Anushruti Singh
For Indian start-ups, these are exciting times on many accounts.
Currently, it’s like an adrenaline rush is pushing these start-ups to go public. So far around 28 companies have already made their maiden offers as of July 2021, and these include- Barbeque Nation, PowerGrid InVit, Comstar, PSU NBFC, IRFC and Brookfield India REIT. However, in this start-up league, it is Zomato which can be credited with heralding this IPO spree and it has been dominating the headlines ever since.
Sameer Nath, Managing Partner at TrueScale Capital calls it a watershed moment for the venture and technology ecosystem in India. “Till now, only profitable technology companies had gone public in India. While it is early days yet, the success of the Zomato IPO bodes very favourably for the start-up ecosystem,” he says.
“The Zomato IPO is a historical moment, and it has opened the floodgates for start-ups who foresee an IPO as a step towards creating wealth,”
says Siddharth Kothari, Chief investment strategist at Om Kothari Group.
“It’s also an ultimate exit to any VC, so I think a lot of start-ups and VCs are excited about what Zomato has pulled off,” he continues.
And this is just a precursor of the coming times as many other start-ups—Paytm, Policybazaar, Mobikwik, Nykaa, Flipkart, Delhivery,etc. are gearing up for the bourses. In fact, some companies might opt for foreign listings as well.
There have been media reports that Grofers and Flipkart are exploring the US listings through a special purpose acquisition company, also known as the SPAC route. Earlier in February, a leading renewable energy firm ReNew Power decided to go public via the US Nasdaq with an $8 billion valuation.
Now let’s picture this…
The Indian stock exchanges- BSE and NSE including SMEs ranked ninth globally in terms of the number of IPOs in year-to-date (YTD) 2021. While there were no cross-border deals.
At least 17 IPOs got listed on BSE and NSE in Q1 2021 versus only one IPO in Q1 2020 and 10 IPOs in Q4 2020. This is a huge increase of 1,600 per cent when compared to Q1 2020 and an increase of 70 per cent as compared to Q4 2020.
The IPO pipeline has over 20 companies that have filed their Draft Red Herring Prospectus (DRHPs) and more than 30 PE-backed companies are planning exits.
Given this scenario, the market experts we spoke to foresee this frenzy continuing in the coming days.
“We are witnessing a high momentum in the Indian capital markets. A significant amount of activity is driven by huge dry powder awaiting investment and companies exploring a listing in India or overseas. The markets continue to reward companies with robust, scalable and technology-led business models,” Sandip K Khetan, IPO leader at EY India comments in the latest EY India’s IPO trend report.
The race to go public is driven by the fact that the markets are very receptive, and the investors are very keen. But indeed, there are many more reasons for this phenomenon and the IPO market is likely to stay bullish in the next quarters of 2021 as well.
Start-ups are coming of age
The Indian start-up ecosystem is at an inflection point right now. And the experts wholeheartedly agree and attest to this fact.
For starters, it’s raining unicorns in India despite the pandemic. For example, with 19 start-ups gaining unicorn status in 2021, India now has 54 unicorns. BharatPe bidding for PMC Bank, Aakash Institute’s acquisition by Byju’s or PharmEasy buying a majority stake in the diagnostics services chain Thyrocare, are all examples of this maturity.
According to HSBC Global Research, the combined value of start-ups (excluding fintechs) can reach up to $180 billion by 2025. While, NASSCOM says that tech and new start-ups are anticipated to fuel growth at a CAGR of 40–45 per cent.
Considering this, more Indian internet start-up leaders who operate businesses ranging from food delivery, e-commerce to online insurance, are now on the verge of listing as well.
Last year, three of the 22 businesses listed were Internet and technology firms, up from only one in 2010 when MakeMyTrip made its market debut.
In January 2021, Nazara Technologies Ltd. filed initial public offering documents with the Securities and Exchange Board of India (SEBI), India’s market regulator, and became the first Indian gaming technology company to seek a market debut. And now, Zomato’s debut on the stock market has just disrupted the start-up ecosystem. What more do we need to validate the fact that Indian start-ups are IPO ready?
“Recent filings and public offerings reflect the maturity of our market to accept the business models of new age tech companies, which aren’t amenable to valuation through conventional metrics of profitability,”
says SEBI Chairman Ajay Tyagi.
