EQUITY RESEARCH

India | Internet

Internet
Internet Strategy #07/2022: ONDC, a New Challenger
in a Competitive Space?
2 May 2022

Key Takeaway
The already competitive Indian e-commerce market is set to have a new challenger
as ONDC (Open Network for Digital Commerce), conceptualised by Ministry of
commerce, has reached pilot stage. ONDC aims to unbundle online transactions
into smaller activities that would be fulfilled by different entities under a common
protocol. If successful, ONDC will democratize e-commerce, increase competition
and accelerate growth. We need to closely monitor the developments.

ONDC overview: ONDC is a community-led network that aims to create an open,

inclusive and competitive marketplace. Currently, in the platform-centric model,
marketplaces have end-to-end control, right from seller on-boarding, customer
acquisition, order fulfilment, complaint redressal and managing payments. ONDC
will 'unbundle' this complex system into separate microservices that can be
addressed separately.

Need for ONDC: The Indian e-commerce market has seen exponential growth over
the years. Still, there are a few challenges: a) limited reach in rural markets, b)
platform-centric models limiting transparency, independence and discoverability of
sellers, c) high entry barriers limiting new competition. ONDC is facilitating the
creation of an interoperable decentralized network, which will lower the entry barriers
promoting competition, which in turn will improve reach and address concerns
related to a platform-centric model.

Open Network: Open Network is akin to protocols used for e-mails. A Gmail user can
e-mail an Outlook account with ease. The sender and receiver are not on the same
platform, but the protocol enables seamless integration. The protocol will act as the
common language that different entities fulfilling each of the granular activities use
to communicate with each other.

Genesis: ONDC is set up as a non-profit organisation with the Quality Council of India
and Protean eGov Technologies (formerly NSDL e-Gov) as initial promoters. It was
conceptualised following DPIIT's (Department for Promotion of Industry and Internal
Trade) studies on bottlenecks in India’s digital commerce ecosystem.

The pilot: ONDC has already launched a pilot version across five cities—Delhi,
Bengaluru, Coimbatore, Shillong and Bhopal. It has roped in a few seller apps and
plans to onboard 150 sellers across these cities for the pilot. PayTm will act as the
buyer app. The network plans to go national by August 2022. ONDC is in advanced Vivek Maheshwari * 
discussions with over 80 companies for integration. The network won't be restricted Equity Analyst
+91 22 4224 6135
to retail, but will include food delivery, mobility, wholesale trade, hospitality, travel
vmaheshwari@jefferies.com
and tourism.
Jithin John * 
Strong team: The people behind ONDC includes the pioneers of many of the Equity Associate
successful government-led digital projects including UPI, Aadhaar and Ayushman +91 22 4224 6126
jjohn@jefferies.com
Bharat. The advisory council has a mix of ministry officials, industry experts,
corporate leaders and heads of market associations. Kunal Shah * 
Equity Associate
Challenges: a) ONDC is complex to implement, unlike UPI; b) switching customers +91 (22) 4224 6111
from incumbents who are already offering a great service will be difficult; c) creating kshah5@jefferies.com
a critical mass will be difficult as buyer & seller sides are disconnected. ^Prior trading day closing price unless
otherwise noted.

Please see analyst certifications, important disclosure information, and information regarding the status of non-US analysts on
pages 13 to 17 of this report.
 * Jefferies India Private Limited 
 EQUITY RESEARCH
India | Internet

ONDC - an overview
 
ONDC or Open Network for Digital Commerce is a market and community-led network that aims to create an open, inclusive and
competitive marketplace. Currently, incumbent e-marketplace platforms follow a platform-centric model, whereby they have end-
to-end control over the entire e-commerce transaction process, right from seller on-boarding, customer acquisition, order fulfilment,
complaint redressal and managing payments. ONDC's open network will 'unbundle' or break down this complex system of granular
activities into separate microservices that can be addressed separately by any entity that chooses to perform one or more of these
activities. For example, say 'A' is a customer-facing app that does customer acquisition and order origination, while 'B' helps sellers
digitise their catalogues and onboard them, and C is a logistics provider. ONDC's network will make it possible for A, B and C
to interoperate and fulfill an order. This way, platforms can be replaced by a set of buyer-side/ seller-side apps, logistics service
providers, payment processors and back-end tech service providers working together under ONDC's open protocol. This helps in
large-scale democratization of digital commerce in India by providing a level playing field for large and small players.

