfer the money to their banks from the wallet at lower cost— 1%

in the case of Paytm and for no cost in the case of Mobikwik and Freecharge (acquired by

Snapdeal).

Paytm has maintained its leadership in payments

Paytm is the largest mobile wallet in India, and the only wallet to have a payments bank

licence awarded by the RBI in Aug-15. Within a few years, Paytm has grown to a

subscriber base of over 170 mn. From a mobile recharge platform (mobile recharges are

still the most popular transactions on Paytm), it has diversified into multiple transactions

such as Uber cab payments, movie ticket bookings and the like. The company is now

focusing on expanding its offline merchant base. It has increased the merchant base from

about 0.7 mn a month ago to 1.1 mn in November.

As per the company, the payment bank is likely to be launched in February 2017 and the

stated target is 200 mn account holders by the end of 2017 (Source: Business Standard).

The business model will be based on selling financial and banking products—including

insurance, wealth management and loans to generate income.

For Paytm, while both e-commerce and payment business remain important, the focus is

clearly more on the payments business now as compared to last year.

Figure 39: Paytm's wallet userbase has grown at a very rapid pace—it is the

largest player in terms of number of wallets

Source: Credit Suisse research

Third-party logistics should keep benefitting from e-commerce growth

Although companies such as Flipkart, Amazon, Snapdeal, Myntra and Jabong have in-

house logistics capabilities, they partner with third-party courier and logistics firms for

additional coverage and last mile delivery. Traditional logistics providers such as BlueDart,

DHL, FedEx, Gati, DTDC and First Flight have a larger reach but do not traditionally have

e-commerce specialisation (but have built it over a period). E-commerce specialist logistics

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12 January 2017


firms such as Delhivery and Ecom Express provide not only delivery services, but also

end-to-end warehousing solutions. Flipkart's in-house logistics arm Ekart also offers

logistics services to other e-commerce firms such as Paytm (which does not have its own

logistics operations).

There are some niche players as well. Runnr and Rivigo provide hyperlocal logistics

services and technology-based logistics solutions, respectively.

The overall logistics market may grow at a pace lower than the underlying e-commerce

GMV growth given the productivity gains expected as e-commerce firms scale-up and

mature. Its share as percentage of GMV is likely to come down over time. Increased

density of shipments may also bring productivity improvement in the last mile delivery.

Assuming 10-15% logistics costs (as % of GMV) for the ecommerce firms, the overall

logistics market size would be close to US$1-1.5 bn, which is divided between in-house

logistics arms and third party logistics firms.

Listing sometime away, profitability still work-in-

progress, opportunities for consolidation

Some of the Indian internet companies such as Flipkart, Zomato, Snapdeal and Quikr

have been operating for quite some time and have gone through an upcycle and currently

undergoing a tough funding environment. However, the market is still nascent and remains

highly dynamic and competitive. E-commerce companies have had to make several

strategic changes to their business models in the past couple of years and there is no

assurance that the current business model can lead to long term sustainable growth.

While a year ago, the argument against the potential public market listing was ample

availability of private capital, that is no longer the case now. As discussed earlier,

successive rounds of funding are difficult to come by now and valuations are subject to

greater scrutiny even by the private investors. One option in such a scenario could be to

raise money through public listing. However, most of the larger firms seem to have enough

cash for the moment and do not appear to be in a hurry to tap public markets.

The China experience shows that age and profitability may be one of the criteria, but not

necessary pre-requisites for a potential IPO. However, the probability of public listing by

any of the larger Indian e-commerce firms in the next two-three years seem low. The

general thought process among the e-commerce firms seems to be that a public listing

could restrict their ability to aggressively invest in the business and that public investors

may want to see at least a concrete path to profitability, if not actual profitability itself.

A smaller e-tailing platform, Infibeam, filed for an IPO in March 2016, received just 1.1x

subscription. However, the stock has done well since listing—it is up over 150%. Another

internet company, Bharatmatrimony (matrimony portal) filed a draft prospectus (DRHP)

during the year, but has postponed the plans for IPO. Shopclues (a horizontal e-

commerce firm, that has been recently valued at US$1 bn is one of the e-commerce firms,

that has been vocal about its listing plans. The company has plans to file IPO documents

with Nasdaq by September 2017. Delhivery (a third-party logistics company) is also

contemplating an IPO next year.

No large e-commerce listings seem likely in

the next 12-18 months

12 January 2017


Figure 40: Age has not been a factor for Chinese

internet companies' IPOs …

Figure 41: … and neither has profitability + + + + + +

+

* Calculated based on the NASDAQ listing of Alibaba in 2014. Alibaba was also listed during 2007-12 on the Hong Kong stock exchange. Source: Company data, Credit Suisse research


Clear focus on profitability now, but how soon can it be achieved?

