Internet In India In A Hyper Growth Phase

(Editor: This article is written by Sandeep Aggarwal, Sr. Internet & Software Analyst, Caris & Company.)

Last week we participated in a heavily attended VCCircle E- Commerce Forum in New Delhi, India, where we had a chance to be a keynote speaker to talk about overall Internet trends/outlook in India and also to moderate a panel with the CEOs of 3 of the top 6 largest OTAs in India (Yatra, Via, and Travelocity). During this day-long conference, we interacted with nearly 25-30 Internet companies and other important constituents of India's Internet ecosystem such as online services providers, VCs, PE firms, etc. We came out incrementally more positive on our already bullish views on India's Internet outlook. As we mentioned in our India Internet initiation report in September 2010, the country has hit the tipping point for the Internet and we expect a hyper-growth phase in the next 3-5 years, particularly in E-Commerce, online travel, social media, mobile Internet, gaming, and some of the online advertising formats. Our key takeaways from this day-long conference, where we interacted with nearly 25-30 Internet companies and other important constituents of India's Internet ecosystem, include:

1. More evidence for the inflection point in India's Internet. In his keynote session, Google's head of India Rajan Anandan presented some very interesting trends and statistics for the growing Internet activities in India. Some of the noteworthy trends he highlighted were – a) there are approximately 100mm Internet users in India on monthly basis (interestingly this number is 15mm more than what we estimated in September '10), b) Google's search query volume increased 20x from 2005 to 2010, c) the number of hours spend online by the Internet population in India is 16 (4 hours more than our estimate from September '10), and d) there are 40mm mobile Internet users in India. We indeed believe that India Internet has hit the tipping point and from here on online activities should experience hyper growth until 2015. In our view, even for a much longer horizon India will likely remain one of the fastest growing Internet markets globally.

2. OTAs sound upbeat about the overall trends and market opportunities. We focused on many of the top issues and trends shaping up the online travel industry in India while moderating a panel with the CEOs of three OTAs (i.e. Dhruv Shringi from Yatra, Vinay Gupta from Via, and Himanshu Singh from Travelocity). All three CEOs sounded very upbeat about the overall trends and market opportunities for the OTAs in India, essentially echoing our long-term thesis in terms of fast-growing and under-penetrated online travel market, rising middle class, and readiness to transact online.

3. Online travel is the most established Internet category and arguably starting to get a bit crowded. Online travel is the largest segment of the Internet in India, followed by E-Commerce, online classifieds, and online advertising. OTAs in India make most of their livelihood from air bookings and the market is starting to get crowded with 6-7 OTAs along with strong offline/ online travel agents network and supplier direct competition. However, the overall airline industry is adding new seat capacity and the secular growth trend of air bookings moving online will continue to provide tailwind to the entire industry. We expect the online travel market in India to grow at 35% to 40% for the next 3 years.

4. Hotels & Packages will remain a small percentage of total gross bookings in near-to-mid term for OTAs in India. While, Hotels & Packages, car & bus are growing very rapidly, almost all OTAs continue to generate 85% or more of their gross bookings from air. We believe that Hotels & Packages can contribute higher-quality revenue growth for OTAs but India has a small base in terms of number of hotels with high occupancy rates, making it difficult for OTAs to carve out meaningful market share in near-to-mid term. However, India will increase the number of hotels in the next 3 years, thus providing sizable opportunities for OTAs.

5. Indian OTAs have defensible models. Dhruv Shringi from Yatra made a strong case why multi-national OTAs such as Expedia, Priceline, etc. may not be able to dislodge Indian OTAs, when India becomes a bigger focus for multi-national OTAs.He argued that Indian OTAs have many years of head start, stronger grip on local markets, highly established relationships with travel suppliers, and ability to localize the travel offerings for Indian consumers better than multi-national OTAs. While, we don't agree on all of the points he made, we believe that other than a language advantage, multi-national OTAs need to develop deep expertise in the local market to be meaningful in India.

6. E-Commerce is in early stage of growth trajectory. One predominant theme, we heard from the CEOs and founders of many E-Commerce companies, was that the majority of E-Commerce companies in India are seeing triple-digit growth of gross revenue. As per our estimates, India's E-Commerce is roughly a $650mm market if we exclude Online Classifieds and revenue of multi-national pure-play E-commerce companies and multi-channel retailers.

7. Fulfillment and logistics materially lacking for E-Commerce. E-Commerce in India suffers from lack of fulfillment and logistical infrastructure and capabilities. In our view, India is nowhere close to where the majority of developed E-Commerce markets and China are in terms of fulfillment capabilities.

8. Cash remains one of the single biggest gating factors for E-Commerce adoption. In India cash remains the highest mode of transaction. As per our estimates, the Indian cash economy is worth $550bn and much of that cash is unaccounted or popularly known as "black money" (undeclared earnings and tax evasion – highly common phenomena in India). Because of the use of cash, consumers dislike buying things online as they do not want any record of the transaction. Many E-Commerce companies are offering Cash on Delivery to deal with this situation but digital records for buyers are still being created and Cash on Delivery transactions carry high moral hazard and suffer from higher "returns".

9. E-Commerce remains in its infancy in terms of embracing other global best practices. In addition to sub-par fulfillment/logistics and a mostly cash economy, there are many other basic ingredients of E-Commerce in India that are quite below global best practices. For example, the majority of existing E-Commerce companies lack the level of sophistication and desire to innovate in line with what we have seen in the US or China for selection, payments, website UI, and overall shopping experience.

10. India among the most exciting markets for Google. As per our estimates, Google generates close to $175mm in revenue from India and is perhaps growing its top-line in excess of 45%. It dominates the market as an online advertising provider, especially given that India has nearly 35mm SMBs.

11. Lots of buzz around Facebook. We had a chance to speak with the CEOs and founders of dozens of Internet companies in India. Our assessment is that Facebook is not only seeing massive adoption by users in India but also advertisers are using Facebook for brand awareness and customer acquisition. Many of our industry contacts told us that they are allocating sizable budgets to advertise with Facebook and in many instances the allocations are 50% or more of the entire online ad budget.

12. Mobile Internet is a big growth driver. With a mobile installed base 6x to 8x bigger than PC installed base, mobile will remain a big growth driver for the Internet. India is already a sizable market for MVAS (Mobile Value Added Services), text and consumption of content/media via mobile handsets. However, we expect E-Commerce, mobile payments, gaming, and media to benefit from the increasing mobile Internet activities.