ecommerce in india

KBuzz Sector Insights Issue 17– May 2012

kpmg.com/in

1 © 2012 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

Pending

The intensifying debt crisis in the Euro zone, ambiguity around the political and economic direction troubled European economies could assume, and burgeoning domestic challenges - are some of the primary factors leading to weakening economic conditions in India. This deteriorating economic environment is creating grounds for a depreciating currency, a slowdown in critical sectors such as services and dipping investor sentiment. For example, according to provisional data released by the Reserve Bank of India (RBI), the services sector - which is critical to India’s economic health - is showing signs of a slump. Services exports grew by a mere 4 percent to USD137 billion (around INR7.5 trillion) in the last fiscal year, while services imports contracted 3.8 percent to USD 81.1 billion1.

Worsening economic conditions are also reflected in a depreciating currency. The Indian rupee breached the 50-mark and hit a record low crossing INR56/USD, with regulatory measures by the RBI resulting only in brief sentiment boosts. The sovereign debt crisis in the Euro zone is causing investors to adopt a cautious approach resulting in the outflow of capital from India and thereby exerting pressure on the Rupee 2. The central bank has also affirmed that capital flow will be the strongest determining factor in the way the rupee behaves in future. Foreign institutional investors withdrew close to USD 0.93 billion in April 2012, thereby exerting pressure on the country's account deficit and currency 3. Erosion in the value of the rupee is expected to lead to rising import costs and input costs. India’s consumer price inflation has already been pushed to the double-digit level, at 10.36 percent over 9.38 percent in March 2012. The corresponding provisional inflation rates for rural and urban areas in April 2012 stood at 9.86 percent and 11.10 percent, respectively, as compared to 8.70 percent and 10.30 percent, respectively, in March 20124.

In light of such unsettling economic trends, Morgan Stanley has slashed India's growth forecast for the current financial year to 6.3 percent as opposed to its earlier prediction of 6.9 percent. The firm also cut the 2013 forecast to 6.8 percent from 7.5 percent previously 5. However, the OECD has issued a slightly more optimistic view of India’s economic prospects and expects the economy to register 7.1 percent growth in 2012 6. While many other economists also maintain an optimistic outlook on India’ economic capabilities, much depends on how global uncertainties and situations unfold and on the degree to which the Euro zone crisis can be contained.

Additionally, the implementation of pending reforms towards stimulating foreign investment and the execution of structural changes to resolve supply-side bottlenecks are expected to help India combat its current economic challenges.

I hope you find this issue of KBuzz engaging and insightful.

Regards,

Rajesh Jain Head – Markets KPMG in India

© 2012 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

1. LiveMint, Services exports growth at 4 percent as global uncertainties take toll, May 22, 2012

2. The Economic Times, RBI imposes restrictions on forex dealers as rupee hits 55 per dollar, May 21, 2012

3. SEBI Statistics

4. The Hindu, Retail inflation surges to 10.32% in April , May 18, 2012

5. The Economic Times, Morgan Stanley cuts India's growth forecast to 6.3 percent versus 6.9 percent earlier, May 21, 2012

6 . The Economic Times, OECD sees euro zone debt crisis threatening world recovery, May 22, 2012


Indian Economy 03 Eurocalypse

Healthcare 06 Private Equity in Healthcare

IT-BPO 09 India-Africa IT corridor: The next growth frontier

Pharmaceuticals 13 India’s first compulsory licence – Implications

Private equity 16 PE/VC firms target E-commerce businesses for investments

Real estate and construction 20 Special Economic Zones in India: Off-track?

Transportation and logistics 24 Trends in global shipping

Indian Economy



Rohit Bammi Head Financial Risk Management [email protected]

“The current bout of heightened volatility that we are witnessing in the markets is likely to continue for the remainder of 2012, as we witness the events in Europe and the US unfold (presidential election, debt ceiling, forced budget cuts, etc.). Companies are well advised to proactively plan and manage this volatility to minimize the impact on the bottom line”

Rohit Bammi Head

Financial Risk Management KPMG in India

Eurocalypse

Rising debt levels and burgeoning trade imbalances have led a few Euro Zone economies including Greece and the other PIIGS countries (Portugal, Italy, Spain, and Ireland) to form the epicenter of a crisis that is now threatening world recovery. The deepening crisis, marked by economic indecisiveness, particularly in Greece is now manifesting in growing ambiguity on the political and economic direction that it will assume in the coming days. An inconclusive G 20 Summit (November 2011) followed by equally unsettling political events are now questioning the future of the 17-country currency union1.

Greece in the month of May 2012 witnessed an inconclusive election which is to be followed by a new round of elections around the mid of June 2012. Public opinion polls on the issue reveal that Greece’s anti-austerity, extreme left party, Syriza, which placed second in the first election, may come in first next time around, though still short of an outright majority2. Analysts suggest that even in the event of a successful coalition, the pledge to cut spending as required by the terms of its two bailouts worth USD 306 billion might be difficult to implement. These form requisites for Greece’s existence in the Euro Zone and thereby raise the apparition on the probability of Greece exiting the Euro Zone. The prospect of an exit has not only spawned fear among investors but also a new lexicon. A Grexit, shorthand for a Greek exit, coined by Citibank, is now gaining immense popularity as the most possible result of the crisis. Citibank’s Chief Economist, Willem Buiter has raised the probability of Grexit to 50-75 percent from 50 percent previously. Strengthening exit fear contagion is already sending shock waves to the rest of the world2.

