Consumer Spotlight M&A and Private Equity Perspective on the Consumer Sector

Q2 FY2017

Merisis’ Consumer Sector Coverage

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 GST to generate a 2%-3% saving for all FMCG companies, due to reduction in warehouse, logistics and inventory cost

Consumer Goods & Services

 RBI's 'festive gift' of 0.25% cut in policy rate expected to lift consumer sentiment further and boost buying in the ongoing festival season. This would in turn help the automobile and consumer durable companies to build up on their revenues  Consumer surge has been witnessed in consumer durables, new mobile phone connections and expensive handsets sales. Sales of consumer durables such as TVs, refrigerators, air-conditioners and washing machines are expected to grow 25-30%  Uniformity, simplification in process and a centralised registration for ecommerce companies post GST would help reduce tax burden, logistics and inventory cost, positively impacting profitability  Some Indian e-commerce firms, like Urban Ladder, Zivame, FabAlley and Yepme, are considering turning into single-brand retailers.

E-Commerce

 The e-commerce market may reach $125 billion in terms of Gross Merchandise Value by 2020, growing at the rate of 31%, a Ficci report mentioned  According to a McKinsey report, digital finance to add $700 billion to India’s GDP, create 21 million jobs by 2025. Nearly two-thirds of India’s GDP increase will come from improved productivity of businesses and governments as a result of digital payments, said a McKinsey report  Indian financial sector is evaluating blockchain, the underlying technology powering bit coins, and some are even considering deploying it

Finance

 Retail lending NBFCs emerge as a sweet spot for PE investors. There have been 11 transactions worth $750 million involving NBFCs so far this year  India’s total healthcare expenditure at about 4.1% of GDP, among the lowest in the world. 75% of dispensaries, 60% of hospitals and 80% doctors are located in urban areas, serving only 28% of India  India’s home healthcare industry is worth ~$3 billion and is growing at 20% annually, almost 90% being unorganised

Healthcare

 Technology is changing the dynamics of the healthcare industry which is growing at a rapid pace of 17% per year to expand to $160 billion by 2017

 India has improved its position in the global higher education, with a record 31 educational institutions making it to a new list of the world’s top varsities topped by the University of Oxford in the ‘Times Higher Education (THE) World University Rankings 2016-17’ list

Education

 The government will soon set up a Higher Education Financing Agency (HEFA), that would provide the much needed funds to boost research oriented infrastructure for premiere institutions like IITs, NITs and IIMs.

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Investment Activity - India Macro Overview  The International Monetary Fund (IMF) in its latest assessment of global growth said India’s economy is recovering strongly, bumping up the country’s growth forecast for the current and next year. The IMF has forecast India will grow 7.6% this fiscal and next, up from 7.4% estimated in July for both the years.  In a new monetary policy framework, India has set an inflation target of 4% till March 2021

Total Fundraising – Q2 FY2017 By Volume – 243 Deals 7%

Deal Overview

163

107 31

160

7%

512

58%

21%

525 828

Information Technology Health Care Utilities

Consumer Industry Overview  Consumer inflation fell sharply for the second month in a row in September, touching a 13month low of 4.31% in September compared with 5.05% in August and 6.07% in July and thus validating RBI's decision to frontload an interest rate cut in anticipation of such a development. The decline was due to a steep drop in food inflation to 3.88% in September from 5.91% in August. The data raises hopes of more rate cuts with a good chance consumer inflation will stay below RBI's 5% target for March 2017.

