India internet opportunity

| Copyright Kalaari Capital 2017 Page 1
India Internet Opportunity
May 2017

2005 2010 2015 2020 2025
7
11
5
4
Ranking by size
of Economy
US
China
Japan
Germany
UK
France
India
US
China
Japan
Germany
India
US
China
Japan
India
Will be $5T Economy by 2025, 4th largest in the world
Source: OECD

171M consumption class households by 2025
Household Income
per Annum
Deprived - <$1,800
Seekers - $4,000-10,000
Globals - >$20,000
Strivers - $10,000-20,000
Aspirers - $1,800-4,000
101
73 71
48
92
105 109
103
11
56
68
93
7
16
558
23
2005 2015 2020E 2025E
Number of Households (Millions) by Income class
206M
244M
273M
322M
7%,
14M
34%,
93M
53%,
171M27%,
66M
Consumption class
2005 real prices
Source: NCAER, McKinsey

Rapid smartphone penetration driven by price disruption
200
160
130
117
220
300
2013 2015 2016
• Smartphones getting increasingly cheaper,
driving rapid adoption
• 50+% smartphones sold in 2016 were
in sub $100 price range
• Chinese companies rapidly gaining market
share. 46% of market share as on Q416 as
compared to 14% in Q415.
• Xiaomi within 2 years has become the
2nd largest player as on Q4CY2016
• ~35% of smartphones are sold online. The
leading category for E-tailers with ~50% of
total sales coming from smartphones
Signed off
Source: IDC, Cybermedia Research : India Mobile Handset Market, Counterpoint Research, Statista

Smartphone penetration + Affordable data = Massive digital video opportunity
500M
3G/4G users
120M
3G/4G users
10GB
Avg. Data usage
per month
1GB
Avg. data usage
per month
2016
(Excluding Jio)
2020
4x growth in users
x
10x growth in avg. data usage
=
40x growth in total data
consumption
• Video to be key beneficiary of increased
data usage. Jio users exhibited ~18-20x
increase in mobile video consumption
compared to an average smartphone user
• Strong preference towards short form
video content. 62% of videos watched
on YouTube are <20 minutes
• With massive increase in digital media
consumption, Ad spend will also witness
significant shift. In 2016, ~12% of India’s
Ad spend is digital, compared to 50% in US
and 40% in China
• Digital Ad spend to be $4-5B by 2020 from
$1B in 2016. Opportunity for Indian content
creators to get a sizable share of pie.
Average data cost
$3 per GB per month
Average data cost
$1 per GB per month
Source: Quarterly reports of Indian telco (Airtel, Vodafone, Idea, Aircel), Reliance Jio Investor presentation
E&Y Future of Digital Content India, Jan 2016

Already the largest user base for global internet giants; Monetization nascent
CEOs of most major internet companies have
visited India in last one year, indicative of
India’s internet market potential
Key initiatives by global internet giants towards
India’s internet story
• Google to setup free wi-fi across 400
railway stations in India
• Facebook launched ambitious plans to
provide free internet access to rural India
under “Free basic”. Got shelved due to
regulatory hurdles
• Google launched ‘Internet Saathi’ program
to educate women about smartphone uses
200M 184M 180M
Monthly Active Users (MAU)

Users at different stages of digital adoption
• Despite having 300M smartphone users, India
has only 120M high speed mobile internet
(3G/4G) users
• Low-end 2G users on Whatsapp and Facebook,
but their data consumption is 1/5th of an
average 3G user
• Growth of power users critical for India’s
digital economy. The user base with 3G/4G
connectivity to reach 500M by 2020
• Opportunity for E-tailers to capture the share
of rapidly growing power internet user base
50M
Online Shoppers
200M
Social Media and Messaging
Users
460M
Internet Connections
120M
High speed internet users
(3G/4G)
300M
Smartphone Users
Power Internet Users
Source: InternetLiveStats, Quarterly reports of Indian telco (Airtel, Vodafone, Idea, Aircel)

1. India E-tail

0
2
4
6
8
10
12
14
16
2009 2010 2011 2012 2013 2014 2015
Early Days
Market Creation
E-tailMarketSize($B)
Top 3 Offline Retailers Turnover
$10B
Top 3 Online Retailers Turnover
$12B
As on 2016
E-tail : 2012-15 was a phase of rapid growth and market creation
Source: Redseer Consulting - E-tailing Revolution in India

