Ecommerce in India

KBuzz
Sector Insights
Issue 17 May 2012
kpmg.com/in
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 Indias
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. Indias 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.
Pending
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 Indias 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
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
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.
Indian Economy
Eurocalypse
03
Healthcare
Private Equity in Healthcare
06
IT-BPO
India-Africa IT corridor: The next growth frontier
09
Pharmaceuticals
Indias first compulsory licence Implications
13
Private equity
PE/VC firms target E-commerce businesses for investments
16
Real estate and construction

Special Economic Zones in India: Off-track?
20
Transportation and logistics

Trends in global shipping
24
Indian
Economy
Eurocalypse
Rohit Bammi
Head
Financial Risk Management
rohitbammi@kpmg.com
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 Greeces 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 Greeces 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. Citibanks 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.
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
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
worlds 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 countrys currency and current account deficit4.
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
18.6
12.0
EU (total)
Source: Import Export Data Bank, 2010
1.
2.
3.
4.
Bloomberg, Greece Prepares for Vote Under Caretaker Gov't, May 16, 2012
Citibank, Eye of the Market, May 18, 2012
Ministry of Commerce ,Import Export Data Bank, http://commerce.nic.in/eidb/default.asp, May 21, 2012
SEBI, SEBI website, http://www.sebi.gov.in/sebiweb/ May 21, 2012
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.
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. Indias 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
Amit Mookim
Head
Healthcare
amookim@kpmg.com
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)
PE Investments in HLS
1200
50
1000
40
800
30
600
20
400
10
200
FY08
FY09
FY10
Amount (USD Mn)
FY11
No Of Deals
Source: Venture Capitals PrePulse Report Nov 2011
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.
1. Press Articles ( Times of India , Economic Times , Financial Express)

2. Venture Intelligence PrePulse Report Nov 2011
3. Merger Markets

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
10

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, Indias economic partnership with African countries
has been vibrant, extending beyond trade and investment to technology
transfers, knowledge sharing and skills development.
Pradeep Udhas
Head
IT-BPO
pudhas@kpmg.com
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 ITbased economic growth in India could help African countries bridge this digital
divide and improve their competitiveness in the global marketplace.
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
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.
Pradeep Udhas
Head
IT-BPO
KPMG in India
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.
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
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.
1.
2.
3.
4.
5.
NASSCOM Strategic Review 2012

KPMG in India Analysis
Destination Compendium, 2010
Developing an African Off-shoring IndustryThe Case of Nigeria, Ismail Radwan and Nicholas Strychacz, May 2010
Africa ICT Market Forecast, IDC, 2012
11

IT market in Africa
45.0
CAGR ~ 7%
40.0
USD Billion
35.0
30.0
28.2
29.4
2010
2011
31.9
34.3
36.7
39.3
41.9
25.0
20.0
15.0
10.0
5.0
0.0
2012
2013
2014
2015
2016
Source: Africa ICT Market Forecast, IDC, 2012
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 54nation African continent, with a promise to expand cooperation in
technology and knowledge. Indias 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.
6
7
The Hindu Business Line, March 9, 2012, http://www.thehindubusinessline.com/industry-and-economy/info-tech/article1523196.ece

Ministry of Information Technology, Government of India, www.mit.gov.in/content/africa
12

Government of Indias Initiatives in Africa
Tunisia
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.
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
Ghana
Tanzania
Seychelles
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
Mauritius
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
Lesotho
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.
13
Pharmaceuticals
14

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.
Rajesh Jain
Head
Markets
rcjain@kpmg.com
In a landmark decision, Indias intellectual property office allowed

Hyderabad-based Natco Pharma Ltd to make and sell a generic version of
German drug maker Bayer AGs patented cancer treatment Nexavar. Its 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 months dosage. After
Bayer rejected Natcos 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 months 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 Indias image as an investing hub
The decision will further wane Indias 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 Indias first compulsory licence 13 March 2012
3. KPMG in India Analysis
15

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 Indias 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
16
Private Equity
17

Background
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.
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
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.
Vikram Utamsingh
Head
Private Equity
KPMG in India
Exhibit 1: Private equity investments in e-commerce

500
450
400
350
300
250
200
150
100
50
0
8
205
99
99
2009
2010
242
152
94
2007
2008
Deal Value
25
27
39
12
10
8
6
2006
Deal
Volume
11
467
6
4
USD mn
USD mn
Vikram Utamsingh
Head
Private Equity
vutamsingh@kpmg.com
PE firms are targeting e-commerce businesses in India for investment. Ecommerce 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.
2
2011
0
2012 (Till April)
Average deal size

28
22
78
30
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
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.
2.
Venture Intelligence, KPMG in India analysis