“It (profits) may not be in the next six months but we definitely are on that path. That is

very clear,” – Sanjay Baweja (erstwhile CFO, Flipkart), October 2016

"Snapdeal is well positioned to turn profitable in the next two to three years." – Kunal Bahl

(Founder, Snapdeal), July 2016

"We are tremendously improving our profitability every week and month. Many cities are

already breaking even for us and many are on path to profitability… We have enough

money to turn profitable in the next two to three years." – Bhavish Aggarwal (Founder,

Ola), November 2016

“Profitability is a good thing to have in my view”. “We don’t have it yet. I think maybe in

one-and-a-half years to two years. That’s my estimate. You cannot time these things.” –

Pranay Chulet (Founder, Quikr), October 2015

While most of the e-commerce firms have been optimising their operations and gearing

their businesses towards a profitable model, the actual profitability still seems to be

sometime away. The likes of Amazon and Uber are likely to delay this given their large war

chests. In other segments as well, where there are no large foreign players, the

competition is high. Also, the companies, that have built a competitive moat over a period

by burning money, would prefer to maintain or even deepen the moat. Any potential new

entrants in the market—such as Alibaba and Rakuten—may also change the strategy of

the e-commerce firms.

Market consolidation can be structurally positive

Any consolidation can be structurally positive for the sector. We have already seen some

large acquisitions in the past 12 months (including Goibibo's acquisition by Makemytrip,

Jabong's acquisition by Myntra/Flipkart, Citrus Pay's acquisition by PayU, Quikr's

acquisition of Commonfloor and PropTiger-Housing.com merger). This can help in

reducing the competitive intensity in the respective segments and also help the companies

0 2 4 6 8 10 12 14 16

Vipshop

Youku

Tencent

Bitauto

Jumei

Weibo

Autohome

Qihoo

51jobs

Baidu

Tuniu

Jiayuan

58.com

RenRen

Qunar

Boyaa

JD.com

Soufun

Dangdang

500.com

Alibaba*

Age at the time of listing (in years)

-80% -60% -40% -20% 0% 20% 40% 60%

Youku

Vipshop

Weibo

Tuniu

Qunar

58.com

JD.com

Dangdang

Jumei

Baidu

RenRen

Bitauto

Jiayuan

51jobs

Qihoo

500.com

Soufun

Boyaa

Tencent

Alibaba

Autohome

EBIT margin at the time of listing

12 January 2017


gain synergies out of operations. We believe that given the current challenging funding

environment, there could be more companies open to consider any potential takeout offer.

E-tailing still has the potential to be a US$60 bn

market by 2020

Even if India were not to follow the trajectory of China as far as e-commerce is concerned,

it is unarguable that e-commerce is bound to be significant force in India over the next few

years and there will be at least some companies that emerge as large winners.

The past 12-18 months has been a reality check for the industry, which we believe is good

and important for the long-term profitable growth of the sector and sets the right tone for

the next phase of the Indian e-commerce market's evolution. We believe that the better

companies will come out of this phase as more mature and prudent, with better capital

allocation strategies and greater focus on unit economics.

The structural factors (large percentage of the young population that is aspirational, lack of

significant reach of offline organised retail, increasing and cheaper internet reach and

speed, better smartphone penetration, etc) remain intact for the Indian internet firms. We

believe, the e-commerce sector can return to growth after a flat 2016. While GMV is not

the "holy grail" any more for the Indian companies, we believe it is still a reasonable

measure to size the sector, as in China.

While the setbacks of the past 12 months and the changes in strategy does make our

previous expectations of a US$60 bn market by 2020 seem challenging to achieve, this is

not an improbable size either. Assuming the online buying population to increase from

over 75 mn levels as of now to over 200 mn by 2020 (below 40% of the internet users),

and per online shopper spending to increase to US$250 from current levels of about

US$150, we get to a GMV of US$50-60 bn by 2020 (up from US$11-12 bn in 2016). Just

to put things in perspective, China's GMV (B2C) was over US$600 bn in 2015, with over

400 mn online shoppers and an average per shopper spend of close to US$1,500 (China's

per capita GDP was 5x that of India in 2015).