Nath of TrueScale Capital also agrees that the start-ups that were fledgling in the past few years have turned successful and have considerably upped their confidence quotient in the process. This is why the anticipated pipeline of technology IPOs represents a huge step forward for the venture and technology ecosystem in India. “It indicates that this ecosystem is maturing and that the public market is now eager to participate in what the private market has been nurturing for the past decade,” he comments.
Positive investor sentiment
On many occasions, the start-ups we spoke to always emphasised their growth even though there were many challenges due to the pandemic which the traditional sectors are still bearing the brunt of. This shows that the Indian start-ups are writing their own growth stories and bringing forth IPOs is their way of making the most of the opportunities that have cropped up for them in the present scenario.
SEBI’s chairman Tyagi believes that the successful IPOs of such companies are likely to attract more funds in the domestic markets, creating a new ecosystem of entrepreneurs and investors.
For instance, after its bumper IPO, Zomato’s shares gained nearly 80 per cent on the first day of trading on the Bombay Stock Exchange, taking the market value of the food delivery platform to nearly $13 billion.
Even various research analyses show that the growing scale and maturity of India’s internet economy has started to attract more value and investment opportunities.
Last year almost 7,000 new start-ups were founded, and 12 start-ups achieved the unicorn valuation. As of July 2021, India has 52,391 start-ups. According to HSBC global research, more than $60 billion has been invested in India’s internet start-ups in the past five years, with around $12 billion in 2020 alone. While a Bain & Company analysis states that the funding deal volume blew up by 7 per cent in 2020 to around 810 transactions from about 750 in 2019, despite the disruption due to the coronavirus pandemic.
Coming to 2021, the deals are only getting bigger.
In the first half of 2021, investors have pumped at least $11 billion into Indian tech start-ups with over 600 deals, notably from US-based investment firms such as Tiger Global and Sequoia Capital.
Binod Modi, head of strategy at Reliance Securities says that COVID-19 is a blessing in disguise for start-ups in India as the evolution of the work from home culture and the sharp increase in internet users has led to the rapid growth of online services.
“Notably, most global funds including VC funds, hedge funds and PEs have raised India dedicated funds in the recent period, which supported investment in a number of start-ups in India and the trend is expected to sustain, going forward,” he asserts.
Nath, also agreeing about this positive investor sentiment, feels that the upcoming IPOs are indeed good news for the Indian economy as they will bring more money into the markets. “Meaningful liquidity is being generated by these start-ups and new pools of public equity capital are getting exposure to this vibrant sector. A sustainable trend of IPOs will encourage founders, employees and investors to build long-term durable businesses that can grow from early-stage private ventures to ‘mature’ public companies,” he says.
For investors it’s a payday
Start-up IPOs are good news for investors.
Vijay Bhushan, Chairman of Capital Market & Commodity Market at PHDCCI explains the why factor in brief, “Start-up investors are likely to get an exit route at an attractive price. They will be able to book profits on their investment,” he comments while explaining why IPOs are important to investors.
Investors who invested in a firm during the pre-IPO period can sell their shares for a profit, watch their share value rise, or simply cut their losses and exit from an unprofitable investment. As a result, an IPO provides private investors with an ‘exit route’ to sell their stake in the company.
At the same time, start-up founders also think that IPOs are the most likely mode of exit.
As per a survey by Innoven Capital, 47 per cent founders feel that an IPO is a likely mode of exit with 70 per cent growth and late-stage founders looking at a public market exit. In fact, the survey also revealed that respondents from the logistics sector were the most bullish about launching an IPO in India…83 per cent prefer the IPO route.
On this, Nath of TrueScale says, “The advent of tech start-up IPOs is a huge positive for investors and VCs.” He elaborates further, “First, the IPO of their start-up represents a significant milestone in the company’s growth journey. Second, they get (or will get) liquidity for their shareholding in the company. Third, it creates a virtuous cycle where liquid capital (and strong returns) flowing back to investors enhances confidence and ultimately creates more capital which can be re-deployed in the Indian VC and start-up ecosystem.”
For instance, Zomato’s investor Info Edge which held around an 18.5 per cent stake in the food delivery platform before the listing, sold about 3.32 per cent of its stake (49.3 million shares) as part of Zomato’s offer for sale. According to market experts, Info Edge has already made a fortune through this IPO, as it has already delivered more than 60 per cent returns over the issue price of Rs 76.
“As per the last funding round of Zomato, private investors parked $600 million in the food-delivery platform at a buying price of Rs 44.8. One would be jealous after knowing that Info Edge had invested at an average cost of Rs 1.16 per share. It has made a bumper profit of 64.5 times on the issue price,” wrote Kaushlendra Singh Sengar, founder & CEO at INVEST19 in his commentary.
