By India’s equity valuations are soaring, with levels not seen since 2007, according to Rajat Agarwal, Asia equity strategist at Société Générale. Tech stocks across the globe are also experiencing a surge in popularity. Given this climate, it’s no surprise that Indian tech companies are eyeing initial public offerings (IPOs).
However, the previous batch of Indian unicorns, led by Zomato and Paytm, faced a rocky start. They entered the market at inflated prices in 2021, only to face a significant downturn in the tech industry crash of 2022.
Now, the class of 2024 is ready to make their debut. Swiggy, Zomato’s top competitor, and FirstCry, a unique retailer combining e-commerce and physical stores, are among the leaders. The question remains: will this time be different?
In theory, India is a goldmine for digital disrupters. With a population of 1.4 billion, the majority of whom have never shopped in big-box stores or visited a bank branch, online providers have the perfect opportunity to “leapfrog” traditional retail and banking models. Additionally, incomes are rising, and internet connectivity is growing rapidly.
Investors also have ample room in their portfolios for Indian tech investments, asserts Aashish Agarwal, India country head for Jefferies. Currently, the Indian internet space comprises only 1% or less of the total market capitalization, making it far from overcrowded.
Excitement about the IPO pipeline is palpable for Matthew Culley, an emerging markets portfolio manager at Janus Henderson. He believes these IPOs can bring goods and services to underserved parts of the country. Culley states, “We are very interested in a lot of these companies.”
However, none of this year’s IPO prospects have announced their final pricing. Past experience suggests that they might be priced too high, warns Venkat Pasupuleti, portfolio co-manager for India at Dalton Investments. He highlights that Indian IPOs have often relied on financial engineering to boost their financials, which may not be sustainable for long-term investors.
As the Indian tech IPOs gear up for their grand entrance, investors will be watching closely to see if these companies have learned from the past and can deliver sustainable growth. The promise of a vast untapped market combined with evolving consumer behaviors and increasing internet penetration creates an exciting backdrop for potential success.
Providers of Online Financial Services Face Post-IPO Regulation
The world of online financial services is not without its challenges, as Paytm recently discovered. Following its initial public offering (IPO), the Reserve Bank of India put a halt to new deposits into the fintech company. In addition, the antifraud agency is conducting an investigation into its foreign-exchange operations. As a result, Paytm’s shares have plummeted by 75%, serving as a cautionary tale for other fintech firms like PhonePE and MobiKwik, who are currently in the pipeline.
Zomato’s Success Story
On the other hand, Zomato has a more positive narrative to tell. Its shares have tripled in value over the past year, reclaiming their peak from late 2021. One factor driving this growth is Zomato Everyday, a newly launched service that offers “home-cooked” meals. Analysts at Jefferies, such as Agarwal, predict that there is still room for the stock to rise further. They express high conviction in the company’s prospects.
According to SocGen’s Agarwal, a pattern is emerging where consumer tech companies are achieving profitability at a relatively faster pace compared to fintech companies.
Nykaa’s Resilience in the Beauty Market
Despite Nykaa’s stock experiencing a 60% decline since going public in 2021, it has executed its business strategy effectively. Janus Henderson’s Culley remarks that Nykaa has managed to build a successful beauty-oriented business without facing significant competition from established players like Sephora. This accomplishment is commendable and demonstrates Nykaa’s ability to thrive in a competitive industry.
The Wisdom of Sticking with Established Names
Dalton’s Pasupuleti prefers to invest in well-established finance companies like ICICI Bank and Axis Bank. These institutions are predominantly owned by foreign investors who exhibit a more cautious approach compared to Indian savers who are just beginning to explore the stock market. Pasupuleti also highlights India’s dependable software outsourcers as attractive investment options. He believes that these companies will benefit from increased orders from their key clients, U.S. banks, as a result of the Federal Reserve lowering interest rates.
A Positive Macroeconomic Outlook for India
The majority of investors are optimistic about India’s macroeconomic outlook, which is expected to receive a further boost with Prime Minister Narendra Modi’s third-term election this spring. The key question, however, is how this outlook translates into market valuations for newly listed companies.
Janus Henderson’s Culley observes that companies going public today have more reasonable expectations. However, he cautions that as the excitement builds, there is a risk of discipline slipping and valuations becoming inflated.
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