Exhibit 1 - ONDC provides an open protocol and associated network, enabling players Platforms can be replaced by a set of
to build digital applications on it
buyer-side/ seller-side apps, logistics
service providers, payment processors
and back-end tech service providers
working together under ONDC's open
protocol

.
Source: ONDC, Jefferies
ONDC is neither a super aggregator app nor a hosting platform. All existing digital commerce apps and platforms can voluntarily
choose to adopt and be a part of the ONDC network. ONDC will act as an enabler by providing an open protocol and associated
network on which any player can build own applications. While it is difficult for a single player to create end-to-end platform
capabilities like the incumbents, unbundling will promote competition as it lowers entry barriers. For example, a non-e-commerce
player with strong customer traction (social media apps, news websites, short-form video apps, telcos, banks, etc) can turn into a
buyer-side app, while other network participants will provide seller onboarding, logistics, tech-support, etc.

ONDC has been set up as a non-profit organisation with the Quality Council of India and Protean eGov Technologies (formerly
NSDL e-Gov) as initial promoters. It was conceptualised following DPIIT's (Department for Promotion of Industry and Internal Trade)
studies on bottlenecks in India’s digital commerce ecosystem. In the below sections, we dwell into the details on ONDC.

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The need for ONDC

The Indian e-commerce market has seen exponential growth in recent years, driven by data affordability, smartphone adoption,
development of digital payment infrastructure, creation of a warehousing and logistics capabilities and investments in market
development by digital commerce players. Still, there are a few challenges which slows down the next leg of growth for India Internet:
a) limited reach to rural markets, next billion users and traditional sellers / MSMEs b) platform-centric models limiting transparency,
independence and discoverability of sellers c) high entry barriers limiting new competition

 
Exhibit 2 - Key challenges faced by Indian digital commerce sector

Restrictive platform-centric
Limited reach High entry barriers
model
.
Source: ONDC, Jefferies
#1: Limited reach: Though e-commerce in India is growing fast, its penetration is a fraction of that in many other countries. Of the 12
million retail outlets in India, only 15,000 (~0.1%) are digitally enabled. Urban markets are well served by the e-commerce platforms.
The metro/Tier 1 segment makes up only 14% of India's population, but accounts for ~40% of the online shoppers. The speed of
delivery, product variety and ease of returns are much better in urban markets. However, as per industry estimates, the bulk of the
new user additions in the next decade will be from tier 2 & beyond cities. Hence, it is important to improve the reach of the digital
commerce services in the rural/ tier-2+ markets.

Exhibit 3 - E-commerce penetration across countries Exhibit 4 - Bulk of the retail sector is yet to
be digitally enabled
50 (%)
45
40
35
30
25
20
15
10
5
0
China UK South Korea Indonesia US Canada India
.
Source: RedSeer, Statista. Jefferies .
Source: ONDC, Jefferies
Exhibit 5 - Trend in India E-commerce user base Exhibit 6 - E-Commerce user base split

. .
Source: RedSeer, Jefferies Source: RedSeer, Jefferies

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#2: Restrictive platform-centric model: As discussed earlier, the current e-commerce marketplaces follow a platform-centric model,
wherein the platform is responsible for the entire transaction chain, right from customer acquisition and seller onboarding to
returns and complaint redressal. While platforms have been pivotal in the growth and development of the Indian digital commerce
landscape, there are some challenges associated with this model, among them: a) consolidation into a few marketplaces has led
to limited choice for sellers and hence reduced discoverability beyond the top 2-3 platforms, b) it curtails the ability of sellers to set
their own terms and conditions, c) transparency and marketplace neutrality can be compromised at times.

Algorithms control the priority order of seller listings on Flipkart/Amazon. Paying or popular sellers have an edge over the others.
Platforms have grown into large integrated solutions. It has become very difficult for small-scale sellers to come online except as
part of an established platform. This creates a virtuous cycle of growth for platforms with sellers and customers coming on to them
helping them grow bigger and bigger, in turn reducing the competitiveness of sellers and increasing concentration risk.

Portability of reputation built by a seller on a platform is another key concern. Sellers gain valuable customer validation through
ratings and reviews, which get built over time on a platform. This reputation is a key intangible that can be leveraged to fuel future
growth. It is impossible to transfer this hard-earned reputation to another platform or own app/website. If there arises a conflict
between the platform and the seller, the seller is either forced to forfeit the reputation or agree with the platform. This way, the
seller's reputation is locked within the platform.