However, it is also true that last year, the overall exit value dropped by 70 per cent, from US$4.4 billion in 2019 to US$1.3 billion in 2020. That is why start-up investors didn’t get cash out chances. But after seeing the current momentum, market experts are very enthusiastic about a full-scale recovery. As IPOs are going to add to the money cycle and more capital will continue to pour in.
According to Modi it’s a win-win for start-up investors, “There is a vast addressable market due to our large population and increasing internet users offer a promising growth potential for start-up investors,” he says.
SEBI’s gone soft on start-ups
There was a time when start-ups like MakeMyTrip and Yatra got listed on the Nasdaq, as it was not easy to go public at home. However, through its Innovators Growth Platform (IGP), formerly known as the Institutional Trading Platform (ITP), market regulator SEBI has made it easier for start-ups over the years. Since its creation, the regulator has made a slew of changes to make listing in India easier for start-ups.
Given the growing number of impending IPOs, SEBI may provide additional relaxations as it’s the need of the hour.
“SEBI has been impressive with its policies and its ability to change. Previously it was difficult for a start-up to imagine listing, especially a loss-making start-up because of all the rules and regulations. Because of the slew of relaxations, and seeing the Zomato IPO’s success, I am sure several start-ups will follow suit. I believe, many of them will succeed the way Zomato has, maybe not on the scale of Zomato but at their own scale which is a big win for the ecosystem and SEBI deserves to be praised for their active role in this,” Kothari opines about SEBI’s initiatives.
In May 2021, the regulatory body had already denoted the several changes that it intends to make. This will include reducing the holding period for pre-issue capital and allowing discretionary allotment to eligible investors. Besides that, delisting requirements will be relaxed for migrating to the main board. SEBI is reportedly also planning to introduce rules regarding controlling shareholders of companies, as well as revising its promoter regulation policy, according to several media reports.
Current rules classify majority shareholders as promoters, preventing them from exiting during the so-called lock-in period after an initial public offering. As the start-ups with high private equities and VC fundings, now have diversified shareholding, where often there are no promoters, the latter concept fails and is an issue for them.
It’s a bull run
“The bombardment of IPOs is the function of the bull market,” says Kothari. “We always see that when there’s raging sentiment and a hot-going bull market, IPOs increase. Similarly, in the bear market, the line-up dries out slightly because of the response and the valuation of the companies isn’t as good,” he further explains.
And the value of stocks these days is touching the sky.
And market analysts, after witnessing the response to the Zomato IPO understand that this is the best time for making hay, while the sun shines. They say that start-up founders should take note, if they want to attract public money to realize their visions.
“Stock market leaders are somewhat surprised by the listing gains of Zomato,” says Bhushan of PHDCCI, but the most heartening fact was that there were substantial listing gains for the allottees of this IPO, he said.
That is why it’s going to be totally worth it, feel the experts.
According to Info Edge founder Sanjeev Bikhchandani, there are several takeaways post the Zomato listing. Firstly, this kind of response to an IPO is unprecedented, especially from the millennials. It reflects how people are willing to invest in firms that may be loss making but have a solid business model. Another takeaway from Zomato’s listing is that those tech start-ups in which the founders do not have a 20-25 per cent shareholding, can go public in India.
Speaking at a FICCI event, he said, “A company, which is growing fast and has a good, solid business model and a strong brand franchise but is currently loss making, can go public in India and get a market cap which is comparable to what it would have gotten in the US if it had gone public there.”
“We got reports from online brokerages that listen, we have had a record number of new account openings, because there were people who had never invested in the stock market, who were probably millennials, under 30, customers of Zomato…it is companies like this that will broaden the base of the equity markets, you are getting new investors,” he further said.
On the same note, Modi also says that undoubtedly most of the start-ups are loss making and judging them on a valuation basis does not make sense. “However, most of the long-term investors bet on the long-term prospects of a particular start-up based on its products or services feasibility, its addressable market and its reach and digital platform,” he avers.
2021 will be the year of IPOs
That’s what the experts that we spoke to are saying.
And there are several data points to suggest that tech start-up IPOs in India will become a sustainable trend.
First of all, India has the world’s 2nd largest internet user base. It has the 3rd largest start-up ecosystem, the 5th largest economy and the 2nd largest population in the world with a vast majority of it comprising of people aged below 30.
This contributes to the growth of companies in India, says Nath.