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
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.
18

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 ecommerce 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 Indias 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 Indias 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.
4.
5.
6.
7.
8.
9.
Euromonitor
KPMG in India analysis
Internet World Stats
Avendus report on India goes Digital, November 2011
comScore
World Bank
EIU
19

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.
11.
12.
13.
Euromonitor
Venture Intelligence, KPMG in India analysis
Avendus report on India goes Digital, November 2011
Form 10-K filing for the period ending December 2011
20
Real Estate and

Construction
21

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.
Sachin Menon
Partner
Real Estate and
Construction
sachinmenon@kpmg.com
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.
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
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, RenaultNissan, 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.
1. www.sezindia.nic.in
2. www.sezindiainvest.com
22

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
23

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
24
Transportation
and Logistics
25
Manish Saigal
Head
Transportation and
Logistics
msaigal@kpmg.com
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 intraAsia containerized trade segment has been highest at ~ 6.4 percent1,
against other trade corridors witnessing sub-5 percent growth level1.
Intra-Asia trade growth: A global comparison
20%
Average growth
rates (2009-12)
10%
Intra-Asia: 6.4%
0%
Transpacific: 4.0%
-10%
Asia-Europe: 4.5%
The global shipping

industry has been
witnessing shifting
patterns, one of which is
the emergence of intraAsia 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
Global: 4.0%
-20%
2009
2010
2011
2012
Intra-Asia
Transpacific
Asia-Europe
Global
Source: Wydra Shipping and Aviation Research Institute , KPMG in India analysis
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.
Share of global container trade
2012
2008
19%
ROW,
46%
110
Mn TEUs
21%
Intra-Asia
Trans-Pacific
18%
Europe-Asia
45%
127
Mn TEUs
ROW
17%
17%
17%
Source: Wydra Shipping and Aviation Research Institute , KPMG in India analysis
1. Wydra Shipping and Aviation Research Institute , KPMG in India analysis
26

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 intraAsia 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 intraAsia 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 ChinaAfrica 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.
2. Industry discussions, KPMG in India analysis

3. UNCTADs Review of Maritime Transport 2011, KPMG in India analysis
27
This document has been compiled by the Research, Analytics, and

Knowledge (RAK) team at KPMG in India.
kpmg.com/in
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.
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.
The KPMG name, logo and cutting through complexity are registered trademarks or trademarks of
KPMG International.

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Real estate and construction

Transportation and logistics

The current bout of

KPMG in India point of view - The future course

Share in India's Total Export (%)

Share in India's Total Import (%)

Private Equity in Healthcare

Amount (USD Mn)

Source: Venture Capitals PrePulse Report Nov 2011

Government of Singapore Investment Corporation (GIC) invested about INR

Olympus Capital Asia Investments invested INR 500 crore in DM Healthcare,

1. Press Articles ( Times of India , Economic Times , Financial Express)

Private Equity in Healthcare

4. Venture Intelligence Prepulse Report November 2011

India-Africa IT corridor: The next growth frontier

Africa as an off-shoring destination

Its proximity to Europe as well as the spread of a diverse set of languages

Durban, Cape Town,

IT, Contact Center

IT, Contact Center

IT, Contact Center

Source: KPMG in India Analysis, Destination Compendium 2010

The booming domestic IT-BPO market in Africa

NASSCOM Strategic Review 2012

India-Africa IT corridor: The next growth frontier

Source: Africa ICT Market Forecast, IDC, 2012

The Hindu Business Line, March 9, 2012, http://www.thehindubusinessline.com/industry-and-economy/info-tech/article1523196.ece

India-Africa IT corridor: The next growth frontier

A Centre of Excellence for Communications

Indo-Tunis Joint Working Group (JWG) on IT was formed,

Plans to set-up an IT center in Seychelles;

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

KPMG in India point of view

Indias first compulsory licence Implications

In a landmark decision, Indias intellectual property office allowed

Its price was not reasonably affordable

It was imported and not manufactured in the country.

Indias first compulsory licence Implications

4. KPMG in India Analysis

PE/VC firms target E-commerce businesses for investments

Exhibit 1: Private equity investments in e-commerce

Average deal size

This deal-making seems to reflect the blossoming of online retailing in India

Venture Intelligence, KPMG in India analysis

PE/VC firms target E-commerce businesses for investments

PE/VC firms target E-commerce businesses for investments

Real Estate and

Special Economic Zones in India: Off-track?

Almost six years later,

The GOI put in place comprehensive SEZ legislations streamlining and

Special Economic Zones in India: Off-track?

Special Economic Zones in India: Off-track?

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

Trends in global shipping

The global shipping

Trends in global shipping

2. Industry discussions, KPMG in India analysis

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

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