E-tail penetration nascent in Tier-II & beyond
• Organized retail economics unviable for
Tier-II & beyond. Organized only 5% of
retail consumption
• Smartphone penetration already high at
>30%. Majority of next 200M
smartphone users will be from Tier-II &
beyond
• With growing smartphone and internet
penetration, opportunity for E-tailers to
tap into this large consumption market
• Tier-III & IV contributes to 50% of E-tail
sales in China
E-tail ,
0.6%
Organised,
5%
Unorganised,
94%
E-tail ,
8%
Organised,
19%
Unorganised,
73%
80%
20%
Tier-II & beyond
Tier-I
Total Retail Consumption
($630B)
Source: McKinsey iConsumer China 2016 Survey, IBEF, Knight Frank – Think Retail 2016

Tier-II & beyond – Regional language important to drive adoption
• Regional language offering (reviews, search, navigation, product
content) important to drive engagement and conversion
• E-tailers don’t control most content. Product content uploaded
by sellers and reviews by users
• Translation from current tools too literal. Not suitable for most
Indians that use mixed language (e.g. Hinglish)
• Growing market opportunity calls for E-tailers to make
concerted efforts to serve the regional language users
460M
Internet
Connections
125M
English Speaking
Users Peter England Blue Formal Regular Fit Shirt
पीटर इंग्लैंड ब्लू औपचाररक नियमित फ़िट शटट
Example
from Google
translate
Most internet users from Tier-II and
beyond are Non-English speaking
Source: IAMAI

• Until E-commerce players can
build a frequent usage behavior,
app retention will be challenging
• Mobile web strategy important
to capture this segment
• Opportunity for unified
interface solutions to access
multiple online services (e.g.
WeChat in China)
50%+ of smartphones sold in India are in sub $100 price range with typical
internal storage capacity of 8GB
OS, 3.5
Whatsapp,
1.2
Media, 2
Apps, 1.3
Typical allocation of
8GB capacity
3rd party apps on
smartphones due to
space constraint
80%
Average 90 days
uninstall rate
6-8
Tier-II & beyond – Low app retention, mobile web strategy important
Source: CNBC, Frost & Sullivan, Kalaari Estimates

Category mix skewed towards electronics
E-tail Market and Category mix by Country
65%
25%
2%
16%
31%
4%
17%
19%
8%
3% 7% 7%
India
($15B)
China
($610B)
US
($393B)
Apparel &
Accessories
Home
Furniture &
Decor
Grocery
Consumer
Electronics
Source: Statista, Digitalcommerce360, China Internet Watch, Kalaari Estimates

Higher online penetration in non-electronics important to drive growth
396
Total Spend ($B)
Apparel & Accessories
Home Furniture & Decor
Grocery
Consumer Electronics
• While electronics has high online
penetration (~27%), it is ~6% of
consumers’ spend
• As market matures, other categories
with sizable share of consumer spend
will also witness higher online
penetration
• Fashion
• Home & Décor
• Grocery
• Jewelry
• These are complex categories and will
require business model innovations
(e.g. Omni-channel, Internet brands)
Jewelry
Beauty & Personal care
56
36
35
18
12
0.5
3.8
9.8
0.05
0.3
0.1
0.13%
6.8%
27%
0.14%
1.7%
0.8%
x =
Online Share (%) Online Spend ($B)
Category-wise Total Spend vs Online Spend
Source: Kalaari Estimate, CII-BCG Study - “Retail transformation: Changing Your Performance Trajectory”

2. Digital Payments

India is a cash heavy Economy
4.5%
500M
3G/4G users
Of India’s consumption spend
through digital payments
70%
E-tail orders are CoD
• Cash in circulation in India is 18% of
the country’s GDP. The figure is 3.5%
to 8% for developed countries such as
the US and the UK
• Cash economy drives the shadow
economy, which is 26% of GDP in
India compared to 14% China and 7%
in USA
• For e-tail’s next phase of growth, CoD
dependency needs to be reduced.
Currently, for every successful CoD
order, 1.24 delivery attempts are made
Source: RBI, Red seer consulting E-commerce Report 2016

Merchant network highly underpenetrated
500M
3G/4G users
0.3
POS transactions per
debit card per month
884M
500M
3G/4G users
2.5MPOS Machines
14M
Merchant Outlets
Source: RBI
• ATM withdrawals account for 88% of
the total volume and around 94% of
the total value of debit card
transactions.
• India at one of the lowest POS per
1000 debit cards ratio at 2.4
• US - 13, China – 14, Australia –
33, Brasil - 15
• Limited internet connectivity adds to
the friction in the digital payment
infrastructure. Coupled with 2% take
rate, merchants disincentivised to
accept plastic money
Debit Cards
500M
3G/4G users
3.2
30M
Credit Cards
POS transactions per
credit card per month