By Value - $2.4 Billion

4% 2% 0.41%

Consumer Services Industrials

Financials Materials

Consumer Focused Fundraising – Q2 FY2017 By Volume – 164 Deals

By Value - $1.7 Billion

8%

8%

635

9% 15%

616

60% 287 86 57 Consumer Goods & Services Health Care

E-Commerce Education Financials

Total M&A – Q2 FY2017 By Volume – 187 Deals 10% 7%

By Value - $23.1 Billion

1.1% 1%

1,300

Private Equity  Investments dipped significantly by 63% in value and 45% in volume from $6.3 billion peak across 469 deals in Q2 FY2016 to $2.4 billion, spread across 243 deals in Q2 FY2017  The lower mean ($13.9 Mn in Q2FY17 vs. $15.8 Mn in Q2FY16) and median deal value suggests that investors have started writing smaller cheques

33%

11%

 Increase in deal value within financials, telecommunication services, information technology and materials in Q2 FY2017

7,300

36 13%

25%

Information Technology Industrials Utilities/Materials Energy

Merger & Acquisition  M&A deals struck during Q2 FY2017 were recorded at 187 deals worth $23.1 billion - a 242% increase as compared to Q2 FY2016 primarily on the back of HDFC Life’s acquisition of Max Life Insurance with the total number of deals being fairly steady

920 65

1,278 2,438

9,793

Consumer Services Financials Health Care Telecommunication Services

Consumer Focused M&A – Q2 FY2017 By Volume – 76 Deals

By Value - $10.3 Billion 13

8%

279

181

12% 12% 22% E-Commerce Health Care Education

46%

9,758 Consumer Goods & Services Financials

37

Top 5 PE Deals in Q2 FY2017

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Hike Ltd. - (Aug 16, 2016)  Hike messenger raised $175 million in a Series D round led by Tencent and Foxconn, along with existing investors – Softbank, Bharti and Tiger Global  Hike plans to introduce a payment solution, among other things by 2017  Hike became the first billion-dollar social company in India Post Money Valuation = $1.4 billion

US$ 175 million Kotak Mahindra Bank Ltd - (Sept 29, 2016)  Canada Pension Plan Investment Board, has bought just under 1% additional stake raising its stake to 5.77% from 4.89% in Kotak Mahindra Bank from Japan's Sumitomo Mitsui Banking Corp for INR 1,151 crore ($170 million)

US$ 170 million

 The RBI had earlier this year given an approval to CPPIB to acquire up to 10% stake in Kotak Mahindra Bank from a previous limit of 5%

India Infoline Finance - (July 20, 2016)  The UK government-owned CDC Group acquired a 15% stake in India Infoline Finance, a non-bank finance company, for Rs 1,000 crore ($ 149 million)  Owned by IIFL Holdings, a diversified financial group, it plans to use the capital to expand in semi-urban areas and its offering in affordable housings. Valuation = 2.6x B/V

Pre-Money Valuation = INR 5,500 crore ($ 820 million)

US$ 149 million TCNS Clothing Company Pvt. Ltd. - (August 19, 2016)  Delhi-based TCNS Clothing, which owns the women’s apparel brand W and Aurelia, raised $140 million in funding from US-based PE firm TA Associates  Matrix Partners who had invested ~INR 100 crore in 2011 for 20% has exited

US$ 140 million

 W is the first Indian women's brand to have more than 200 stores and Aurelia is available at more than 100 outlets. The firm has achieved consumer sales of more than $120 million in 2016, a 70% growth over the previous year

Valuation = ~$280-400 million

One 97 Communications Ltd. - (August 29, 2016)  One 97 Communications Ltd, which runs mobile payments and e-commerce platform Paytm, received $60 million from Taiwanese chipmaker MediaTek Inc. (Mountain Capital fund). Existing investor Alibaba Group also invested $60 million in this round  Alibaba, along with its payments arm Alipay, owns around 41% of One 97 and is the single largest shareholder of the firm that operates Paytm.

US$ 120 million

Post-Money Valuation = $ 4.8 billion

Top 5 M&A Deals in Q2 FY2017

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Max Life Insurance Co. Ltd. - (August 8, 2016)  HDFC Standard Life Insurance Company and the Max group entities finalised the merger of Max insurance arm with the former, creating the largest private sector insurance company with a market valuation of Rs 65,000 crore  HDFC Life the new entity will become a listed company with HDFC Ltd and Standard Life (Mauritius Holdings) 2006 Ltd as its promoters

US$ 9,730 million

 Max Financial Services shareholders (after amalgamation with Max Life) will get seven shares of HDFC Life for every three shares of Max Financial. The relative valuation of HDFC Life and Max Life will be 69% and 31% respectively

Monsanto India Pvt. Ltd. - (Sept 20, 2016) India

 Bayer AG is acquiring 26% stake in Monsanto India Pvt. Ltd. for a total consideration of $165.9 million (INR 11.14 billion) through open offer thus taking its stake in the company to 98.14%  The acquisition of Monsanto India is a part of the global deal where Bayer is acquiring the US based seed major Monsanto for $66 billion.

