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“Internet In India Has Hit The Tipping Point”

09 November, 2010

The successful listing of Indian online travel company Makemytrip (MMT) on NASDAQ has reaffirmed the faith of many investors in internet businesses. MMT, whose market cap has now zoomed beyond $1 billion, also received a “Buy” rating with a price target of $46, from a few analysts including Sandeep Aggarwal, senior internet & software analyst, Caris & Company, a San Francisco based research-driven boutique investment bank. He believes that MakeMyTrip could achieve 50-60% top line growth and 80-100% bottom line growth as it’s doing business in a high growth and under-penetrated market. Aggarwal, who recently authored a detailed report on Indian internet, also said that India has hit the tipping point for Internet. In an interview to VCCircle, Aggarwal highlights the drivers for the internet growth in India, and which internet based business models will work in India. Excerpts:

Do you expect more India based Internet/technology companies getting listed on NASDAQ?

Absolutely. We expect more Internet companies based out of India to consider NASDAQ for their IPO and listing. The kind of premium valuation multiples global institutional investors are willing to pay for “hyper” growth stories such as MakeMyTrip are hard to come by in many other stock exchanges or locations, in our view. Also, India does not have a long list of sizable public Internet companies that can offer good comps for the Internet sectors that can benefit a new IPO candidate. We believe that India as an emerging growth story and Indian Internet as a highly under penetrated market are now noticeable and lucrative themes for global investors.

You gave a buy rating on MakeMyTrip? Can you explain the rationale?

Yes, we have a Buy rating and $46 price target for MakeMyTrip. MakeyMyTrip is riding on many secular growth themes that are highly compelling. They include: it operates in a emerging market with long-term high growth outlook 2) Indian travel industry is the 2nd fastest growing travel market globally and 3) online travel which remains much under penetrated vs. US, Western Europe, and most of APAC regions. So, MakeMyTrip is currently offering global institutional investors long-term topline growth, very high growth rate potential for revenue and early signs of margin expansion – and both of these means premium valuation. Globally there are not many public Internet companies who are offering long-term growth of 50% to 60% for revenue and 80% to 100% for margins.

What is the kind of internet based business models in India which VCs should consider and those that they should stay away from?

For a successful exit in 3-5 year horizon, VCs in India need to either fund the ideas/start-up that fit in with the global expansion plan of the large US based internet companies such as Google, Yahoo, eBay, Amazon, Microsoft and so on. Or the start-ups who can be sizeable/profitable on stand alone basis and eventually go public.  In our view, traditional industrial houses in India will not make aggressive Internet acquisitions because they lack in-house view point for the Internet and will likely stay away from making expensive Internet M&As. So in other words, funding Internet start-ups that are focused on big addressable opportunities or aspire to become category leaders in India have better chances for successful exits.

VCs in India tend to favour more late stage start-ups and that means the business models that can show early signs of traction with bootstrap budgets are getting funding. While that approach ensures lowering of risk, it does not service funding the Internet start-ups that can become next Google or Amazon with the help of capital infusion early on.

In your detailed India Internet report in Sep 2010, you said that India has hit the tipping point for the Internet — what exactly has changed?

Though Indian Internet started around the same time the Internet was made available for public usage globally in mid-1990s, many factors such as overall poor infrastructure, low PC installed base, limited Internet connectivity, low broadband penetration, and lack of need to be online (beyond email/instant messenger/casual search etc.),  resulted into very slow ramp-up of the Internet in India.

While many of those constraints continue to exist today, overall PC installed base has dramatically increased in India; smartphone penetration is very high; there has been a dramatic increase in white collar jobs in India in last one decade (giving information workers access to PC and highly quality Internet connection), increasing wealth, younger demographic, and high penetration of digital goods such as flat panel TVs, digital camera, camcorders, music downloads etc.