KPMG in India point of view - The future course The most obvious analysis of the situation is to determine the costs of a Greek exit for India. With Europe constituting for around one-fifth of the world’s economy- it would be optimistic to say that the crisis can be contained to Europe. However, for India, which is integrated with the troubled PIIGS group in general and Greece in particular only by a miniscule amount of trade –is likely to be only indirectly impacted3.

A Euro Zone exit is expected to result in a major dip in global investor sentiment and thereby trigger a flight to safety among the group. This essentially is expected to translate into an outflow of short term funds from India. A trailer of this has already been seen with short term investors having nearly withdrawn USD 0.93 billion in April 2012 from India, exerting pressure on the country’s currency and current account deficit4.

1. Bloomberg, Greece Prepares for Vote Under Caretaker Gov't, May 16, 2012 2. Citibank, Eye of the Market, May 18, 2012 3. Ministry of Commerce ,Import Export Data Bank, http://commerce.nic.in/eidb/default.asp, May 21, 2012 4. SEBI, SEBI website, http://www.sebi.gov.in/sebiweb/ May 21, 2012

Countries Share in India's Total Export (%) Share in India's Total Import (%)

Greece 0.14 0.03

Portugal 0.21 0.02

Italy 1.81 1.15

Ireland 0.11 0.07

Spain 1.02 0.4

PIIGS 3.3 1.7

EU (total) 18.6 12.0

Source: Import Export Data Bank, 2010


Eurocalypse

KPMG in India point of view - The future course Primarily driven by panic outflows, the Indian Rupee in the month of May 2012 registered historical lows against the US Dollar. The Rupee touched an all time low of INR 56/USD and has largely displayed volatility over the last few months5. The depreciation in the Rupee may well continue along with an outflow of investment and is likely to breach higher levels on a probable Greek exit. On another concerning note, the ongoing depreciation in the currency is expected to lead to mounting import bills. India’s consumer price inflation has already been pushed to the double-digit level, at 10.36 percent over 9.38 percent in March 20126. A recent hike in petrol prices may be seen as a sign of rising price pressures for consumers5.

Given the gravity of the situation, it is imperative that India focuses on accelerating the execution of the many pending reforms focused on stimulating investment and growth in the economy.

5. The Economic Times, Petrol price up by INR 7.50/litre, steepest hike ever, May 23, 2012

6 . The Hindu, Retail inflation surges to 10.32% in April , May 18, 2012

Healthcare



Introduction

Globally healthcare has been an important destination for PE investing; the sector has witnessed continual interest from investors and is on a traction mode. It has been reported that the value of global healthcare PE deals doubled from approximately USD15 billion in 2010 to about USD30 billion in 20111. The sector represented 15 percent of total global PE investment activity, comprising 65 percent of the investment value1. It was also reported that a great deal of investor interest in healthcare was witnessed in emerging economies, particularly in Brazil, China, India and Eastern Europe 2.

Landscape of PE investments in healthcare (these figures are inclusive of pharma deals)

Amit Mookim Head Healthcare [email protected]

Private Equity in Healthcare

0

10

20

30

40

50

0

200

400

600

800

1000

1200

FY08 FY09 FY10 FY11

Amount (USD Mn) No Of Deals

With the tremendous potential that the sector holds along with development infrastructure and investment opportunity, India too is following this trend and numerous big ticket investments have taken place in the sector recently. Some examples are 3 :

• Advent International, a private invested about INR 520 crore (USD 105 million) in CARE Hospitals, a multi-specialty hospital chain

• Government of Singapore Investment Corporation (GIC) invested about INR 500 crore (USD 100 million) in Vasan Healthcare, which runs a chain of eye hospitals

• Olympus Capital Asia Investments invested INR 500 crore in DM Healthcare, which runs hospitals in India and West Asia.

Three of the six private equity investments so far this year worth over USD100 million each were in the hospitals and clinics sector, thus indicating the immense interest of investors in the segment.

PE Investments in HLS

Source: Venture Capitals – PrePulse Report – Nov 2011

1. Press Articles ( Times of India , Economic Times , Financial Express) 2. Venture Intelligence – PrePulse Report – Nov 2011 3. Merger Markets


Private Equity in Healthcare

Opportunities for investment can broadly be categorized under:

Innovation

While innovation has not historically been what has driven the Indian medical devices landscape, there has been a recent emergence of companies that are developing clinically relevant products that are better, faster and/or cheaper. In terms of healthcare delivery, the new day care models of hospitals and the single specialty hospitals are also attracting the interest of investors.

Cross-border collaboration

There is an emerging opportunity wherein Indian device companies and/or investors that have access to differentiated technologies in the US and have the ability to build an Indian operating presence, will be in a position to build value by leveraging the comparative advantages and comparative needs of India and the US. Distribution

One of the key hurdles to growth in the Indian healthcare segment is the lack of high quality distribution infrastructure.

Manufacturing

Western companies are looking to improve their operating margins; they are looking to places like India, China and Malaysia as destinations for OEM and Contract manufacturing4.