Exhibit 7 - Existing digital marketplace model Exhibit 8 - Though multiple platforms exist, they operate in silos

.
Source: ONDC, Jefferies

.
Source: ONDC, Jefferies
Even if sellers want to be listed on multiple platforms, they will be required by the platforms to maintain separate infrastructure,
resulting in higher costs, which in turn limits participation. The platform-specific terms & conditions limit the flexibility of the sellers
in developing a universal sales strategy or product portfolio.

Platforms operate in silos and the entire transaction chain originates and terminates within the platform. Hence, buyers and sellers
need to be on the same platform. This creates fragmented pools of buyers and sellers spread across multiple platforms. Efforts
are duplicated, leading to loss of effort and money. Hence, ONDC feels there is a need for a coordinated strategy to solve these
challenges at a population scale.

#3: High entry barriers: Creation of an integrated model requires significant capital investment. The unbundling of the value chain
into independent micro-services will help reduce entry barriers significantly. Investing in customer acquisition, while developing
warehousing, logistics infra structure and simultaneously focussing on seller onboarding, is nearly impossible for new entrants.

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What is an Open Network and what are the benefits it offers?

To address the above challenges, ONDC is facilitating the creation of an interoperable decentralized network, which will lower the
entry barriers promoting competition, which in turn will improve reach and address the concerns related to a platform-centric model.
For understanding, the Open Network is akin to the collection of protocols used for e-mail (Internet Message Access Protocol -
IMAP / Simple Mail Transfer Protocol - SMTP). A Gmail user can e-mail an Outlook account with ease. The sender and receiver are
not on the same platform, but the protocol enables seamless integration. UPI is a better example, which has revolutionised digital
payments by enabling instant funds transfer across bank accounts.

Once the open protocol is in place, it will enable the 'unbundling' of the complex system of e-commerce transactions into granular
activities which can be separately carried out to complete a whole transaction, as discussed earlier. The protocol will act as the
common language which different entities fulfilling each of the granular activities use to communicate with each other. Any entity
can choose to perform one or more of the micro activities. The design permits entities to perform all the activities simultaneously.
Hence, platforms also can be a part of the open network, but have to use the open protocol for the ONDC activities.

Exhibit 9 - Old and the new models

.
Source: ONDC, Jefferies
Unbundling will lower entry barriers and promote competition by opening up the network for entry of new players offering micro-
services including logistics, warehousing, specialised services for buyers and sellers. Also, there exist players who already have one
or more of the value chain capabilities. Social media apps, digital payment apps, news platforms, short-form video apps, telecom
companies, banks, etc have strong customer traction, but they don't leverage it currently for e-commerce. Similarly, there are entities
with strong seller relationships, including Tally, GoFrugal, etc, which provide B2B services. Tech companies can develop compatible
tools to service network participants. The open protocol will act as the common vocabulary or language, enabling re-bundling of
micro-services.

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What is ONDC not?

• ONDC is not a government regulatory body; it is a community-led initiative whose idea came as a result of a ministry study.
It is a not-for-profit company promoted together by private companies, PSUs and government bodies.
• It is not an application or a platform, but is an open network employing an open protocol.
• ONDC is not a central intermediary, which is the role of a platform in the current platform-centric marketplace model. ONDC's
goal is to eliminate the need for a central intermediary.
• It will not directly help digitise businesses, but will facilitate digitisation by creating the open network that will bring together
players who provide digitisation services to sellers.
• It is not mandatory to join ONDC. Incumbent marketplace players can choose to join or not join ONDC. They can continue
with their independent platform-centric model of operations.

Exhibit 10 - Three foundational pillars of ONDC

.
Source: ONDC, Jefferies

Genesis of ONDC
The idea of ONDC was a result of studies conducted by the Ministry of Commerce on the digital commerce ecosystem in India.
Department for Promotion of Industry and Internal Trade (DPIIT), Ministry of Commerce and Industries, conducted an outreach
during the pandemic in order to understand its impact on small sellers and local markets, which revealed that the ability of the local
retail ecosystem to participate in digital commerce is largely limited. Following this, consultations were held with several ministries
and industry experts to identify possible solutions to address these issues.

