In a year of historic deal-making, over $40 billion was raised by Indian start-ups in 2021. A large portion of these investments were in the pre-IPO (Initial Public Offering) round, going into a slew of growth-stage start-ups. Public markets want to ride the digital euphoria induced by the pandemic. Subsequently, food delivery major Zomato became the first Internet unicorn in India to hit the public markets, and it created such buzz about a start-up listing that a guise of high-growth—but unprofitable—Internet companies were trying to grab their share. Queued up for Luck in stock markets.
“The Zomato IPO opened the floodgates. It signaled to the market that ‘ki apna time aa gaya (our time has come)’. Its Rs 9,375 crore IPO received bids of over Rs 2 lakh crore and it [valuation] Almost doubled on the listing date. The company also went for an accelerated listing. At that time, markets across the world were euphoric,” says Aditya Kondavar, partner and vice president, key accounts at Complete Circle Capital.
As the global economy reopens in 2021 after COVID-19 restrictions, the digital economy grew as fast as never before and accommodative monetary policies saw private capital flow into start-ups. With investment in start-ups increasing in 2021 and a less volatile market, many hyper-growth start-ups saw this as an opportunity to capture sky-high public market valuations. As a result, 2021 marked a record-breaking year for IPOs globally, with 2,682 IPOs raising a total of $608 billion.
However, every start-up that jumped on the IPO bandwagon now faces a reckoning as the global economic environment looks astonishingly different than it used to be. Start-up valuations have started falling and tech stocks around the world are suffering. After its stellar debut in India in July, Zomato’s stock has mostly been on a slide. Its share price hit a record low of Rs 46 on July 25 as the one-year lock-in period for its pre-IPO shareholders ended. Neither the company’s acquisition of quick commerce platform Blinkit for Rs 4,447 crore, nor its initiatives like instant delivery or intercity services have enthused investors.
“We are really positive about food delivery. It is a monopoly and it will remain a monopoly. However, initiatives like 10-minute and intercity delivery are not long-term strategies but marketing moves. Blinkit is a big strategic bet. IIFL Institutional Equities Depending on how they are able to execute, Blinkit could be a material value creator for them in the long term, says Rishi Jhunjhunwala, senior vice president and lead analyst of technology at TechRepublic.
looking for profit
Paytm is another acclaimed start-up which has created history as India’s biggest IPO. Its Rs 18,300 crore IPO was the largest ever stock market listing in India. But its reckoning was also immediate. Listed at a 9 per cent discount to its issue price of Rs 2,150, its stock closed down over 27 per cent on the first day. A report by Macquarie Research, just hours before its listing, dubbed the firm a ‘cash guzzler’, and said its business model lacked focus and direction.
Now, the Vijay Shekhar Sharma-founded company has managed to narrow its losses to Rs 571 crore sequentially in Q2FY23 and is expecting a return in its stock. With growth in lending, expansion in merchant subscriptions, and momentum in commerce and cloud, the company has seen its revenue jump 76 per cent year-on-year and 14 per cent quarter-on-quarter to Rs 1,914 crore. Growth driver. According to various brokerages, several growth levers should work in its favour, including cost-effective acquisition of customers and merchants, stable loan disbursements, adding new tools, and a thriving digital payments industry. Furthermore, the company is gradually adding monetization features in more and more verticals. However, its focus is spread too widely, which worries investors.
“For Paytm, it is not about growth. It is about what they want to do. Payments is a very difficult space to make money as it comes with a lot of regulatory risks. They have tried to be a one-stop-shop for mobile apps. But, they will have to cut a lot of things to become a profitable payment super app,” says Jhunjhunwala.
However, JP Morgan has said in a report that Paytm has created more sources of monetization in payments, commerce and financial services, which gives the company the unique ability to generate profits across multiple segments at a lower CAC (customer acquisition cost) than its peers. gives ability.
play cosmetics
Unlike huge loss-making Zomato and Paytm, Nykaa was the only profitable unicorn to enter the public markets recently. However, it too had its share of troubles as its stock hit an all-time low in October. The public market troubles of the Falguni Nair-led company could be linked to the long-pending rectification of the astronomical valuations the start-up managed to garner over the past few years. Besides, macroeconomic factors that were spooking global equity markets were affecting Indian investors as well. Nykaa—which was valued at close to $2 billion in its previous pre-IPO round—sought an $8 billion valuation with the IPO—and after a blockbuster debut, its market cap grew to $13 billion.
