India Internet A Closer Look Into the Future...Jul 09, 2020 · Krishnan, Rahul Jain, Aditya Soman, Aditya Gupta, Heath Terry, Lisa Yang, Kate McShane and Ryan Wallace for their contributions

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

India Internet A Closer Look Into the Future

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

The Goldman Sachs Group, Inc.

We expect the India internet TAM to grow to US$177 bn by FY25 (excl. payments), 3x its current size, with our broader segmental analysis driving the FY20-25E CAGR higher to 24%, vs 20% previously. We see market share likely to shift in favour of Reliance Industries (c.25% by FY25E), in part due to Facebook’s traffic dominance; we believe this partnership has the right building blocks to create a WeChat-like ‘Super App’. However, we do not view India internet as a winner-takes-all market, and highlight 12 Buy names from our global coverage which we see benefiting most from growth in India internet; we would also closely watch the private space for the emergence of competitive business models.

Manish Adukia, CFA +91 22 6616-9049 [email protected] Goldman Sachs India SPL

Heather Bellini, CFA +1 212 357-7710 [email protected] Goldman Sachs & Co. LLC

Piyush Mubayi +852 2978-1677 [email protected] Goldman Sachs (Asia) L.L.C.

Nikhil Bhandari +65 6889-2867 [email protected] Goldman Sachs (Singapore) Pte

Vinit Joshi +91 22 6616-9158 [email protected] Goldman Sachs India SPL

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PM Summary: A Closer Look Into the Future 3

The landscape 5

Q&A with our global analysts 9

Overview of our internet TAMs 11

Companies in our global coverage with exposure to India Internet 16

Unicorns in India Internet 21

Snapshot of Facebook and Google in India 22

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

Assessing the COVID-19 impact by India internet segment 37

Online retail: Biggest battleground with focus on grocery 38

Travel: Mature but with pockets of growth 53

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

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

Entertainment: The most competitive internet sub-segment 71

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

Advertising & classifieds: The most profitable vertical 81

Education: Profitable with high growth potential 85

Fintech: Large TAM but monetization elusive 87

Profiles of private internet companies 100

Appendix: Global valuations, etc. 101

Disclosure Appendix 104

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Goldman Sachs India Internet

Table of Contents

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PM Summary: A Closer Look Into the Future

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

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

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

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

We extensively cross-reference work from our regional/global teams in terms of evolution of internet in their respective markets, and attempt to analyse India internet from both a global and local lens. Our top stock ideas with relatively more exposure to India internet include: Buy (on CL) - Reliance Industries, Amazon, Alphabet, Prosus, Sea Ltd., HDFC Bank; Buy - Facebook, Walmart, Bharti Airtel, Maruti Suzuki, MMYT, Blue Dart; Sell - Info Edge and Jubilant Food.

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

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

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

See inside for... Why RIL+FB could drive c.25% of all internet GTV by FY25, vs US$200 bn in transactions but $0 revenues, yet an attractive vertical n

...and a lot more.

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

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

Air travel Payment (non-cash as % of

total)

Advertisement Hotels Ecommerce Food services FMCG/ grocery

ChinaUSIndiaIndonesia

Triangles show India FY25E

penetration, GSe

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

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The landscape

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

We note that companies in the India internet space continue to incur substantial cash burn, which we estimate to be >US$2.5 bn over the last 12 months. We see this as attributable to the following factors: (1) Operations are sub-scale - products build in anticipation of (still elusive) higher demand; (2) Competition is high - most segments have at least two well-funded players, competing with the idea of winner-takes-all; and (3) Low income levels resulting in customers being very price sensitive - if platforms try to bring down cash burn, the growth falls sharply (as seen in travel, food delivery, ride-hailing, e-commerce, etc.). Thus, the biggest question remains how, if ever, will India internet become increasingly monetized.

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

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

>550 mn (3G/4G users)

450 mn (smartphones)

400 mn (video viewers)

300 mn (online

gamers)

200 mn (music

listeners)

100 mn(shoppers,

digital payers)

25 mn (fooddelivery)

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

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

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

Exhibit 3: India mobile broadband subscriber growth has seen a 5x increase in the last five years... Wireless broadband (3G + 4G) subscribers in India

Exhibit 4: ...with data usage per user seeing a sharp increase over the same time period Data usage per month per data user

133 mn

258 mn

395 mn

545 mn

654 mn

Mar 16 Mar 17 Mar 18 Mar 19 Jan 20

0.8 Gb 1.3 Gb

6.4 Gb

10.8 Gb

14.6 Gb

Mar 16 Mar 17 Mar 18 Mar 19 Mar 20

Does not represent unique users and can include users with more than one SIM card.