Taking inspiration from population-scale solutions including UPI, IMAP/SMTP (e-mail protocols), HTTP (protocol for data
communication and browsing), etc, ONDC was ideated. The DPIIT then constituted a Steering Committee of experts to analyse the
potential of ONDC as a concept and its possible impact. On the recommendation of the Steering Committee, a Project Management
Unit (PMU) was set up under the Quality Council of India (QCI). An Advisory Council was constituted with leaders involved in the

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execution of population-scale initiatives in India in addition to the Steering Committee members. With the QCI and Protean eGov
Technologies Limited as initial promoters, ONDC was incorporated as a Section 8 (non-profit) company in December 2021.

Exhibit 11 - Benefits for the stakeholders

.
Source: ONDC, Jefferies

Components of ONDC
The key technology components of ONDC are listed below.

Buyer-Side Apps: Any application that will interact with the buyers and is responsible for demand generation or transaction
origination. It can be any interface that allows a buyer to search for a seller for the product they want, add to cart and complete
the purchase, including a mobile app, website, voice assistants, chat-bots etc. Monetisation can be through margins earned per
purchase. ONDC will not mandate a monetisation structure.

Features of a buyer-side app are:

• Parse buyer search request into relevant fields and search network-visible catalogue for options that meet search request
• Display search results identifying criteria where used (sponsored, most popular, etc.)
• Display network aggregate data (ratings), and access to network info (reviews) as well as catalogue info (features, faqs,
specifications)
• Allow buyer to add to cart from multiple sellers/seller apps

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• Allow buyer to select delivery options if more than one exist for the chosen seller/seller app
• Check out (and pay) to initiate purchase
• Confirm order with seller app/seller and send confirmation to buyer with order ID

Seller-Side Apps: Any application that will interact with sellers which can receive buyer requests and, in response, publish their
catalog of goods and services and fulfill buyer orders. Monetisation can be through margins earned per sale or listing fee. ONDC
will not mandate a monetisation structure.

Features of seller-side apps are:

• Make catalogue of registered sellers visible to the network

• Accept buyer app search query and serve catalogue options in standard format
• Accept order post-payment and delivery selection and provide tracking information

Exhibit 12 - Components of open network enabled by ONDC

.
Source: ONDC, Jefferies
Gateway: Application that will ensure discoverability of all sellers in the network by multicasting the search request received from
buyer applications to all seller applications, based on criteria including location, availability, and other customer preferences. Initially,
ONDC intends to offer a gateway through its technology partners to kick-start the operations. However, it is envisaged by ONDC
that multiple gateway providers will come into existence with independent service offerings in the network with an increased scale
of transactions.

Beckn Protocol: ONDC will use the Beckn protocol to develop the open network. Beckn protocol is an open, interoperable and
universal transaction protocol. The genesis author of the Beckn protocol and the angel donor for its evolution is the Beckn
Foundation, which is co-founded by Nandan Nilekani (co-founder and non-executive chairman of Infosys), Pramod Varma (Chief
Architect for UPI, Aadhaar, digital stack and esign) and Sujith Nair (CEO, Beckn Foundation). Beckn Foundation has no rights over
the Beckn protocol, which is completely open source. ONDC is at liberty to use or change the protocol as per its own discretion.
It is also at liberty use any other open protocol that it may deem better suited. There are fail-safe arrangements embedded in the
governance policies of Beckn Foundation to continue uninterrupted use and development of the protocol in the unlikely event that
the foundation ceases to exist.

Adaptor Interfaces: Adaptor interfaces are the open APIs (software intermediary that allows communication between two
applications) developed based on the open-source interoperable specification of Beckn protocol. These APIs will enable exchange
of information for execution of transactions, allowing all participants of the network to interact.

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Open Registries: Applications that maintain a list of participants who join ONDC, list of network policies, etc.

To kickstart the process of participant onboarding and stimulate participation initially, ONDC may roll out reference buyer and seller
side applications by itself or through its technology partners. Reference applications will also be made available in open source for
any service providers to adopt and build on to become part of the ONDC network.

Network participants listed above will bear the responsibility of managing the order life cycle including customer acquisition, seller
onboarding, catalog management, order management, invoicing & reconciliation, warehousing and inventory management, logistics,
customer support, returns management, payments, etc.

Illustrative transaction journey of a customer on ONDC Network

Step 1: Customers logs on to Paytm. Paytm currently doesn't have a broad-based and diverse e-commerce offering, but once the
ONDC network is established, it can embed the listed sellers and thereby leverage the customer footfall it enjoys for e-commerce
transactions as well. The customer searches for a product, say '5 kg Sona Masoori rice bag'.

