India Internet Conference Report - India Internet: the stage is set - HDFC Securities

Mr. Apurva Prasad & Mr. Amit Chandra, Institutional Research Analyst, HDFC Securities

In collaboration with HDFC Bank (IB), we recently hosted the leading Indian internet companies (both listed and unlisted) cutting across multiple industries at our Internet conference. Most internet companies are on a hyper-compounding trajectory, powered by their business moat and supported by the industry drivers of rising internet/smartphone penetration, the democratisation of technology, and seamless payment ecosystem. With customer cohorts expanding and overlapping with the economy, we list key highlights and lead indicators across sectors.

A quick check on global internet for growth/size/valuation threshold unveils (1) ~T100 US and China-listed Internet companies have a median growth of 20% and revenue of USD 2bn, (2) listed global tech software and services (n=1540) have median growth of 10% and revenue of ~USD 100mn, (3) 3-Y growth estimates (consensus) across leaders in sub-segments categories are 29% (e-commerce), 13% (Ad and Social), 20% (Entertainment), 23% (Gaming), 17% (Classified & Web Hosting), 25% (Food & Mobility), >35% (EduTech & HealthTech), and 21% (FinTech).

Given (1) global precedent, (2) Indian ecosystem drivers (e-retail expected to grow 3.6x in five years, digital payments 10x in the next five years), (3) expected broad-basing of the capital base (disparity between listed Indian internet at 30 unicorns in India with ~50% entering in just the past two years), we believe the stage is set.

Agile models: Accelerated by the pandemic, internet companies/start-ups are instrumental in not just adding value from '0 to 1' but also taking that from '1 to n', leading to a rising user base, improving AOV, and stable churn. Key drivers include: (1) shorter cycle timelines to scale the business (disrupt/partner offline models) also supported by Metcalfe's Law working across monetisation models such as classified, e-commerce, subscription, ad tech, (2) focus to improve the LTV/CAC with emphasis on subscription route, and (3) investments to build omnichannel model, new offerings and supply chain.

Key highlights and industry read-across: (1) Auto demand is sustaining post-Diwali and shift in auto buying behaviour/trend indicators with increased spending on e-commerce platforms (online channels receive ~90% of the search for vehicle purchase). (2) Delay in OOH activity recovery and strong growth in the wearables segment. (3) Within grocery retail, a shift to the online channel has led to lower customer acquisition cost (CAC) and stable demand with improvement in selection without impact on inventory; competitive intensity to remain for fringe operators in furniture retail. (4) Penetration levels of e-pharmacies in drug market with foot-in diagnostics and consultation have increased; however, the impact on pharma manufacturer is limited, given the fragmented distribution and dominance of offline stores. (5) In-store BNPL can become a significant low-cost retail credit acquisition channel for banks. (6) Challenges for incumbent banks and NBFCs to overhaul the existing legacy systems to experiment with frictionless payment systems. (7) Uptick in term and health (protection) insurance products should continue due to increased awareness (pandemic), and web-aggregators could gain more relevance. (8) Price competition in broking is expected to continue (discounted pricing plans) as new-age online brokers are benefiting from the structural surge in Aadhar/digital account openings (especially in Tier-2-3 cities).

Source : Equity Bulls

Keywords