Source: Telecom Regulatory Authority of India

Source: Company data from Bharti Airtel

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https://research.gs.com/content/research/en/reports/2020/04/22/f8cac47b-4bcc-46f4-8116-b81ec7a26b4a.htmlhttps://research.gs.com/content/research/en/reports/2020/04/22/f8cac47b-4bcc-46f4-8116-b81ec7a26b4a.htmlhttps://research.gs.com/content/research/en/reports/2020/04/22/f8cac47b-4bcc-46f4-8116-b81ec7a26b4a.htmlhttps://tech.economictimes.indiatimes.com/news/internet/google-to-invest-10-billion-in-india-sets-up-india-digitisation-fund/76937223https://economictimes.indiatimes.com/tech/internet/jio-investment-first-biggest-of-india-investment-plans-google-ceo-sundar-pichai/articleshow/76978425.cmshttps://economictimes.indiatimes.com/tech/internet/jio-investment-first-biggest-of-india-investment-plans-google-ceo-sundar-pichai/articleshow/76978425.cmshttps://economictimes.indiatimes.com/tech/internet/jio-investment-first-biggest-of-india-investment-plans-google-ceo-sundar-pichai/articleshow/76978425.cms

Exhibit 5: Mobile data usage in India is among the highest in the world... Data usage (Gb per month per user) on mobile (excluding WiFi)

Exhibit 6: ...with the cost of data one of the cheapest Data price per GB (US$)

0.0 3.0 6.0 9.0 12.0 15.0

Germany

Spain

UK

Japan

US

France

South Korea

China

India

$0.2$0.5 $0.6 $0.6

$1.0$1.4

$3.9

$8.0

India Russia China Indonesia Brazil UK Japan US

Data as of March 2020 or latest available

Source: Nokia MBiT, Goldman Sachs Global Investment Research

Compiled by cable.co.uk in February 2020. India tariff compiled by Goldman Sachs.

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

Exhibit 7: Indian consumers spend an average of about 3.5 hours per day on mobile devices Average daily hours spent on mobile (2019, Android)

Exhibit 8: Social media and entertainment is where people in India spend the most time India - split of time spent on mobile phone (2019)

0.0 1.0 2.0 3.0 4.0 5.0

Germany

UK

Russia

US

Japan

India

South Korea

China

Indonesia

Social media42%

Entertainment28%

Retail10%

News etc.7%

Games6%

Others7%

Source: App Annie State of Mobile 2020

Source: FICCI-EY

Exhibit 9: India accounts for 9% of global app downloads... App downloads (2019, in mn)

Exhibit 10: ...but less than 1% of global app store spend Spend on app store (2019, in US$ bn)

India, 19 mn, 9%

Rest of the World, 185 mn, 91%

India, $0.4 bn, 0%Rest of the World,

$119.6 bn, 100%

Source: AppAnnie data sourced from Times of India

Source: AppAnnie data sourced from Times of India

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Exhibit 11: More than 75% of India’s population has an income level below US$2,500 per year Population by income bands (2019)

Exhibit 12: We expect smartphone growth to slow down given low income levels India smartphone user base and smartphone penetration

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

India Indonesia China Brazil Russia Korea Japan USA

$1,500 & lower $1,501 - $2,500 $2,501 - $5,000

$5,001 - $10,000 $10,001 - $20,000 $20,001 & above

24%27%

32%36%

42% 44%45% 47%

49%51%

0

100

200

300

400

500

600

700

FY16 FY17 FY18 FY19 FY20 FY21E FY22E FY23E FY24E FY25E

Smartphone users (mn)

Smartphone penetration

Source: Euromonitor

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

Source: IDC, Goldman Sachs Global Investment Research

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

India

China

Korea

USJapanUK

Germany

Brazil

Russia

Indonesia

Thailand

20%

30%

40%

50%

60%

70%

80%

90%

100%

0 100 200 300 400 500 600 700 800 900

Inte

rnet

pen

etra

tion

Internet users (mn)

Source: Internet World Stats

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Q&A with our global analysts

1. In your view, has WeChat led to faster growth or expansion for any of the categories such as food

delivery, ride hailing, e-commerce, etc.?

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

2. If you had to think of three reasons why WeChat was able to create the Super App ecosystem,

what would those be? How is WeChat monetized?