According to him, “India also has a thriving private market for tech start-ups across founders, executives, VCs and growth or late-stage investors. Finally, India tech is built on robust pillars—consumer tech companies digitizing consumption in India as well as enterprise tech companies building products for the world from India.”
Whereas, Modi has something different to add.
He feels that the emerging anti-China elements in various parts of the world and the maturing US and other markets have created space for start-ups in India. “Additionally, considering the vast population of India, it offers one of the largest addressable markets of the world, which augurs well,” he avers.
Market expert Bhushan also opines that the start-up IPO phenomenon is going to be a trend for quite some time because of the overwhelming response to the Zomato IPO. “2021 is likely to witness the largest quantum of funds raised through IPOs. The investors will have to choose their investment in the IPO carefully as the stock market is at a lifetime high, and they need to select fundamentally strong companies whose shares are being offered through the IPO,” he says.
“The main opportunity for start-ups will be that the existing investors in the start-up will get an exit option. The other opportunity would be to get a higher valuation and easier access to capital for the start-up,” he further says.
However, with every opportunity come a host of complexities which can hamper the start-up route for an IPO.
Discussing these, Bhushan highlights, “The top challenge will be the pricing of the IPO as well as effective marketing particularly among the non-institutional and retail segments.”
Then Modi highlights another challenge, saying, “The key challenges for Indian start-ups have been capital and technology. However, with the growing interest of global funds and strategic partners these challenges are to be addressed for promising start-up companies.”
But risks are synonyms with the stock market
Many times, it is difficult to predict or understand how the market is going to react.
Warren Buffett is famous for being vary of IPOs because he joked once that IPO actually stood for ‘It’s Probably Overpriced’. It might be a joke, but it has a ring of truth to it.
Assume it’s your company, and its IPO comes out. Bringing a company out to the open market involves a lot of talks with bankers and expectations of an optimistic (not a fair value but a very optimistic) valuation because you are talking about your own business and will be more than a little biased. You as an owner want the share price to be as premium as possible.
“So, this probably means that most businesses have given an opportunity to investors to buy after a fallen share price, as an IPO generally does give you an opportunity to buy the stock at a price lower than the IPO price. I wouldn’t be too quick to jump on to IPOs for sure at any point during either a bull or bear market but there are exceptions of course,” says Kothari.
For instance, with the D-mart IPO, people thought it might be overpriced initially, but it turned out to be a multibagger because of its business performance and superior execution. “If you didn’t buy it during an IPO or earlier in its listing, you missed out on huge gains,” Kothari informs us.
According to Kothari, even a company like Infosys did fantastic after its IPO, as that became its biggest wealth creator. “It’s on a subjective case-to-case basis but it’s fair to say that overall, one should be varied, and most IPOs will give an opportunity to industrialists to buy at a lower price than its initial public offering,” he said.
Going ahead, will this success be sustained? The experts unanimously feel that only time will tell.
Nath of TrueScale Capital says that for this positive investor sentiment to continue, we will need to see more data points. “The sustained success of upcoming offerings will signal that the sentiment for start-up IPOs in the Indian market remains bullish,” he asserts.
Whereas Bhushan believes that the stock market leaders are somewhat surprised by the listing gains of Zomato. “I believe that the real picture will emerge when 5 to 6 start-up companies get listed,” he adds.
Kothari advocates caution, saying, “Investors should be careful, it takes one U-turn for the market sentiment to change and IPOs to fail.” For instance, Nazara Technologies, which had a stellar listing recently, had failed almost three years ago.
Kothari, sharing his own experience says, “I had invested in Nazara’s pre-IPO, and it got a fantastic listing a couple of months ago. This same company had a failed IPO three years ago and it didn’t go through. It was all a matter of sentiment not economics and the strategy or the long-term plans of the management team were very different then. It’s just a matter of it being a bear market then and now as it is a bull market, they have capitalised on that.”
There are lot of factors that have a role to play in this scenario, as India is committed to becoming a US $5 trillion economy in the coming years.
And therefore, economic activities will continue to get a push from the government. Which is very much evident in the last couple of months, says Binod Modi. “An anticipated sharp pickup in government capex and private capex is likely to result in incremental capital requirements for a number of unlisted companies. This along with a conducive stock market is likely to keep the IPO market buoyant in 2022 as well,” he concludes.
Finally, its unprecedented times even for start-ups. First it was raining unicorns…now it’s an IPO rush…wonder what’s coming next for the start-ups in India.