US$ 166 million

EV/Revenue = 7.69x

EV/EBITDA = 35.03x

Citrus Payment Solutions Pvt. Ltd. - (Sept 14, 2016)  Global payment service provider PayU, owned by Naspers acquired Indian payments technology company Citrus Pay for $130 million in an all cash deal  Sequoia Capital, the earliest backer with a $10 million for 32% stake, earned a 4x return on its investment. eContext Asia and Beenos Asia made 3x returns and Ascent Capital, which bought 8% stake in 2015, made healthy returns

US$ 130 million

 The deal will increase PayU’s India customers to 30 million processing 150 million transactions in 2016 worth a total $4.2 billion

Jabong (Jade EServices Pvt. Ltd.) - (July 26, 2016)  Flipkart Ltd acquired Jabong an online fashion store from Global Fashion Group (backed by Rocket Internet and Sweden-based investment AB Kinnevik) through its unit Myntra for $70 million (Rs.470 crore) in an all cash deal

US$ 70 million

 Myntra and parent Flipkart together held 60% share of the online fashion and lifestyle market in the country. With the acquisition of Jabong, the trio will together command a whopping 75%. Deal Value/Revenue = ~0.5x

Gaussian Networks Pvt. Ltd. - (Aug 22, 2016)  Delta Corp Ltd acquired Gauss Networks Pvt. Ltd in a $27 Mn (INR 182 Cr) cash and stock deal  Gurgaon-based Gauss Networks is an online firm that specialises in games like rummy, poker, chess, Scrabble, golf and pool among others. It has products including adda52.com, adda52rummy.com and adda52mart.com

US$ 27 million

 The acquisition will mark Delta Corp’s entry in the online gaming space EV/Revenue = 3.86x

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Notable PE Transaction Company Overview

 Hike Ltd. offers an instant chat application messenger. It allows users to send messages, as well as share files, including photos, videos, songs, etc. over the Internet and/or SMS to their families and friends worldwide.  Its Unique Features : message users when they’re offline, password protect private chats & express with regional & localized stickers in their own languages  It also offers a voice calling application  Kavin Bharti Mittal, son of Mr. Bharti Mittal is the CEO and Founder of Hike Ltd  The company was founded in 2011 and is based in New Delhi, India.

Series A (May 2013)

Series B (May 2014)

Series C (Oct 2014)

Series D (Aug 2016)

$7 million

$14 million

$66 million

$175 million

•Tiger Global Investment, Adam D'Angelo, Matt Mullenweg

•Tencent Holdings Ltd., Hon Hai Precision Industry

•Bharti SoftBank Holdings Pte. Ltd.

•Bharti SoftBank Holdings Pte. Ltd.

•Bharti SoftBank

•Bharti SoftBank and Tiger Global

Features where Hike wins over WhatsApp 1. Offline chat: Unique and first of a kind offline chat facility where one can even chat if he or she is offline 2. Stickers: Stickers enhance the experience of the chat and show real emotions of user’s mood while chatting on hike 3. Hidden chat: allows users to keep their private chat hidden so no person will ever come to know it is hidden 4. SMS facility: Free messaging to non-hike numbers 5. Selected online: Can show their last seen to some of the selected friends, which Hike call favorites friends 6. Two way wallpaper or chat theme: If you change it this will get reflected on the wallpaper of friend’s phone too 7. Reward facility: Credit for recharging phone and free coupons for shopping 8. Larger range of content sharing: File formats like pdf, doc, zip etc up to 100MB each could be shared. The figure surpasses the attachment limit of all the present messengers and more interestingly even email service providers 9. Better Security: It has the option of enabling 128 bit encryption