Conclusion

The tremendous growth potential of the Indian healthcare sector is stimulated by favourable demographics and a confluence of factors such as rising income levels, increasing awareness and medical tourism. The increasing PE investments would result in the development of infrastructure and provision of more accessible and affordable services. The USD 78 billion Indian healthcare industry is growing at a CAGR of 17 percent and is expected to be worth USD 280 billion by 20205.

4. Venture Intelligence – Prepulse Report – November 2011 5. IBEF Healthcare

IT - BPO



The India-Africa association dates back over a thousand years. Similar historical backgrounds and the achievement of independence have created a strong common foundation for the India-Africa collaboration in the twenty-first century. In recent times, India’s economic partnership with African countries has been vibrant, extending beyond trade and investment to technology transfers, knowledge sharing and skills development.

Over the past two decades, India has harnessed the power of information technology (IT) to become the hub of the global IT-BPO industry, reaching USD 100 billion in revenues in 20111. However, while many African countries have gauged the importance of IT in advancing their economies, none of them have been able to keep pace with India2. Learning from the success of IT-based economic growth in India could help African countries bridge this digital divide and improve their competitiveness in the global marketplace.

Africa as an off-shoring destination

The first wave of Indian IT firms that arrived in Africa looked at the continent as an alternative destination for offshore delivery centers. Africa has many of the same advantages that made India a leader in off-shoring IT-BPO services. A relatively low per capita GDP in the region provides African cities with a significant cost advantage. In addition, factors such as the availability of talent, progressing education levels, improving infrastructure and geographical proximity to Europe make Africa an exciting off-shoring destination.

Its proximity to Europe — as well as the spread of a diverse set of languages due to its colonial heritage — also makes Africa a preferred choice for many near-shore centers. Local governments ranging from South Africa and Egypt to Morocco have made significant efforts to provide IT-BPO firms with incentives to establish presence in their countries3.

Source: KPMG in India Analysis, Destination Compendium 2010

The booming domestic IT-BPO market in Africa

Over the past decade, rates of economic growth and development in African countries have started to improve. The end of the Cold War and the spread of democracy generated a wave of economic reform across the continent. While countries such as South Africa have very highly developed industrial and services bases to propel their own IT-BPO industries, other countries such as Nigeria and Kenya are also emerging as promising markets for technology firms4. IT-BPO firms ranging from major global players to emerging Indian giants are tapping this lucrative market, which is expected to reach USD 42 billion by 20165.

“Joint initiatives to promote industry and entrepreneurship in Africa can range from investments and technology transfer to knowledge sharing. Government needs to work with industry to devise measures to strengthen this economic partnership which can be lucrative for both nations”

Pradeep Udhas Head

IT-BPO KPMG in India

Pradeep Udhas Head IT-BPO [email protected]

India-Africa IT corridor: The next growth frontier

Country Egypt Morocco South Africa Tunisia Mauritius

Key cities Cairo, Alexandria Rabat, Casablanca Durban, Cape Town, Johannesburg

Tunis Port Louis

Processes Offshored

IT, Contact Center IT, Contact Center IT, Contact Center R&D, Contact Center

IT, Contact Center, BPO

1. NASSCOM Strategic Review 2012 2. KPMG in India Analysis 3. Destination Compendium, 2010 4. Developing an African Off-shoring Industry—The Case of Nigeria, Ismail Radwan and Nicholas Strychacz, May 2010 5. Africa ICT Market Forecast, IDC, 2012


6 The Hindu Business Line, March 9, 2012, http://www.thehindubusinessline.com/industry-and-economy/info-tech/article1523196.ece 7 Ministry of Information Technology, Government of India, www.mit.gov.in/content/africa

IT market in Africa

Source: Africa ICT Market Forecast, IDC, 2012

28.2 29.4 31.9

34.3 36.7

39.3 41.9

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

45.0

2010 2011 2012 2013 2014 2015 2016

USD

Billi

on

CAGR ~ 7%

Over the past few years, Indian firms from various industries —from telecom to automobiles — have expanded their presence in Africa through partnerships, acquisitions and greenfield investments. Their Indian IT-BPO vendors have followed them to the African continent and established centers to support these clients.

Africa attracts Indian firms

The Government of India, too, has started playing an active role with the 54-nation African continent, with a promise to expand cooperation in technology and knowledge. India’s booming economy, the appetite of its public and private-sector enterprises for investment overseas, and its leadership in science and technology have collectively shaped its policy toward Africa. In March 2012, at a conclave held in New Delhi hosted by Government of India, leaders from key African nations and the Indian Government signed several agreements to boost the development of science and technology in Africa. The Indian Government also pledged USD 700 million toward establishing new institutions and training programs. Of this, USD 185 million was reserved for science and technology7.



Government of India’s Initiatives in Africa

Tunisia

Ghana

Mauritius

Tanzania Seychelles

Lesotho

• India has set up an Indo-Ghana Kofi Annan Centre of Excellence for Communications and Information Technology at Accra, Ghana to cater to human resource development in the IT sector

• A Centre of Excellence for Communications and Information Technology (CoEICT) has been set-up by Government of India at Dar es Salaam, Tanzania. The project is being implemented by C-DAC.

