India's Startup IPO Pipeline Robust Despite Initial Flops, Says Redseer
India has significant headroom for growth in its public market cap compared to other countries, says Redseer.
Despite the first round dominated by flop debuts, India could see close to 80 profitable startups list on the exchanges in the next five years, according to Redseer.
Several new-age companies went public last year. Yet, stocks of tech-led firms such as Zomato Ltd., FSN E-Commerce Ventures Ltd.—the parent company of Nykaa—and One97 Communications Ltd.—the parent company of Paytm—are trading well below their IPO prices and far from their all-time highs amid concerns over profitability.
Seeing the rout the first crop of companies had to endure, several others such as Mobikwik, Cars24, Snapdeal Ltd., Oyo's Oravel Stays Ltd., and Droom Technology Pvt. have either withdrawn or deferred their listing plans.
Global macro changes played a significant part in the steep crash that tech IPOs saw, according to a Redseer report.
A typical company that would be cash flow positive two years from now would see discounting of at least 20–30% of its valuation in a low-interest rate situation. This goes up significantly in a high-interest rate situation, which we are seeing right now, according to Rohan Agarwal, partner at Redseer Strategy Consultants.
"When we look at similar situations in the past 20 or so years, we realise that it still takes a bit of time for markets to come back sustainably, even after interest rates start dropping," Agarwal said. "Because, in effect, the market rates would have already factored in the decreasing interest rates into the prices."
The lesson is that there may be more time, maybe a few quarters, for the markets to recover. We always see IPOs bouncing back after downturns.Rohan Agarwal, partner, Redseer Strategy Consultants
A tech company that usually prioritises growth over profits has seen a stronger drop in post-IPO valuations, compared to traditional IPOs that see a milder drop, if any, due to a firmer grip on profitability metrics, it said.
Therefore, combined with the macro situation, profits are now much more valuable in the current situation.
As a result, Zomato and Paytm have renewed their focus on profitability after listing. In turn, startups such as Oyo have refiled earnings to reflect stronger growth and are paying more attention to profitability instead of valuations.
What will help more startups is that their share in India's public markets is minuscule.
About 25% of the $43 trillion in market capitalisation in the U.S. can be attributed to technology and new-age companies, according to Redseer. This includes giants like Apple, Amazon, etc. In India, with about $3.9 trillion market capitalisation, only about 1% can be attributed to tech and new-age companies, according to Agarwal.
"We are just getting started with the journey of start-ups coming up and going towards their path to profitability, then looking at that public market journey," Agarwal said.
Being IPO-Ready
India may see over 100 mature, large-scale, profitable or on-the-path-to-profitability startups in the next five years, according to Redseer.
With about 20 of them already listed, about 80 startups have the potential to embark on an IPO journey.
"While the markets have been challenged, which has impacted the valuation of the tech companies a bit more than others, the potential is out there, especially for tech," Agarwal said.
Learning from the past, startups need to focus on a bunch of metrics such as market leadership, a clearly visible total addressable market, moats or multiple use cases, predictable revenues, high operating leverage, sustainable unit economics and a clear path to profitability to become a sustainable public market enterprise, according to the report.