Figure 42: US$60 bn is challenging but not an improbable e-tailing market size by 2020

Source: Credit Suisse estimates, TRAI, IAMAI, RedSeer Consulting

Total population:

1.3 bn

Internet users: 372

mn

Online buyers: > 75 mn

Spend per

online buyer: ~US$150

Total population:

1.4 bn

Internet users: >550

mn

Online buyers:

>200 mn

2016

Spend per

online buyer: >US$250

2020

GMV

US$11-12 bnGMV

US$50-60 bn

12 January 2017


Companies Mentioned (Price as of 10-Jan-2017) Aditya Birla Fashion and Retail Limited (ADIA.NS, Rs139.05) Alibaba Group Holding Limited (BABA.N, $96.75) Alphabet (GOOGL.OQ, $826.01) Amazon com Inc. (AMZN.OQ, $795.9) Arvind Limited (ARVN.BO, Rs362.75) Baidu Inc (BIDU.OQ, $180.31) Blue Dart Ex (BLDT.BO, Rs4455.7) Facebook Inc. (FB.OQ, $124.35) FedEx Corporation (FDX.N, $188.42) Foxconn Technology Corp (2354.TW, NT$85.5) Gati (GATI.BO, Rs118.8) Groupon Inc. (GRPN.OQ, $3.52) Infibeam (INFC.NS, Rs1182.3) JD.com (JD.OQ, $26.9) Just Dial Limited (JUST.BO, Rs379.25) Motorola Solutions (MSI.N, $82.63) Rakuten (4755.T, ¥1,214) Reliance Industries Limited (RELI.BO, Rs1087.1) Rocket Internet (RKET.DE, €19.54) Softbank (SFTBY.PK, $29.885) Tencent Holdings (0700.HK, HK$198.0) Titan Company Ltd (TITN.BO, Rs361.75) Twitter (TWTR.N, $17.37) Vipshop Holdings Limited (VIPS.N, $11.56) eBay Inc. (EBAY.OQ, $30.25)

Disclosure Appendix

Analyst Certification I, Anantha Narayan, certify that (1) the views expressed in this report accurately reflect my personal views about all of the subject companies and securities and (2) no part of my compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report. The analyst(s) responsible for preparing this research report received Compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities

As of December 10, 2012 Analysts’ stock rating are defined as follows: Outperform (O) : The stock’s total return is expected to outperform the relevant benchmark* over the next 12 months. Neutral (N) : The stock’s total return is expected to be in line with the relevant benchmark* over the next 12 months. Underperform (U) : The stock’s total return is expected to underperform the relevant benchmark* over the next 12 months. *Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Ne utrals the less attractive, and Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canad ian as well as European ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. For Latin American and non -Japan Asia stocks, ratings are based on a stock’s total return relative to the average total return of the relevant country or regional benchmar k; prior to 2nd October 2012 U.S. and Canadian ratings were based on (1) a stock’s absolute total return potential to its current share price and (2) the relative attractiv eness of a stock’s total return potential within an analyst’s coverage universe. For Australian and New Zealand stocks, the expected total return (ETR) calculation includes 12 -month rolling dividend yield. An Outperform rating is assigned where an ETR is greater than or equal to 7.5%; Underperform where an ETR less than or equal to 5%. A Neutral may be assigned where the ETR is between -5% and 15%. The overlapping rating range allows analysts to assign a rating that puts ETR in the context of associated risks. Prior to 18 May 2015, ETR ranges for Outperform and Underperform ratings did not overlap with Neutral thresholds between 15% and 7.5%, which was in operation from 7 July 2011. Restricted (R) : In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances. Not Rated (NR) : Credit Suisse Equity Research does not have an investment rating or view on the stock or any other securities related to the company at this time. Not Covered (NC) : Credit Suisse Equity Research does not provide ongoing coverage of the company or offer an investment rating or investment view on the equity security of the company or related products.

Volatility Indicator [V] : A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward.

Analysts’ sector weightings are distinct from analysts’ stock ratings and are based on the analyst’s expectations for the fundamentals and/or valuation of the sector* relative to the group’s historic fundamentals and/or valuation: Overweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is favorable over the next 12 months. Market Weight : The analyst’s expectation for the sector’s fundamentals and/or valuation is neutral over the next 12 months. Underweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is cautious over the next 12 months. *An analyst’s coverage sector consists of all companies covered by the analyst within the relevant sector. An analyst may cover multiple sectors.

12 January 2017


Credit Suisse's distribution of stock ratings (and banking clients) is:

Global Ratings Distribution

Rating Versus universe (%) Of which banking clients (%) Outperform/Buy* 45% (64% banking clients) Neutral/Hold* 38% (59% banking clients) Underperform/Sell* 15% (53% banking clients) Restricted 3% *For purposes of the NYSE and NASD ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, an d Underperform most closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to definitions above.) An investor's decision to buy or sell a security should be based on investment objectives, current holdin gs, and other individual factors.

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12 January 2017


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