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

3. What model is preferred by Chinese e-commerce companies in terms of 1P (inventory) vs 3P

(marketplace)? Is it different for grocery/FMCG vs electronics/apparel?

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

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

categories?

Ronald Keung, China Internet analyst: We think slower adoption of online groceries vs. other categories, at 6% online penetration in 2019 vs. overall goods at 23%, had been due to a lack of standardization in fresh food (making it more challenging to order online) where supply chains are still largely dominated by small merchants in “wet markets” (that account for 70% of the overall grocery market) and a lack of cold-chain logistics infrastructure. That said, we expect growing structured retail share in groceries, with online penetration reaching 20% for fresh food by 2023E, to be driven by supermarkets and growing online 1P fresh food business models that are well funded by e-commerce giants including Alibaba, Tencent, Meituan and JD. The growth of China’s on-demand delivery rider capacity over the past few years in food delivery will play an important role in facilitating cost-effective & time-effective 30-minute grocery deliveries from stores and front distribution centers in China.

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

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

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

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

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

7. What are the factors that have led to Sea Ltd. being able to establish market share dominance in

gaming in South East Asia? What are the barriers to entry?

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

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

the world?

Piyush Mubayi, Head of Asia TMT: Simplicity and ease of use for both the payer and the merchant, the high penetration of WeChat, the low cost to merchants (~20bps offline and

Overview of our internet TAMs

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

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

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

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

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

Movers &

Shakers

Govt employees

Urban white collar/SME

owners

Educated urban mass

Urban blue collar/migrant workers

Rural landowners

Rural labourers & emerging

URBAN MIDDLE

URBAN MASS

RURAL MASS

RURAL

Working Population

(2020)

Annual income (US$)

0.5 mn 300k

10 mn 19k

39 mn 6k

121 mn 3k

118 mn 2.3k

252 mn 0.8k

21 mn 13k

Working Population

(2025E)

Annual income (US$)

0.6 mn 460k

9 mn 27k

46 mn 9k

147 mn 5k

112 mn 3.3k

264 mn 0.9k

24 mn 20k

Source: Goldman Sachs Global Investment Research, NSSO

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

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

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

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

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

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

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

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https://research.gs.com/content/research/en/reports/2020/04/22/f8cac47b-4bcc-46f4-8116-b81ec7a26b4a.html

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

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

Times Internet

Reliance Industries

Ecommerce

Grocery

Travel

Food

Ride hailing

Video/Music

Gaming

Advertising

Social media

Search

Education

Payments/Fintech

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

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

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

25%

20-25%

20%

15-20%

15-17%

6% 5-6% 5%4%

1.5-2%0%

Fooddelivery

Transactiongames

Ride hailing Hotels Apparel Television Air travel Mobilephones

Grocery Payment(wallet)

Payment(UPI)

E-commerce take rate from Amazon excluding closing fee.

Source: Amazon.in, Company data, Goldman Sachs Global Investment Research

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

$3.6 bn

$0.3 bn

$0.5 bn

$1.1 bn

$1.2 bn $1 bn

$0.5 bn $8 bn

$43 bn $2.4 bn$3.7 bn

$6.2 bn $5 bn $5 bn

$2.5 bn

$67 bn

$109 bn $9 bn $15 bn $34 bn $30 bn $30 bn $20 bn

$246 bn

$112 bn $31 bn $16 bn $8 bn $5 bn $5 bn NA

$177 bn

$32 bn $16 bn $7 bn $2.3 bn$2.3 bn $1 bn NA

$60 bn

E-comm

FY20GTV

FY25EGTV

29%FY20-25E CAGR

FY25Erevenue

Take rate*

FY25Eprofits

Profit* margin

Food &ride-hailing

Gaming & OTT/video

Advertise-ment Education

Fintech/ PaymentsTravel

India Internet

24%29%19%14% 17% 45% NA

11% NA25%23%8% NA NA NA

8% 12%18%13%12% 23% 22% 20%

Valuation (FY24E)

Assumedmultiple 30x 30x30x30x 25x 30x 30x*

Key players

Time to profitability 2-3 years 0-1 year 1-2 years 2-3 years Profitable Profitable 3-4 years

Amazon, Flipkart,

Bigbasket

MMYT,Oyo,

Booking

Swiggy,Zomato,

Ola, Uber

Disney, Dream11, YouTube

Google, Facebook Byju’s

Paytm, Google,

PhonePe

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

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

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Companies in our global coverage with exposure to India Internet