• Plans to set-up an IT center in Lesotho; Government of India is doing a feasibility study to identify country specific need in IT sector

• Indo-Tunis Joint Working Group (JWG) on IT was formed, which identified Technology Park, e-Governance, R&D and Info Security as areas for strengthening of cooperation in ICT

• An MoU between STPI and Elgazala Technopark, Tunisia was formed in March 2009 and an MoU between CERT-In and National Agency for Computer Security (NACS) is under consideration

• Plans to set-up an IT center in Seychelles; Government of India is doing a feasibility study to identify country specific need in IT sector

• India developed Ebene Cyber City at Mauritius in April 2005 which houses companies such as Infosys, Hinduja TMT Ltd, & Satyam Computers

• MoU between CERT-In and National Computer Board of Mauritius was signed for Cooperation in Information Security in March 2009

• MoU for setting up of Mauritius Public Key Infrastructure (PKI) based on the Indian PKI model was signed between CCA) India and ICTA, Mauritius in February 2009

Source: Ministry of Information Technology, Government of India, www.mit.gov.in/content/africa

KPMG in India point of view

After decades of struggle, Africa has emerged as a beacon of economic growth and stability. With the demand for its IT-BPO services rapidly growing, the continent has evolved into an attractive offshoring destination. Indian firms have started to tap this market, and Indian IT companies are at the forefront of this movement.

To make the most of this opportunity, Indian IT-BPO firms should follow a multi-phased strategy. The first measure would be to set up off-shoring centers in an African country that combines excellent delivery location characteristics with a promising domestic market. These delivery centers should focus on basic application development, maintenance and BPO tasks, as Africa provides a large talent pool in these arenas. Initially, companies should focus on understanding the local culture and business environment and associated technological challenges. The second phase would involve tapping the domestic market using a local sales force. Indian firms can could consider leveraging global capabilities and offer to execute such contracts collaboratively, through both Africa and Indian centers.

As parts of the continent continue in their struggle to strike a balance between economic growth, social development and political freedom, a certain degree of risk is involved. However, investors are becoming increasingly cognizant of the fact that the risk of ‘not’ investing in the continent may be greater. Overall, the outlook for economic growth in Africa is favorable, and the business environment in the region has improved, driven by various business reforms under the guidance of the International Monetary Fund (IMF). As such, as the potential size of the African consumer market grows, the region is likely to present considerable opportunities for foreign investments, and a systematically formulated approach may help Indian firms ride this wave of growth.


Pharmaceuticals



India’s first compulsory licence – Implications

Rajesh Jain Head Markets [email protected]

Context

The compulsory licensing (CL) provision arms the government with the power to ensure that medicines are available to patients at affordable rates and has so far been used in Brazil, Thailand and South Africa. It gives the government the right to allow a generic drug maker to sell generic versions of patented drugs under certain conditions (limited availability, inaccessibility, expensive), without the consent of the patent owner.

In a landmark decision, India’s intellectual property office allowed Hyderabad-based Natco Pharma Ltd to make and sell a generic version of German drug maker Bayer AG’s patented cancer treatment Nexavar. It’s the first time that an Indian company has been granted a compulsory licence to market a generic version of a patented drug.

The drug, patented by Bayer in India in 2008, is used in the treatment of liver and kidney cancer, and costs INR 2.8 lakh for a month’s dosage. After Bayer rejected Natco’s request for a commercial licence to manufacture Nexavar, Natco in September applied for a compulsory licence to make a generic version of the drug.

The patent office stipulated that Natco price the drug at INR.8, 880 for a pack of 120 tablets (a month’s dosage) and pay 6 percent of net sales as royalty to Bayer1.

Details

The ruling clarified that the decision was made based on the facts that2:

• Bayer was able to supply its drugs to only 2 percent of the country's patient population and did not meet the 'reasonable public criteria' requirement.

• Its price was not ‘reasonably affordable’

• It was imported and not manufactured in the country.

Consequences

Effect on India’s image as an investing hub

The decision will further wane India’s credibility in terms of a weak intellectual property regime. Innovator companies will not feel secure enough to invest in a country where their extensively researched products (incurring millions of dollars) could be subject to compulsory licensing. During the hearing, the patentee submitted that the cost of making the invention and developing a new medical entity like the drug in the case works out to be about around INR.11,775 crore today, hence lowering the price seemed like a difficult option 3.

Effect on R&D in domestic companies

It could be argued that though the CL provision is aimed at providing medicines at an affordable price, it does hamper research. In essence the Government of India (GOI) has decided to kill the domestic research pipelines with this move, because a company would not risk the huge expenditures involved in research when with a single stroke the GOI can allow another company to copy the product legally at a negligible cost. This move is likely to reinforce the copy cat image of the pharma industry.

1. Times of India - Should compulsory licensing be allowed? - !4 March 2012 2. Live Mint - Natco gets India’s first compulsory licence – 13 March 2012 3. KPMG in India Analysis


India’s first compulsory licence – Implications

Effect on pricing strategies used by MNCs

The decision to grant compulsory licence may force multinational companies to adopt multiple or dual pricing for drugs where medicines are sold in developing countries at a fraction of the cost charged by them in developed markets. It serves as a warning to MNCs that when drug companies are price gouging and limiting availability, the patent office has the power to end monopoly to ensure that the patient has access to life saving medicine.