Step 2: The gateways will check the multi-domain registry and broadcast a search to retail seller apps. The common registry will
allow for the pooling of the digitally-enabled seller base of all the seller apps, eliminating redundancy and effort duplication. When
the buyer app receives a search request through the gateway apps, the product is looked up on the registry. Assume the following
options are displayed.

• Gupta Kirana stores - Rs 200 (w/o delivery)

• Nearshop (fulfilled by Modern Kirana Store) - Rs 260 (w/ delivery)

Step 3: Assume customer places order with Gupta Kirana Store (w/o delivery). He can then add delivery service from a vendor of
choice listed on the platform and available for the location. Assume Dunzo offers delivery at Rs50 and Goodbox at Rs60. Customer
can opt for delivery through Dunzo.

Step 4: Now the customer can choose a payment option available for the seller apps including UPI, COD etc.

 
Implementation strategy and current status
As discussed earlier, ONDC was incorporated as a Section 8 (not for profit) company in Dec '21. Majority ownership is with private
sector institutions to ensure alignment of goals with the market, and flexible and agile decision-making. Not-for-profit structure helps
retain the intent of developing the network as a public asset for the public good. Board composition, accountability, and transparency
norms may be the same as prescribed for listed companies. There will be regulatory oversight by the relevant ministries.

ONDC may establish a council with representation from network participants for development and adoption of network policies and
code of conduct, which will help collaboratively develop policies and rules of the network based on principles of consumer protection
and fair trade. This will help create a base framework of mutually accepted policies and guidelines that all network participants must
abide by. The ONDC Registry and Gateway have already been developed, while development of other tools is underway. ONDC will
make efforts to onboard incumbent marketplaces and technology service providers on to the network. ONDC's success is contingent
upon adoption by a wide range of network participants. Buyer apps who can onboard a large number of buyers either by leveraging
current customer traction that they enjoy or by making market development investments will be pivotal, in our view.

Exhibit 13 - Key companies in active discussions with ONDC for integration and  
onboarding
Google Pay PhonePe Reliance Retail
Samsung Zoho Goodbox
Tally Dunzo Max Wholesale
Governmet eMarketplace Metro Brands FarEye
Shoppers Stop BHIM Microsoft
Paytm GrowthFalcons Go Frugal
eSamudaay India Post SellerApp
.
Source: ONDC, Jefferies

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ONDC has already launched a pilot version across five cities—Delhi, Bengaluru, Coimbatore, Shillong and Bhopal. It has roped
in eSamudaay (a software company supporting digitisation of local businesses), Gofugal and Digiit (ERP players), SellerApp and
Growth Falcon (digital marketing company) as seller apps. PayTm will act as the buyer app. ONDC plans to onboard 150 sellers
across the five cities for the pilot.

The network plans to go national by August 2022. ONDC is in advanced discussions with over 80 companies for integration including
Paytm, Dunzo, PhonePe, Go Frugal, Growth Falcons and Reliance Retail. The network won't be restricted to retail, but would include
food delivery, mobility, wholesale trade, hospitality, travel and tourism.

Exhibit 14 - Promoters and financial backers of ONDC  

QCI Protean e-Gov Technologies
National Stock Exchange of India Small Industries Development Bank of India
National Payments Corporation of India Punjab National Bank
BSE State Bank of India
Central Depository Services (India) Axis Bank
HDFC Bank NABARD
Kotak Mahindra Bank Bank of Baroda
IDFC First Bank ICICI Bank
UCO Bank CSCeGovernance Services India
.
Source: ONDC, Jefferies
 
Strong team with proven track record
The people behind ONDC have led many successful government-led digital projects, such as UPI, Aadhaar and Ayushman Bharat.
The advisory council has a mix of ministry officials, industry experts, corporate leaders and heads of market associations.

Exhibit 15 - ONDC Advisory Council  

.
Source: ONDC, Jefferies

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Exhibit 16 - Board of Directors

.
Source: ONDC, Jefferies
 
ONDC: Key opportunities and challenges
 
Opportunites
#1) Lower entry barriers to promote competition and in turn market growth: Unbundling and interoperability will facilitate the rise of
smaller and specialised players catering to parts of the value chain, thereby increasing competition. Entry of new players offering
micro-services including logistics, warehousing, specialised services for buyers and sellers will help in market growth.