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

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

Reliance Industries - Buy (on CL), covered by Nikhil Bhandari: US$185 bn market cap; 8% potential upside We believe RIL’s existing dominance in telecom and offline retail, combined with the online traffic dominance of its partner Facebook, can create the fastest growing internet platform in India. We believe the convergence of such a platform with the right products (JioMart and a potential Super App) and right price points (leveraging the low cost structure and strong balance sheet) should drive deeper e-commerce penetration and monetization opportunities. Within e-commerce, we forecast RIL online GMV to reach US$35 bn in FY25E with a 31% market share, driven by a 51% market share in online groceries. In addition, we believe RIL is well-positioned to monetize verticals such as entertainment, gaming and education, with additional potential upside in a blue sky scenario from O2O businesses and fintech.

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

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

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

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

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https://techcrunch.com/2020/06/03/google-and-walmarts-phonepe-establish-dominance-in-indias-mobile-payments-market-as-whatsapp-pay-struggles-to-launch/

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

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

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

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

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https://research.gs.com/content/research/en/reports/2020/04/13/ba1fd32b-69f6-4d8d-b770-32550b0628ef.htmlhttps://research.gs.com/content/research/en/reports/2020/04/13/ba1fd32b-69f6-4d8d-b770-32550b0628ef.htmlhttps://research.gs.com/content/research/en/reports/2020/04/13/ba1fd32b-69f6-4d8d-b770-32550b0628ef.htmlhttps://www.autocarindia.com/car-news/indias-most-fuel-efficient-bs6-petrol-cars-416868https://www.autocarindia.com/car-news/indias-most-fuel-efficient-bs6-petrol-cars-416868https://www.autocarindia.com/car-news/indias-most-fuel-efficient-bs6-petrol-cars-416868https://timesofindia.indiatimes.com/auto/cars/are-cng-cars-viable-alternative-amid-fuel-price-hike/articleshow/77032865.cmshttps://timesofindia.indiatimes.com/auto/cars/are-cng-cars-viable-alternative-amid-fuel-price-hike/articleshow/77032865.cmshttps://timesofindia.indiatimes.com/auto/cars/are-cng-cars-viable-alternative-amid-fuel-price-hike/articleshow/77032865.cms

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

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

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

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

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

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

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Unicorns in India Internet

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

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

$0 bn

$4 bn

$8 bn

$12 bn

$16 bn

0% 10% 20% 30% 40% 50%

Last

roun

d va

luat

ion

(per

pre

ss re

port

s)

FY20-25E GTV/revenue CAGR for segment

Size of bubble indicates potential size of underlying industry (TAM) in

FY25E (GS estimates)

Color legend

Dark blue: Online retail & payments

Orange: Logistics, mobility, delivery &

travel

Grey: Gaming, insurance & edtech

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

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

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Snapshot of Facebook and Google in India

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

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

Facebook: Traffic leader but focus now on monetization India makes up 10-20% of the global user base of Facebook3, with the country being the largest market in terms of audience reach for WhatsApp and Facebook, and the second largest market for Instagram. However, Facebook’s revenues in India (US$800-900 mn in 2018, as per Moneycontrol) is just about 1-2% of the company’s total revenues. In our view, this is a function of the fact that the overall size of the digital advertisement market in India, the segment Facebook primarily operates in, is relatively small at about US$3 bn as of 2019.

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

Exhibit 19: Facebook and Google have close to 400mn unique visitors on their platforms in India... Total unique visitors/viewers (in mn), May 2020

Exhibit 20: ...and have a reach of more than 95% Reach as of May 2020

0 mn 100 mn 200 mn 300 mn 400 mn

Network 18 (RIL)

Paytm

Flipkart

Truecaller

Bytedance

Microsoft

Amazon

Times Internet

Facebook

Google

0% 20% 40% 60% 80% 100%

Network 18 (RIL)

Paytm

Flipkart

Truecaller

Bytedance

Microsoft

Amazon

Times Internet

Facebook

Google

For both desktop and mobile.

Source: comScore

For both desktop and mobile.

Source: comScore

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

We believe part of the strategic rationale for Facebook’s investment in Jio Platforms earlier this year was to begin monetizing WhatsApp’s large user base in India via payments/e-commerce; we note that in its 1QCY20 earnings call, Facebook mentioned it will be leveraging its partnership with Jio Mart to enable commerce for small businesses, and also online payments through WhatsApp. We estimate e-commerce and mobile payments in India to be a US$1 trillion market by FY25 (total transaction value, including P2P); WhatsApp + Jio Mart have already launched grocery delivery on their platform, and RIL recently announced expansion of Jio Mart into categories such as fashion, electronics, etc.