Implications

Benefits of invention must reach those who need it, and the ruling in favour of Natco is a move by the government to send the message that the spirit of public welfare should not be diluted for profit driven means. However, this ruling could have multiple implications on India’s pharmaceutical industry future. This socialist action of the government will have massive repercussions on NCE/New Molecule launches in India; research would be hampered as companies would shy away from investing in new molecule research and development. Experts believe that many molecules with excellent potential may not make it to the market for this reason 4.

The move will strain the relationship between Indian companies and their global counterparts. MNCs are in a better position to deal with pricing strains and low sales, they would focus on acquiring Indian firms (most of which have PE vested interests), this could have an adverse effect on the domestic industry in India which in any event is threatening to become MNC dominated again.

This single ruling might not have considerable monetary implications, considering the orphan status of the disease (hepatocellular carcinoma), however the message that the ruling sends across is massive.

We expect the entire MNC lobby to protest silently and exert pressure on the GOI through diplomatic channels. Measures like CLs cannot be the optimum solution of improving access to innovative/expensive medicines in India, while creating an environment that harnesses innovation and research.

One can argue that the research used by Big Pharma to develop new products is often crucially based on publicly-funded research, and the public should be able to reap the benefits of the invention, especially in a life threatening scenario. However, all the pros and cons should be considered before a ruling of such impact is passed.

In the past, most CL episodes occurred between 2003 and 2005, involving drugs for HIV/AIDS, and occurred in upper-middle-income countries (UMICs). AIDS is a global threat and when health activist lobbies unite against MNCs to ensure the welfare of a majority population, the move can be justified to some extent. In such cases it is important to put public welfare over profits. In the Bayer ruling, in spite of the high cost, the orphan status of the disease dilutes this essence.

This move is most likely to spur other generic manufacturers to apply for compulsory licenses. The future is uncertain at the moment and most analysts believe that a long drawn battle will soon shape the industry scenario for pharmaceuticals in India.

4. KPMG in India Analysis

Private Equity



Vikram Utamsingh Head Private Equity [email protected]

“E-commerce companies have attracted significant interest in the past and continue to do so. However, successful PE funds will need to address the risks involved in the sector and be selective in their choice of investee companies to create value for their investors”

Vikram Utamsingh Head

Private Equity KPMG in India

PE/VC firms target E-commerce businesses for investments

Background

PE firms are targeting e-commerce businesses in India for investment. E-commerce investments in 2011 more than quadrupled to USD 467 million compared to USD 99 million that was invested in 20101. Deal volumes too increased to 78 deals compared to only 22 deals in 20101. In fact, the 20 percent growth in overall PE investments in 2011 was largely led by investment activity in the e-commerce and the manufacturing sector2 with e-commerce accounting for nearly 5 percent of total PE investments in 2011 compared to 1.2 percent in 2010.

Deal activity in this sector continued in 2012 with USD 242 million invested in the first four months of 20121. PE funds have backed a wide range of online businesses including online retailing, fashion stores, business services, job portals, e-payments, classifieds etc.

The average deal size has almost doubled from USD 6 million in 2007 to USD 11 million in 2011, as e-commerce businesses have gained traction and require larger investments for growth1.

This deal-making seems to reflect the blossoming of online retailing in India and an unprecedented demand for early-stage money. A large number of investments in the e-commerce domain have been in the form of VC funding. VC deal volume comprised nearly 86 percent of the entire PE deal volume in the e-commerce domain over the five year period 2007-20111. In value terms, VC investments too were 59 percent of the aggregate PE deal value over the same period1.

1. Venture Intelligence, KPMG in India analysis 2. As per Venture Intelligence, PE investments (excluding real estate) increased from USD 7.7 billion in 2010 across 370 deals to

USD 9.4 billion in 2011 across 467 deals

Exhibit 1: Private equity investments in e-commerce

Note: E-commerce includes online businesses entailing online retailing, classifieds, advertising, payment infrastructure etc. and excludes m-commerce, mobile VAS etc. Source: Venture Intelligence, KPMG in India analysis

152 94

205

99 99

467

242

8

6

8

5 5

8

11

0

2

4

6

8

10

12

0 50

100 150 200 250 300 350 400 450 500

2006 2007 2008 2009 2010 2011 2012 (Till April)

USD mn

Deal Value Average deal size

USD

mn

Deal Volume 25 27 39 28 22 78 30



The enablers of e-commerce investments

A growing market

The internet retailing market currently estimated at about INR 46.3 billion has been growing at a compound annual growth rate (CAGR) of almost 44 percent since 20063. The market is projected to reach INR 113.5 billion by 2016, growing at a pace of 20 percent in real value terms3. However, the internet retailing market is still far behind other developed and developing countries. In India, online retailing accounts for only 0.3 percent of all retail volume compared with 1.8 percent in China3, 4.

Several major players in internet retailing are providing warranties for products which is encouraging consumers to buy online. Moreover, these players also offer products at lower prices compared with store-based retailers, which is expected drive internet retailing growth over the forecast period. Further expansion into Tier II and Tier III cities in order to provide more convenience to consumers is also fuelling growth.