Social media apps, telecom companies, banks, digital payment apps, news platforms, short-form video apps, etc, acting as buyer-
side apps will significantly improve e-commerce penetration among the next billion users. Similarly, entities with strong seller
relationships, including banks, Tally, GoFrugal, etc, becoming seller apps will bring in a diverse set of sellers into the network, which
in turn could make the assortment and pricing on ONDC even better than on the incumbents' platforms.

#2) Democratisation of the digital commerce space will reduce channel costs for all players, including incumbents: E-commerce
logistics costs have steadily come down over the years as the platforms scaled up. Warehousing and logistics investments, process
improvements and supply chain innovations by the incumbents have been pivotal. The rise of logistics specialists such as Delhivery
and Xpressbees also helped. If ONDC helps democratise the market resulting in higher volumes, logistics costs can come down
further benefiting all players including the incumbents.

#3) Common seller registry will help expand seller base multi-fold for all players: Platform-centric marketplace model has resulted
in duplication of seller digitisation efforts by the platforms. A cumulation of digitised seller information on a common registry
will reduce redundancy and exponentially increase the seller base. Also, from the seller's end, it is difficult to manage the orders,
accounts, returns etc separately for each of the platforms. Though order origination may be fragmented on ONDC, the common
network will help aggregate the orders making it easy for the sellers to manage the complexities, resulting in better digital adoption.

#4) Portability of reputation will encourage sellers to deliver better customer experience across platforms: Under the platform-
centric model, the ratings and reviews, which gets built over time, are locked within the platform. It is impossible to transfer this hard-
earned reputation to another platform or own app/website. If there arises a conflict between the platform and the seller, the seller
is either forced to forfeit the reputation or agree with the platform. ONDC enables portability of reputation and hence transforms it
into a digital asset that stays with the seller. This incentivises the seller to build a better reputation by serving the customers better.

#5) Networking effects over time tend to create virtuous cycles of growth like in the case of UPI: Current e-commerce marketplaces
follow a platform model under which the entire responsibility of growth and execution rests with the platform. Under a network
approach, success is dependent on participation and adoption. The start might be slow, but there can be a snowballing effect that
will drive exponential growth over time. UPI was started in 2016 with limited adoption in the early years before explosive growth
subsequently.

#6) If incumbents become a part of the network, it will drive a meaningful adoption: A wider seller base, rich network-wide reputation
information, diverse vendor base of logistics providers even in rural markets, etc, can attract incumbents to ONDC. If they come
onboard, they will bring with them a large base of buyers and sellers on to the network. They can also act as logistics vendors for
better utilisation of own infrastructure.

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Challenges
#1) ONDC is a complex ecosystem to implement, unlike UPI: Under UPI, cash was the only commodity. Cash can be thought of as
a single SKU, while e-commerce deals with millions of SKUs. There are a lot of variables involved, including quality of the product,
look & feel, freshness in case of groceries, returns and customer support. Hence, customer adoption and executional complexities
can be very challenging.

#2) Switching customers from the incumbents, which are offering a satisfactory service, will be difficult: Payment systems that
existed before UPI were very complex, requiring users to input multiple fields. The incremental convenience that UPI offered was a
compelling reason for adoption. That may not be the case with ONDC. The current service levels by Amazon/Flipkart are satisfactory
for most users, to say the least. Other vertical offerings in the larger digital commerce space, including Nykaa, Zomato/Swiggy,
Makemytrip, Ola/Uber, etc, are also robust platforms that enjoy strong customer loyalty. ONDC's value proposition should be strong
enough for customers to switch.

#3) Network participants may not make significant market development investments initially: ONDC is only a facilitator or enabler,
unlike platforms, which do significant cash burn for customer acquisition, seller onboarding and building logistics infrastructure.
ONDC Network relies on buyer-apps to bring in order inflow and seller apps to onboard sellers. Until and unless ONDC proves to
be stable, reliable and mainstream, the network participants may not make upfront investments that may be required bring traffic
on to the platform.

#4) Growth in seller base will not necessarily improve buyer experience on the network: A wider seller-base is not necessarily
beneficial to buyers; on the contrary, it may increase clutter on the network, spoling the shopping experience. Platforms in the initial
stages of growth add sellers, and once they mature, they prune seller lists down, weeding out low-rated sellers who provide an
poor products or shopping experience. Nykaa Fashion follows a managed marketplace approach with a concentrated list of sellers,
thereby making the listings more relevant, helping customers arrive at a buying decision quickly. There are several other examples,
including Udaan, Swiggy Instamart, Dunzo, etc.