Mobile wallet payments gaining traction
5,774
6,227 6,070 6,374
6,788
6,174
7,982
9,036
13,720
12,571
9,890
10,554
342 363
414 412
459 476 505 493
1112
1247
1063
1125
Card POS - Transacted Amount ($M) Mobile Wallet - Transacted Amount ($M)
Source: RBI
845M Debit + Credit Cards
2.2M POS Machines
80-85M Active M-wallet users
1.5M Merchants acquired
Mobile wallets gaining rapid merchant adoption owing no hardware requirements
Demonetization
catalyzed the growth
Source: RBI

Mobile wallet payments gaining traction
5 7 16
109
261
293
368
Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17
UPI - Transacted Amount ($M)
Source: RBI

Government laying strong foundation for the digital payments revolution
UPI + Aadhaar + BharatQR + Jan Dhan Yojna + BHIM
Initiative to have bank account for
every Indian
250M accounts opened under the
scheme in 3 years. Accounts for
~50% of total 500M bank accounts
as on 2016
Bharat QR
Universal QR code for merchant
payments
Target to cross 10M merchants in 12-
18 months of launch
Jan Dhan Yojna
Government App for making UPI
based payment
Crossed 17M downloads within 2
months of launch
BHIM
Instant transfer of money between
back accounts with mobile numbers
$600M+ amount transacted in 3
months (Dec’16, Jan’17, Feb’17)
UPI
UPI
Jan Dhan
Yojna
BHIM
Bharat
QR
Aadhaar
Unprecedented pace of execution by the government
Source: RBI
Strong Foundation = 300M Smartphones + 1 Billion Aadhar Cards + 500M Bank accounts

Conclusion
Sizable consumption class in 2016 (27% households). By 2025, 50% of Indian households will be part of consumption class
Price disruption driving rapid smartphone and mobile internet adoption across income classes
Opportunity for e-tailers to tap into this growing smartphone and internet savvy consumer segment
Large scale adoption beyond Tier-I will require innovative solutions to specific challenges – Language, App retention
Business model innovation will be key to drive higher online penetration of non-electronics categories (e.g. Fashion, Home
& Décor)
Significant focus and efforts from government to accelerate adoption of digital payments

| Copyright Kalaari Capital 2017 Page 22Page 22
Authored by Vani Kola and Darshit Vora
Supported by Naman Narain and Vinod Shankar
© May 2017 Kalaari Capital Advisors. All rights reserved.
The Report has been complied for information purpose only. The Report is based on current public
information that we consider reliable, but we do not represent it as accurate or complete. The information,
opinions, estimates and forecasts contained herein are as of the date hereof and are subject to change.

APPENDIX

Urban population distribution in India
Category City Population (2011)
Tier I Mumbai 12.4M
Tier I Delhi 11M
Tier I Bengaluru 8.4M
Tier I Hyderabad 6.7M
Tier I Ahmedabad 5.5M
Tier I Chennai 4.6M
Tier I Kolkata 4.4M
Category No. of Cities
Total Population
(2011)
% of Total
Population
Tier 1 7 53M* 4.5%
Tier II & Beyond 461 320M 26.7%
Tier I: Cities with more than
4 million persons
Tier II & Beyond: Cities
with less than 4 million
persons but more than 1 lac
persons
Classification Criteria
Urban population (377M) is
31% of total population
Overview
*2015 estimate for Tier-1 population is 93M

India Population Distribution by Spoken Language
41%
10%8%
7%
7%
6%
5%
4%
3%
9%
Distribution of Indian Population by Spoken Language
Hindi English
Bengali Telugu
Marathi Tamil
Urdu Gujarati
Punjabi Others

Smartphone shipments by vendor CYQ117
26%
13% 12%
10%
8%
2%
29%
Samsung Xiaomi Oppo Vivo Lenovo Apple Others
Smartphone Market share CYQ117
Source: Canalyst Estimates
Total Shipments : 29m

Signed off
India Internet – On way to become a basic right
18
27
35
21
52
31
233
354
462
0
50
100
150
200
250
300
350
400
450
500
0
10
20
30
40
50
60
2014 2015 2016
Penetration as % of total population % Growth (YOY) Internet users (M)
• Internet users Divide : 70% Urban, 30%
Rural
• Among Urban : 62 % Male, 38 %
Female
• Among Rural: 88% Male, 12 %
Female
• Kerala becomes the 1st Indian state to
declare internet as a basic right for every
citizen. A model for all of India to follow
• NOFN - National Optic Fiber Network
implementation speeded up with an aim
to connect every Gram panchayat

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