Increasing internet penetration

Increasing internet penetration in India augurs well for e-commerce companies. Internet penetration in India increased from 2.5 percent in 2007 to about 10 percent in 2011 and is expected to further rise to 30 percent by 20155, 6. Resultantly, number of users transacting online is also projected to reach 38 million by 2015 from 11 million in 20116. With the commercial launch of 3G mobile services in early 2011 and the roll out of WiMax and other technologies, the adoption of broadband access is likely to grow.

Moreover, internet audience in India is skewed dramatically towards younger population with 75 percent of the web audience being under 357. This compared to 52 percent of the world and 55 percent for the Asia-Pacific region bodes well for the country. It is likely that potential customers for e-commerce companies will emerge from this segment.

Favourable demographics

Another factor supporting e-commerce growth in the country is a relatively young and increasingly wealthy population. More than half of India’s 1.2 billion people are currently below 25 years of age. Also, a higher proportion of working age population (15 to 64 year old) at 54 percent in 2010 is also likely to benefit e-commerce companies with growing disposable income8. Higher working age population increases incomes and reduces dependency, allowing for a strong growth in discretionary spending. In fact, disposable per capita income is projected to nearly double from USD 1,184 in 2011 to USD 2,036 in 2016 4, 9.

Growth in enabling infrastructure and services Another important factor in the development of India’s ecommerce market is the rapid maturation of enabling infrastructure in the form of logistics and payments. Indian consumers are still reluctant about using e-commerce due to the fear of fraud cases and risk of a possible cyber breach in the transaction systems. Towards this end, innovative payment mechanisms such as cash on delivery have helped build e-commerce businesses. Cash on delivery models are especially useful in market expansion amongst first time users and also address issues with drop-off while placing orders.

3. Euromonitor 4. KPMG in India analysis 5. Internet World Stats 6. Avendus report on India goes Digital, November 2011 7. comScore 8. World Bank 9. EIU


Challenges The e-commerce sector is not without its share of challenges. Amongst the primary concern is the execution risk on part of entrepreneurs in their ability to scale up businesses enough to achieve a critical mass. Globally, as well e-commerce has had few winners in each vertical, with a few top players garnering the majority of the market share. For instance, top two internet retailers accounted for nearly 52 percent of the overall internet sales in China in 201110.

Hence, it becomes imperative for PE investors to back the winners and choose the best performing companies. Our analysis indicates that only about 32 percent of PE-backed e-commerce companies have been able to secure follow on rounds of fund raising over the period January 2005 – April 201211.

Another challenge resulting from payment models such as cash on delivery is the fact that a number of e-commerce companies are now experiencing higher sales return and cash burn owing to increased collection charges. Also, changing customer mindset to transact on the net involves huge investments in customer acquisition costs. Only companies that are able to make this investment on a sustained basis are likely to thrive as Indian consumers remain averse to transacting on the internet. Besides, there remains significant scope to improve logistics infrastructure and adopt more efficient delivery systems at competitive costs.

Valuation of e-commerce companies has also been high particularly in the light of their global counterparts which have abnormally high valuations. For instance, Groupon, a group buying site which came out with its IPO in 2011 was valued at close to USD 12 billion12 on revenues of USD 1.6 billion and a net loss of close to USD 298 million in 201113. In India too, e-commerce businesses are relatively new with several e-commerce companies loss making, making it harder to justify such valuations.

Conclusion E-commerce is still a nascent industry in India with business models that are relatively new and yet to be tested. However, the industry is set to grow in India driven by strong fundamentals and PE and VC investors seem to be well positioned to help fund this expansion.


10. Euromonitor 11. Venture Intelligence, KPMG in India analysis 12. Avendus report on India goes Digital, November 2011 13. Form 10-K filing for the period ending December 2011

Real Estate and Construction



The Government of India (GOI) is considering the need to enhance foreign investment and promote exports from the country and in order to make the domestic enterprises and manufacturers competitive globally, announced the introduction of Special Economic Zones (‘SEZ’) policy in the country in early 2000s. As a concept, the SEZs were announced to be deemed foreign territory for the purposes of trade operations, duties and tariffs.

The SEZ legislations (comprising of the SEZ Act and the SEZ Rules) to implement and give effect to the policy was launched with considerable hype in India in 20061. It was introduced at a time when the economy was booming and businesses around the world were looking at India as an attractive destination. It was launched with the promise of lucrative tax incentives to companies setting up their businesses in SEZs, to substantially boost export. The GOI also provided for lucrative tax incentives for companies establishing the SEZs.

The GOI put in place comprehensive SEZ legislations streamlining and simplifying the administrative and legal infrastructure to encourage export oriented business out of the SEZs. The GOI has also been proactive in the development of SEZs. They have formulated policies, reviewed them occasionally and also ensured that ample facilities are provided to the SEZ developers as well as the companies setting up units in SEZs. These favorable conditions resulted in the biggest ever corporate rush for the development of SEZs in India. It is heartening to note that exports from SEZs in India amount to INR 3,158 Billion for the year ending March 20111.

Despite the fact that the existing SEZ Act and FDI Policies for SEZs are very lucrative; the rationale behind the rapid economic and industrial growth of the Indian SEZ policy is being questioned. Almost six years later, with the change in the global economic scenario, coupled with unstable policy, the SEZ story is dying a slow death.