#5) Monetisation on the network is not very clear: ONDC is a unique and novel concept. Hence, the visibility of profitability will be
limited initially. Also, similar models including UPI isn't much profitable currently due to regulations. ONDC network being a public
asset players may be skeptical of the scope for monetisation.

#6) Similar models have failed to successfully scale up in the past: Though not an open network model, there have been attempts in
the online food delivery market to bypass Swiggy/Zomato. DotPe and Thrive are direct delivery enablers, helping restaurants through
technology. They provide a user interface for buyers to place orders and provide tech support for restaurants to manage digital
menus and supply chains. They also have partnerships with logistics companies for delivery. However, as per industry feedback,
traction on direct delivery apps has been limited even after offering better pricing vis-à-vis Swiggy/Zomato. Without customer
acquisition spends, the reach of the direct delivery apps remains limited.

#7) Attaining critical mass will be difficult as buyer and seller sides are disconnected: When a platform develops a marketplace, it
creates a seller base and buyer base simultaneously. However, in an open network, this can become a chicken-and-egg problem.
Sellers may want to see a certain level of traction on the network before they spend on digital cataloguing. Similarly, buyers will
only come if there are enough sellers.

#8) Lack of clarity on accountability, especially in addressing customer complaints and returns: Under a platform-centric model, the
platform takes the ultimate responsibility of handling customer complaints, ensures return policies are followed by the sellers and
weeds out fraudulent sellers proactively. Under ONDC, there is no mechanism to ensure returns or address customer complaints
if there is a dispute between a buyer and a seller. A mechanism to weed out fraudulent sellers may be reactive rather than being
proactive.

#9) It may take years before the network effect gains significant momentum: Network effects takes time to attain. For ONDC, there
is no initial capital burn which may kick-start the cycle. Hence, it may take years before the network achieves critical momentum.

Participants rely on network-wide reputation for deciding whether to interact with a seller or not. It will take time for the sellers to
build a reputation within the network, till which time gauging seller reliability will be difficult.

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Analyst Certification:
I, Vivek Maheshwari, certify that all of the views expressed in this research report accurately reflect my personal views about the
subject security(ies) and subject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly,
related to the specific recommendations or views expressed in this research report.
I, Jithin John, certify that all of the views expressed in this research report accurately reflect my personal views about the subject
security(ies) and subject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related
to the specific recommendations or views expressed in this research report.
I, Kunal Shah, certify that all of the views expressed in this research report accurately reflect my personal views about the subject
security(ies) and subject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related
to the specific recommendations or views expressed in this research report.
Registration of non-US analysts: Vivek Maheshwari is employed by Jefferies India Private Limited, a non-US affiliate of Jefferies
LLC and is not registered/qualified as a research analyst with FINRA. This analyst(s) may not be an associated person of Jefferies
LLC, a FINRA member firm, and therefore may not be subject to the FINRA Rule 2241 and restrictions on communications with a
subject company, public appearances and trading securities held by a research analyst.
Registration of non-US analysts: Jithin John is employed by Jefferies India Private Limited, a non-US affiliate of Jefferies LLC and
is not registered/qualified as a research analyst with FINRA. This analyst(s) may not be an associated person of Jefferies LLC, a
FINRA member firm, and therefore may not be subject to the FINRA Rule 2241 and restrictions on communications with a subject
company, public appearances and trading securities held by a research analyst.
Registration of non-US analysts: Kunal Shah is employed by Jefferies India Private Limited, a non-US affiliate of Jefferies LLC and
is not registered/qualified as a research analyst with FINRA. This analyst(s) may not be an associated person of Jefferies LLC, a
FINRA member firm, and therefore may not be subject to the FINRA Rule 2241 and restrictions on communications with a subject
company, public appearances and trading securities held by a research analyst.
As is the case with all Jefferies employees, the analyst(s) responsible for the coverage of the financial instruments discussed in
this report receives compensation based in part on the overall performance of the firm, including investment banking income. We
seek to update our research as appropriate, but various regulations may prevent us from doing so. Aside from certain industry
reports published on a periodic basis, the large majority of reports are published at irregular intervals as appropriate in the analyst's
judgement.