WhatsApp also has a product called WhatsApp for Business, where merchants/service providers can communicate with their customers through verified accounts (versus doing the same via SMS); recently, Facebook said WhatsApp for Business has a user base of 15mn in India. Integration of payments in WhatsApp for Business can help this product to scale further, in our view, giving vendors the ability to collect payments within the app and ‘close the loop’ with their customers. WhatsApp has been seeing strong engagement from users in the last few months on its tie-up with banks for basic services such as balance enquiry, updates, card statements, etc., with c.1 mn users applying for WhatsApp banking as per ICICI bank.

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

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

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

280

190

130 120

86 72 63

48 41 37 37

120

8882

64

4639

3126 25 22 21

Source: We Are Social, Hootsuite

Source: We Are Social, Hootsuite

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

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

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

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

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

Instagram

Facebook

FB Messenger

WhatsApp

Amazon Flipkart

Google PayPaytm

PhonePe

Snapchat

TikTok

MX PlayerHotstar

MyJio

Youtube

0

40

80

120

160

200

50 75 100 125 150 175 200 225 250

Dai

ly A

ctiv

e U

sers

(mn)

Downloads (in mn, six months ended June 2020)

Size of bubbleindicates time

spent per active user

0

100

200

300

400

500

600

700

800

0

100

200

300

400

500

600

700

800

2014 2015 2016 2017 2018 2019 2020E 2021E 2022E 2023E 2024E

Monthly Active Users (mn)

WhatsApp

Facebook

Instagram

Smartphone usersinc. 4G phones

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

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

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https://tech.economictimes.indiatimes.com/news/mobile/us-social-media-giants-gain-from-ban-on-chinese-apps/77076812https://inc42.com/buzz/whatsapp-payments-tells-sc-its-fully-compliant-with-rbis-data-norms/https://inc42.com/buzz/whatsapp-payments-tells-sc-its-fully-compliant-with-rbis-data-norms/https://inc42.com/buzz/whatsapp-payments-tells-sc-its-fully-compliant-with-rbis-data-norms/https://www.google.com/search?rlz=1C1GCEB_enIN865IN868&ei=dpcAX7vCCoeH4-EPvYapgAw&q=whatsapp+looks+at+lending+payments+nod+ettech&oq=whatsapp+looks+at+lending+payments+nod+ettech&gs_lcp=CgZwc3ktYWIQAzIFCCEQoAE6BwgAEEcQsAM6BwghEAoQoAFQ3iZYmFxgz1xoBHAAeACAAcEEiAHzLpIBBDUtMTGYAQCgAQGqAQdnd3Mtd2l6&sclient=psy-ab&ved=0ahUKEwi71fu47LPqAhWHwzgGHT1DCsAQ4dUDCAw&uact=5https://research.gs.com/content/research/en/reports/2020/04/22/f8cac47b-4bcc-46f4-8116-b81ec7a26b4a.html

In February 2020, Facebook participated in Unacademy’s US$110 mn capital nraising round. Unacademy is an education-technology platform, with a focus on competitive exams. The platform has a paid subscriber base of 200k users, and has been valued at US$510 mn, as per Economic Times.

In 2019, Facebook invested US$20-25mn for a stake in Meesho, a social ncommerce company. Meesho had an annualized GMV of US$334 mn as of Sept 2019, and was expecting to exit March 20 with an annualized GMV of US$850 mn. Meesho leverages WhatsApp to connect buyers and sellers, and was valued at US$700 mn in 2019, as per Economic Times.

In 2017, Facebook placed a US$610 mn bid (albeit unsuccessful) for the digital rights nof the Indian Premier League, the most popular sports league in India in terms of revenues. In 2019, Facebook secured exclusive digital content rights for global ICC (International Cricket Council) events in India until 2023; these rights involve post-match recaps and key match moments, among other things.