In our view, all these factors have increased the Internet population and time spent online. We think with 85 million Internet users in India (roughly half of US) and time spent per week at 12 hrs (comparable to US), Indian market has hit its tipping point and next 3-5 years we should see dozens of Internet models emerging and hopefully seeing very nice growth trajectory. We believe that as more and more companies build their Internet products and services offerings for Indian markets, it will accelerate the further adoption of the Internet as these new products/services are creating more reasons why someone should be online in India.

In which segments of the Internet do you see opportunities?

In our view, the entire India Internet sector is up for grab with immense growth potential and start-up ideas. In terms of size of addressable opportunity and near-to-mid term horizon, we particularly find E-Commerce, B2B, online travel, and mobile value added services particularly compelling.

While in the US, online advertising is the largest category in terms of value creation with Google accounting for nearly 65% of total US Internet market capitalisation – we believe that online advertising opportunities are attractive but further down in terms of size and pace of ramp-up.

What kind of business models will survive?

Though any Internet business model with positive cash flow will obviously have much higher likelihood to succeed vs. heavily VC dependent business model with no or low monetization models, we believe that business models that are focused on big addressable opportunities in terms of sheer size or helping address customer pain points in a visible manner will survive. If a business model can capture both aspects then you have a winning company right there. For example, online travel is not only a  play on $40 billion addressable opportunity in India but it is also addressing many customer pain points in terms of convenience, selection, price, access to vast travel inventory, and travel supplier agnostic comparison etc.

Do you see lot of “me too” ideas in the Internet in India?

We believe that India Internet is full of “me too” ideas and entrepreneurs need to bring original thinking, innovations, global product management discipline, and effective “go to market” strategy to make an ever lasting impact and create a next big Indian Internet company that can survive all sorts of economic cycles and not just bull markets.

What can Indian entrepreneurs learn from Silicon Valley Internet companies?

For decades, Silicon Valley has been the birth ground for Internet start-ups including Yahoo!, eBay, Google, Facebook etc.  Silicon Valley has a very strong ecosystem for encouraging start-ups whether it is semiconductor, IT hardware, software, Internet or cleantech. This ecosystem gives birth to highly motivated and well informed core teams for a start-up, big vision, prior relevant experience, access to capital, mentorship, and highly consumer focused culture. In our view, process of creating a core team, having a global product management discipline, building highly consumer focused products, going methodically to show early signs of traction etc. are some of aspects that Indian Internet start-ups can learn from Silicon Valley based companies. Also, the Indian Internet businesses do not pay as much attention to user interface (UI), speed, the stuff that customer will touch/see, and clarity around business flow as a consumer focused Internet model requires.

As an Internet analyst, what are the metrics or parameters you look at in Internet start-ups and pre-IPO companies?

For an early stage Internet company, independent of their focus or business model, the monthly unique traffic is probably the strongest metric we care about. Beyond that independent of a stage of an Internet company – 1) if it is transactional business, we care about metrics such as growth in units sold, average order size, gross margin and operating margin 2) and for advertising focused Internet models, we care about trends for total pages viewed, total time spend, effective cost per thousand impressions (eCPM), and revenue per thousand pages viewed (RPM).


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1 Comment
Ashish Abrol . 6 years ago

Very informative article.

I have point of disconnect or rather a question for you. why do you feel E-commerce will take off before the ad led model in India?

E-commerce is dependent on the end consumer while the ad led model is more reliant on corporations to sustain itself. I would think that corporates with more sophisticated and well exposed marketing teams are more likely to wet their feet in the water before the end consumer jumps on the bandwagon. Why would India not follow the internet evolution model followed in more developed markets? what is unique about the Indian internet space that it would warrant a different trajectory for the industry? Moreover, e-commerce is competing directly with the profusion of retail malls in India which itself is a novel idea for the country.

i have recently read several internet analysts predict 25-40% yoy e-commerce topline growth. I wonder what might their enthusiasm be due to except the proliferation of e-commerce sites?

remember 2000?

Ashish Abrol

“Internet In India Has Hit The Tipping Point”

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