While the SEZ Scheme has been a phenomenal success in terms of export promotion and employment generation, there seems to be a wide gap in the number of SEZ coming into operation as against the number of new proposals getting approvals. While 587 SEZs have been formally approved, only 380 have been notified while only less than half the notified SEZs are exporting1.

Today SEZs like Mahindra World City SEZs in Chennai and Jaipur which boast of a clientele of BMW, CapGemini, Infosys Technologies, Renault-Nissan, TVS Group and Wipro, among others, are facing issuers getting clients for their SEZs2. This is primarily as a result of the GOI going back on its promises on the tax incentives that attracted the companies to SEZs. Rolling back the policy would become a huge issue. Investors today are looking at cash flows and a stable policy. In order to attract foreign and other investors, the GOI would have to make the policy stable and stick to the promises made by it.

The GOI has also realized the above reality. The Ministry of Commerce and Industry floated a discussion paper in October 2011 to work with the stakeholders to identify and remove the shortcomings in the conception and implementation of the SEZ policy framework. One of the main reasons for the downfall of the SEZ policy was highlighted as the lack of resources to create the adequate infrastructure1.

Special Economic Zones in India: Off-track?

Sachin Menon Partner Real Estate and Construction [email protected]

“Almost six years later, with the change in the global economic scenario, coupled with unstable policy, the SEZ story is dying a slow death.”

Sachin Menon Partner

Real Estate and Construction

KPMG in India

1. www.sezindia.nic.in 2. www.sezindiainvest.com



The SEZ Division of the Department of Commerce which implements the SEZ policy of the GOI released the above discussion paper titled -“Discussion Paper to Facilitate Stakeholder Consultation on Potential Reform of the SEZ Policy and Operating Framework”. The Ministry has also invited comments from the stakeholders. A relevant portion of the above discussion paper has been extracted below:

“An analytical assessment of the SEZ growth pattern since enactment of the SEZ Act 2005 reveals certain distinct trends, which perhaps are pointers to shortcomings in the conception and implementation of the SEZ policy framework. The key trends are as follows:

1. Geographical Concentration of SEZs: Six States, Andhra Pradesh, Kerala, Maharashtra, Gujarat, Karnataka and Tamil Nadu, account for a major proportion of SEZs and 92 percent of total exports from them.

2. Urban centric growth of SEZs – Even within these six States, SEZs are largely concentrated around existing urban agglomerates, leaving the hinterland virtually untouched.

3. Sectoral Dispersion of SEZs: There is a pre-dominance of IT SEZs in the sector, and multi sector SEZs are few and far between. Of the 143 operational SEZs, only 17 are multi product SEZs.

4. Skewed Export Pattern: IT/ITES SEZs and Petroleum sector contribute to the roughly two-thirds of SEZ exports. Non-petroleum manufacturing contributes the balance minority share.

5. Inadequate progress of Manufacturing activity: As reflected in 3 and 4 above, the SEZ sector has not fully addressed the concern of boosting the manufacturing sector in India.

6. Limited number of Operational SEZs: While 583 SEZs have been formally approved as on 31st Oct 2011, only 381 have been notified, of which only 143 SEZs are exporting i.e. only 24.53 percent of the approved SEZs3.”

Another significant aspect affecting the SEZs in India currently is the reduction in the size of incentive package stipulated under the SEZ legislations. The direct tax incentives were reduced by the GOI with the withdrawal of exemption from Minimum Alternate Tax (MAT), levy of Dividend Distribution Tax (DDT) on SEZ Developers. The GOI also withdrew the exemption of MAT available to SEZ units (ie the business operating within SEZs).

Further, the proposed Direct Tax Code (‘DTC’) contains provisions for grandfathering of the benefits to only SEZ Developers notified on or before 31 March 2012 and SEZ units commencing on or before 31 March 2014. The above mentioned withdrawals have been challenged in court, and therefore, there is lack of clarity as to what the outcome would be and would the investors should expect.

Recently, there have been press reports which suggest that the commerce department is proposing fresh tax concessions and a cut in the minimum area requirement to a quarter of the present specifications to SEZs in India. The department wants to extend the benefits of export schemes to SEZ units, that are already available to entities outside the zone, to make up for the levy of minimum alternate tax and other tax concessions that were withdrawn last year.

3. Discussion Paper to Facilitate Stakeholder Consultation on Potential Reform of the SEZ Policy and Operating Framework



To tide over the land problem, the commerce department has proposed not just cutting the minimum area requirement but also changing the rules for contiguity. If the department's proposal goes through, a multi-product SEZ could be built over 250 hectares instead of the minimum floor area of 1,000 hectares at present. In case the zones are planned in the special-category states, which include the North East and the hill states, the minimum area requirement is proposed to be cut from 200 hectares to 50 hectares.

In addition, there is concession planned for IT SEZs too with the commerce department suggesting that the minimum land requirement of 10 hectares be done away with. Also, the requirement of one lakh square metres of built-up area would be insisted upon only if the IT or ITES zone is in Delhi (NCR), Mumbai, Chennai, Hyderabad, Bangalore, Pune and Kolkata. In case of 15 category B towns, this requirement is proposed to be fixed at 50,000 square metres and 25,000 square metres for all other cities.