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

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

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

Step 1: Press on the ’+’ sign at the bottom of the WhatsApp chat window

and click on payment

Step 2: Enter the amount to be paid/transferred and click on Send Step 3: Enter the UPI pin linked with the

underlying bank account and click Submit. Amount gets transferred to the

linked bank account of the receiver immediately

Source: Screenshot of WhatsApp iOS app in India

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

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

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

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

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

4 Unified Payments Interface, explained in the Fintech section.

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Exhibit 25: Android is the dominant mobile phone operating system in India Split of unique visitors (mobile phones) by operating system, March 2020

Exhibit 26: Google’s apps are the leaders in their respective categories Daily Active Users (in mn) and time spent for select Google apps in India

Android, 377 mn, 99%

iOS, 5 mn, 1%

49:59

12:03

6:519:05

3:29

0 mn

30 mn

60 mn

90 mn

120 mn

150 mn

YouTube Google (search) Gmail Google Maps Google Pay

Grey boxesshow time spent per active user

per day, in minutes

Source: comScore

Pre COVID data (February 2020); for Android.

Source: SimilarWeb

Exhibit 27: YouTube had 3x as many visitors as the number two app in entertainment Unique visitors (March 2020) for apps in entertainment category, India

Exhibit 28: Google has the highest market share in mobile payments (UPI) UPI transactions share (in million)

38 mn

38 mn

39 mn

39 mn

61 mn

84 mn

96 mn

113 mn

113 mn

360 mn

Zee5

Google Movies & TV

Amazon Video

Gaana Music

Jio Saavn

Jio TV

Google Play Music

Hotstar

MX Player

YouTube

515 434 540

454

368

460

186

127

120

92

71

115

1,247

1,000

1,235

Mar 20 Apr 20 May 20

Others

Paytm

PhonePe

Google Pay

Source: comScore

Source: Press report (Techcrunch), NPCI

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

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

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

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

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

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

Investments As per our regional internet analysts, investments are a central part of Tencent’s strategy. In 2018, Tencent mentioned it had invested in more 700 companies so far, with 122 of them passing US$1bn valuation, and 63 public listings over the past 11 years (until 2018); Tencent mentioned that investments allow the company to build a larger ecosystem beyond its own business capabilities. Some of Tencent’s investments in China include: games (Kingsoft), entertainment/media (Huya, Bilibili), food delivery (Meituan), e-commerce (JD, PDD, VIPshop), ride-hailing (DidiChuxing), classifieds (WUBA), etc. We believe this investment strategy could potentially be adopted by RIL as an approach to expand its internet/technology ecosystem.

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

0

200

400

600

800

1,000

1,200

1,400

Added phone album;Share

photos to moments

Added WeChat Pay,Official Accounts, etc.

Added WeChat moment video,

WeChat red packet Launched WeChat

Mini Program

Users can open 3 days of

Moments

Launched Mini

Program Games

Interface whole new designAdded Time

CapsuleAdded Top Stories

Users can hide articles and

expand them later to view again

Added floating window

1.2 bnMAUs as of

1Q20

2012 2013 2014 2015 2016 2017 2018 2019 1Q20

Source: Company data, Goldman Sachs Global Investment Research

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

WeChat’s main chat interface Discovery tab with moments, channels and mini programs

Moments tab where contacts share photos, texts and links

Mini programs e.g. Tencent video mini program

A series of mini programs listed within WeChat Pay tab

Channels tab to view short-form videos

Source: Company data, Goldman Sachs Global Investment Research

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

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

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

45bn daily messages 410mn daily video/audio callsWeChat

SocialPayments

or to join group chats Red Packet

Traffic diversion Traffic diversion

Private trafficSocial traffic

Traffic diversion

Traffic diversion

Content Social$Ecommerce $Advertising Creation Sharing $Advertising $Offline commerce

$Ecommerce $Smart living$Mini games $Merchant solutions

Social Traffic Traffic SocialSharing Support Support Sharingof ofContent Content

Moments

$Advertising

3.5mn+ active official accountsEncouraging original and high-quality content

Focus on picture + text content + video

c.850mn MAUs2.3mn+ mini programs avaiable

42.6x monthly average times of use per user

Text/picture/video/mini video sharingInformation feed based on time of posting Commercial + offline

Payment

Payments, accepted at 10mn+ stores

Official MiniProgramsAccounts

The WeChat Ecosystem

Individual usersGroup-chat communities

Scan QR codeto add friends

1,203mn Monthly Active Users

85min+ daily time spent per user

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

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

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

Exhibit 32: E-commerce, payments and entertainment are likely to be key segments RIL + FB could initially

Documents

India Internet A Closer Look Into the Future...Jul 09, 2020 · Krishnan, Rahul Jain, Aditya Soman, Aditya Gupta, Heath Terry, Lisa Yang, Kate McShane and Ryan Wallace for their contributions