Japanese brokerage firm Nomura said in a report that the company’s operational efficiency in the Beauty and Personal Care (BPC) category has given it a strong market share of around 25 per cent. The report states that the company has a strong moat led by high scale, exclusive brand tie-ups, BPC-focussed apps, omnichannel sales and a strong influencer network. Nykaa is also the only profitable large online BPC retailer among peers such as Myntra, Purplle and MyGlamm. Led by high repeat customers and a large user base, Nyka is set to grow its BPC revenue exponentially by 32.4 percent between CY20 and CY25 and is likely to maintain its dominance in the segment with 26.8 percent market share , said a report by Elara Capital in October.
“they [Nykaa] BPC has a compelling play where they have first mover advantage, a large market share, a premium client base and a proven unit economics model with strong margins. Going forward, online BPC margins may even double in the next three years. Effective execution of the fashion vertical is a major challenge given the intensity of competition and high discounting,” says Karan Taurani, Senior Vice President, Elara Capital. Nair said during the second quarter results that the company is building a unique customer proposition in a fashion aided by investments in differentiated product mix, collaboration with global brands and expansion in breadth and depth of its owned brand portfolio .
slip away
PB Fintech, the operator of PolicyBazaar, is another company with a solid business model and a clear path to profitability, which has been hit by intense selling pressure on exchanges and global headwinds. With a handful of products and services across its insurance and lending verticals such as the core technology platform for corporate and SME insurance; Healthcare Division DocPrime; online loan marketplace MyLoancare; A report by IIFL said the company aims at the digital insurance and consumer credit markets (with 93 per cent and 50 per cent market share, respectively) and enjoys first-mover advantage in the regulated insurance sector. The complexity of the products and the need for after sales servicing future-proof its business model across all verticals. IIFL expects the company to break-even on post-tax profit by FY2025.
Logistics firm Delhivery’s decision to bring out its IPO in May this year – when many companies were shelving their plans – was seen as a bold move. The company had reduced its offer size by about 30 per cent and had a flat opening in the market. However, a combination of the previously mentioned factors, including selling pressure on the shares, saw its share prices fall by 50 percent from their all-time high in October.
Meanwhile, the company operates on an asset-light model and boasts of one of the lowest cost structures in the market due to its focus on leveraging scale, tech and automation. Delhivery is working on expanding its B2C (business-to-customer) model to other verticals, especially the B2B (business-to-business) space. In that direction, it acquired Bengaluru-based Spoton Logistics to strengthen its B2B play, besides foraying into other verticals such as express partial truckload, full-truckload, integrated supply chain and cross-border services.
IIFL in its June report said that with an aggressive pricing strategy across all segments and 85 per cent variable or semi-variable operating costs, it needs to be seen how Delhivery can deliver on growing revenue, cutting costs, on a part Will run on the test of passing. Report a profit to investors, and still a profit.
According to a Jefferies report released in October, B2B growth potential with the acquisition of Spoton is being undermined by cost rationalization and low e-commerce penetration. B2B being a high-margin business, Jefferies estimates that the vertical will grow to 48 per cent of sales by FY2026, up from 40 per cent earlier.
The steep fall in the share prices of these internet firms has their peers keeping a close eye on their plans to go public. From OYO to Snapdeal, boAt and MobiKwik to Droom, Yatra Online, and PharmEasy, all have indefinitely shelved their IPO plans and are focusing on cutting costs, expanding their runways and adopting a profit-oriented approach are doing.
Consulting Firm Protiviti India Member Pvt. MD Nitin Jain. Ltd., says it is working with some start-up clients with IPO plans, whose focus now is to improve margins, prepare a sustainable profit and loss statement, and then market with strong investor confidence. I have to go “Investors today are more informed and have realized that for any IPO to deliver strong returns, the fundamentals of the business need to be strong. ‘Valuation’ as a business metric is losing its sheen.
After initially being seen as the year of bumper start-up IPOs, 2022 is shaping up to be a year of extreme caution. Many major start-ups and tech giants have laid off their employees to prepare for a long, grueling funding winter and economic uncertainty. “In the current scenario, liquidity has tightened, problems have been identified in these companies, and the growth anticipated by their investors has not materialised. And with interest rates rising, equity valuations automatically come down. People are shifting their money from equity to debt market. FIIs are continuously withdrawing money from Indian markets. Also, the underlying fundamentals of the listed start-ups are not strong,” says Kondavar of Complete Circle.
Clearly, it is a steep learning curve that both listed and unlisted start-ups are climbing, and the ongoing corrective phase of the market will surely separate the best from the rest.
@binu_t_paul