Metrics and Competition  User Base - 100 million out of which 95% are Indians  Messages Exchanged - 40 billion messages each month  Stickers exchanged - 9 billion stickers each month  Minutes per user – 120-150 minutes per week  Hike competitors in India Facebook-owned WhatsApp, Facebook Messenger, Line, WeChat & Viber

Merisis Opinion  With 120-150 minutes per user per week, Hike has created stickiness. In this business the challenge is creating high levels of engagement and Hike has shown that promise  Tencent could help Hike become a full service mobile platform, much like WeChat which allows users to send messages, book cabs, make payments or buy daily need things.

Notable M&A Transaction

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Deal Overview

 Max Financial Services and Max Life Insurance, a joint venture between Max Financial Services and Japan-based Mitsui Sumitomo Insurance, had agreed to merge with HDFC Life. Under this arrangement, Max Life Insurance was to merge with Max Financial Services as a precursor to the merger with HDFC Life  As a part of the transaction, firstly Max Life Insurance will merge into Max Financial Service in the ratio of 5:1, then life insurance business of Max Financial Service will merge into HDFC Life Insurance in the ratio of 7:3, finally non-life insurance business of Max financial will merge into Max India Ltd in the ratio of 1:500

 Since Max Financial Services is already listed, the combined entity would automatically be listed, without HDFC Life having to go to the market separately for an initial public offering (IPO).  After the merger, HDFC will hold 42.5% in HDFC Life, Max Group will hold 6.5%, Standard Life 24.1%, Mitsui Sumitomo 7.8%, and others including Axis Bank will hold 19.1%  The merged entity will have an embedded value of over Rs 15,000 crore. The combined entity will have assets under management of Rs 1.10 lakh crore  As part of the transaction, Mr. Analjit Singh, the promoter of Max Group will be paid a non-compete fee of Rs 850 crore over 4years (Rs. 501 crore upfront, and three installments totaling Rs. 349 crore) HDFC Life collected premiums of Rs 6,488 crore for financial year 2015-16 (FY16). Max Life, on the other hand, collected premiums of Rs 2,882 crore for FY16, and is among the top five private life insurance players

Valuation The valuation of the merged life insurance entity will be around Rs 65,000 crore, and will be called HDFC Life Agreed valuation and exchange ratio, the relative valuation of HDFC Life and Max Life would be 69% and 31%, resply.

Deal Rationale  The merged HDFC Life will become the second-biggest insurer in the country with a 10.8% market share, behind stateowned Life Insurance Corp of India (LIC), which commands a 70% share  The Max brand will be used for seven years. HDFC Life has also entered into a trademark licence agreement to use the Max brand as part of life products

Merisis Opinion  The HDFC-Max deal is expected to spark a wave of consolidation. Insurance companies with well-regarded products and innovative approaches have not been able to sell policies to a wider audience due to lack of distribution.

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Merisis Consumer Practice Selected Transactions Equity Syndication

Equity Syndication

M&A

Equity Syndication

Undisclosed

US$ 15 Mn

Undisclosed

US$ 4 Mn

Investment

Investment

Acquires

Series A Investment

November 2015

October 2015

January 2015

April 2012

About Merisis Merisis Advisors, a leading independent advisory company, helps growing companies raise capital from institutional investors as well as advises owners and funds exits from their investments and maximizes the value of their portfolio. Merisis Advisors focus areas are Technology, Consumers and Industrials and its experienced team provides deep domain expertise in these verticals as well as a strong commitment to client. With offices in Mumbai and Bangalore, Merisis Advisors helps its clients through the complex process of fund raise and M&A, and deliver on its promise of “Growth Simplified”. Merisis is the Indian representative of AICA, a global alliance of independent advisors with presence in 25 countries. For more information visit www.merisisadvisors.com

Sumir Verma

Fazal Ahad

Managing Director

Director

Email: [email protected]

Email: [email protected]

Mobile: +91 99672 55500

Mobile: +91 98201 49574

Mumbai

│

Bangalore

www.merisisadvisors.com