If the proposals go through it would be a much needed relief to SEZs in India. Further, bringing in more stability to the SEZ policy and taking necessary measures to correct the inefficiencies identified above would add to the much needed impetus for the revival of SEZs in India4.

4. www.sezindia.nic.in, KPMG in India Analysis

Transportation and Logistics



Introduction The shipping industry has historically been the cornerstone of global trade. With changing trade dynamics at both global and regional levels, the shipping sector too has been witnessing significant transformation. In this paper, we analyze two specific trends: while from the opportunities perspective we research the increasing significance of the intra-Asia corridor, from the operations perspective we analyze the performance of shipping vessels.

Warehousing demand growing at ~ 6.8 percent CAGR (2010-13) Driven by increasing consumption, manufacturing, and relatively better macroeconomic scenario, the intra-Asia shipping market appears more promising in terms of growth opportunities than its other global counterparts. For instance, the average growth rate witnessed in the intra-Asia containerized trade segment has been highest at ~ 6.4 percent1, against other trade corridors witnessing sub-5 percent growth level1.

“The global shipping industry has been witnessing shifting patterns, one of which is the emergence of intra-Asia market as the largest and fastest growing region. These shifts may present unique opportunities for shipping as well as the larger transportation and logistics ecosystem.”

Manish Saigal Head

Transportation and Logistics

KPMG in India

Manish Saigal Head Transportation and Logistics [email protected]

Trends in global shipping

Intra-Asia trade growth: A global comparison

This emerging trend has also impacted the significance of ports across the world. While in 2000, the top 10 container ports included three European, two American and five Asian (two Chinese) ports, in 2010 the scenario was significantly different with top 10 slot being claimed by six Chinese, two Far East (Singapore and Busan), one Middle East and only one European port.

In terms of actual cargo volume, share of intra-Asia region has increased from 19 percent to 21 percent1 within a short period of 2008-12.

-20%

-10%

0%

10%

20%

2009 2010 2011 2012

Intra-Asia Transpacific

Asia-Europe Global

Average growth rates (2009-12)

• Intra-Asia: 6.4%

• Transpacific: 4.0%

• Asia-Europe: 4.5%

• Global: 4.0%

Source: Wydra Shipping and Aviation Research Institute , KPMG in India analysis

Share of global container trade

19%

18%

17%

ROW, 46%

2008

110 Mn TEUs

21%

17%

17%

45%

Intra-Asia

Trans-Pacific

Europe-Asia

ROW

127 Mn TEUs

2012

Source: Wydra Shipping and Aviation Research Institute , KPMG in India analysis

1. Wydra Shipping and Aviation Research Institute , KPMG in India analysis


Further, these shipping corridors display significantly different business characteristics:

Intra-Asia • Includes South East Asia, North Asia, Philippines, Taiwan , all countries in

the Far East with China and with each other (excluding India) • Majority vessel capacity is in the range of 1,700-1,800 TEUs. An

increasing trend of 2,000-3,000 TEUs vessel is being witnessed2

• Marked by low freight rates and lower profit margin • ASEAN-China Free Trade Agreement (ACFTA) to continue driving intra-

Asia trade growth.

Transpacific • Includes all shipments from the Far East to North America (east and west

coast) and the Gulf • Was the largest trade corridor till 2007, when intra-Asia lane took over the

top slot • Largest vessels deployed on this corridor • Majority of the cargo on this corridor originates in China.

Asia-Europe • Includes shipments from Far East to European ports, excludes Indian

subcontinent and Middle East • Increasing security concerns due to piracy in the Gulf of Aden that

disrupts preferred routes.

Changing operational characteristics

In addition to changing geographical dynamics marked by the rise of intra-Asia trade, the global shipping landscape is also witnessing critical changes in operational performance of the vessels. With the overall productivity of vessels on a global level decreasing from 7.9 tons per dwt in 1970 to 6 tons per dwt in 20103, the sub-segment performance too varies significantly:

• The productivity of tanker segment has reduced the most – from 9.74 tons per dwt in 1970 to a mere 6.12 tons per dwt in 2010 – the dry bulk segment witnessed a smaller fall from 6.21 to 5.11 tones per dwt during the same period3. This has been so because tanker and bulk vessels transport cargo from extraction to consumption points and return in ballast. The increase in number of production centres has resulted in longer production-to-consumption distances, resulting in lower fleet productivity

• Fleet productivity for dry cargo (container, general cargo, etc.) has improved significantly from 6.38 in 1970 to 11.69 tons per dwt in 2010, thus displaying the containerization growth3.

Conclusion The discussed trends are just a few among many similar dynamics that are would gradually overhaul the shipping landscape. While emerging markets in Asia and Latin America and the trade corridors of China-India and China-Africa would continue to be focused more, market consolidation of shipping players and port routes are also likely. Also, containerization is expected to witness higher growth in comparison to other shipping segments. Such developments would also drive changes in port sector where process mechanization and deeper drafts would assume higher significance.

Trends in global shipping

2. Industry discussions, KPMG in India analysis 3. UNCTAD’s ‘Review of Maritime Transport’ 2011, KPMG in India analysis

The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.


The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International.

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This document has been compiled by the Research, Analytics, and

Knowledge (RAK) team at KPMG in India.

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