Investment Recommendation Record

(Article 3(1)e and Article 7 of MAR)
Recommendation Completion May 2, 2022 , 08:08 ET.
Recommendation Distributed May 2, 2022 , 08:08 ET.

Explanation of Jefferies Ratings

Buy - Describes securities that we expect to provide a total return (price appreciation plus yield) of 15% or more within a 12-month
period.
Hold - Describes securities that we expect to provide a total return (price appreciation plus yield) of plus 15% or minus 10% within
a 12-month period.
Underperform - Describes securities that we expect to provide a total return (price appreciation plus yield) of minus 10% or less
within a 12-month period.
The expected total return (price appreciation plus yield) for Buy rated securities with an average security price consistently below
$10 is 20% or more within a 12-month period as these companies are typically more volatile than the overall stock market. For Hold
rated securities with an average security price consistently below $10, the expected total return (price appreciation plus yield) is
plus or minus 20% within a 12-month period. For Underperform rated securities with an average security price consistently below
$10, the expected total return (price appreciation plus yield) is minus 20% or less within a 12-month period.
NR - The investment rating and price target have been temporarily suspended. Such suspensions are in compliance with applicable
regulations and/or Jefferies policies.
CS - Coverage Suspended. Jefferies has suspended coverage of this company.
NC - Not covered. Jefferies does not cover this company.
Restricted - Describes issuers where, in conjunction with Jefferies engagement in certain transactions, company policy or applicable
securities regulations prohibit certain types of communications, including investment recommendations.

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Monitor - Describes securities whose company fundamentals and financials are being monitored, and for which no financial
projections or opinions on the investment merits of the company are provided.
Valuation Methodology
Jefferies' methodology for assigning ratings may include the following: market capitalization, maturity, growth/value, volatility and
expected total return over the next 12 months. The price targets are based on several methodologies, which may include, but are
not restricted to, analyses of market risk, growth rate, revenue stream, discounted cash flow (DCF), EBITDA, EPS, cash flow (CF),
free cash flow (FCF), EV/EBITDA, P/E, PE/growth, P/CF, P/FCF, premium (discount)/average group EV/EBITDA, premium (discount)/
average group P/E, sum of the parts, net asset value, dividend returns, and return on equity (ROE) over the next 12 months.

Jefferies Franchise Picks

Jefferies Franchise Picks include stock selections from among the best stock ideas from our equity analysts over a 12 month
period. Stock selection is based on fundamental analysis and may take into account other factors such as analyst conviction,
differentiated analysis, a favorable risk/reward ratio and investment themes that Jefferies analysts are recommending. Jefferies
Franchise Picks will include only Buy rated stocks and the number can vary depending on analyst recommendations for inclusion.
Stocks will be added as new opportunities arise and removed when the reason for inclusion changes, the stock has met its desired
return, if it is no longer rated Buy and/or if it triggers a stop loss. Stocks having 120 day volatility in the bottom quartile of S&P
stocks will continue to have a 15% stop loss, and the remainder will have a 20% stop. Franchise Picks are not intended to represent
a recommended portfolio of stocks and is not sector based, but we may note where we believe a Pick falls within an investment
style such as growth or value.

Risks which may impede the achievement of our Price Target

This report was prepared for general circulation and does not provide investment recommendations specific to individual investors.
As such, the financial instruments discussed in this report may not be suitable for all investors and investors must make their own
investment decisions based upon their specific investment objectives and financial situation utilizing their own financial advisors
as they deem necessary. Past performance of the financial instruments recommended in this report should not be taken as an
indication or guarantee of future results. The price, value of, and income from, any of the financial instruments mentioned in this
report can rise as well as fall and may be affected by changes in economic, financial and political factors. If a financial instrument
is denominated in a currency other than the investor's home currency, a change in exchange rates may adversely affect the price of,
value of, or income derived from the financial instrument described in this report. In addition, investors in securities such as ADRs,
whose values are affected by the currency of the underlying security, effectively assume currency risk.
Distribution of Ratings
Distribution of Ratings

IB Serv./Past12 Mos. JIL Mkt Serv./Past12 Mos.

Count Percent Count Percent Count Percent

BUY 2003 62.87% 132 6.59% 28 1.40%

HOLD 1053 33.05% 20 1.90% 2 0.19%

UNDERPERFORM 130 4.08% 0 0.00% 0 0.00%

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Other Important Disclosures

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Authority of Singapore. For investors in the Republic of Singapore, this material is provided by JSL pursuant to Regulation 32C of
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