Start-ups have become an inevitable part of our lives. Our day begins with grocery delivery from Big Basket to travelling to work in an Ola, making payments through Paytm, Mobikwik, etc.; ordering food from Swiggy or Zomato to check the latest shopping trend on Flipkart, Nykaa, etc. As Indians, we take pride in the rise of Indian start-ups. While Covid led to faster adoption of the smartphone based online economy, the Government provided the necessary relaxations.
As a result, India has become the third largest start-up ecosystem in the world, just behind the US and China. India presently has more than 60 unicorns, surpassing the UK and Germany by a very large margin. This year (till 21st October, 2021), around USD 23 billion have been raised by Indian start-ups in more than 1,000 deals with 33 start-ups entering the coveted unicorn club.
Next Move – Many are taking the IPO route
But as is common to funded start-ups, many of these unicorns are taking the IPO route to raise funds and give exits to their early investors. It started with Zomato, which became the first unicorn to enter Dalal Street, raising INR 9,375 crores. It was subscribed 38.25 times the offer, receiving a stellar response from investors. It’s raining IPOs everywhere in the start-up world with Paytm, Policybazaar, Oyo, Delhivery, Nykaa, Car Tech Trade, etc. all filing/ or already filed their DRHP.
The general reasons for going public are growth and expansion, repayment of debts, funding capex, and survival in the competitive business world. Along the way, the promoters cash in huge sums of money by selling a portion of their stake and employees get rewarded by exercising Employee Stock Options (ESOPs) that enable them to buy the shares at a low price before the IPO and sell at a high price when the stock gets listed. As the Indian start-up ecosystem matures, the early investors (Venture Capitalists, Private Equity Investors and Angel investors) get to sell their shares at hefty sums and book huge returns. For example, Vedant Fashions that runs the Manyavar brand has filed its papers for IPO. But the company will not get any money from IPO proceeds. The entire IPO proceeds will go to the early investors, promoters and employees.
RBI has been injecting liquidity into the system to support economic recovery post COVID and to maintain the inflation rates. Also, interest rates are low, borrowing has become easier, leading to a large inflow of money in the market. This is ultimately invested in the stock markets. In addition, the bullish trend in the bourses has been an incentive to attract investors to invest even in loss-making companies.
Further, there is ample liquidity in the global market. In the current fiscal year (till August) 1.22 crore new depository accounts have been opened. This clearly indicates that retail investors, unable to spend their savings on travel and other leisure due to lockdowns, have channelised their money into the capital markets. Tons of funds are being poured into promising start-ups in India by both Indian and foreign investors. In addition, the regulatory issues for tech companies in China is becoming a boon for Indian companies as investors are shifting their base from China to India.
Latest start-up IPOs and upcoming ones
The year 2021 has been a revolutionary one for IPOs in India, especially for start-ups. Zomato had an outstanding IPO launch, wherein the loss-making entity was oversubscribed by more than 38 times and was valued exorbitantly high at USD 9 billion. This showed the investor’s confidence in potential future growth and encouraged many unicorn start-ups (who have not even reached the break even in profitability) to go the public route to raise funds.
As per a recent report from EY, USD 9.7 billion was raised by 72 Indian companies through IPOs in the first nine months of 2021, as compared to USD 4.1 billion from 43 companies in the year 2020. Till date, the year 2021 has marked the highest IPO proceeds in the last two decades. India ranked 11th by proceeds globally in YTD 2021. Further, around 35 more companies are planning to hit Dalal Street in the last three months of 2021, raising another USD 10 billion.
Nykaa (FSN E-Commerce Ventures) was set for an IPO on 28th October, 2021 and was fully subscribed on Day 1. It is one of the profitable unicorns to go for an IPO and is headed by Falguni Nayar. It intends to utilize the fund proceeds for expansion of retail stores, capex and debt repayment. The price band is fixed at INR 1,085 – 1,125/share. The IPO comprises a fresh issue of equity shares worth INR 630 crore and an offer for sale (OFS) of 41.97 million shares by promoters and existing shareholders.
Paytm recently received SEBI’s approval for its INR 18,300 crore IPO at a price band of INR 2080-INR 2150 per share. Despite being into huge losses, the company is likely to be indeed the largest IPO in the Indian stock market. Warren Buffet’s Berkshire Hathaway is an investor in Paytm’s parent One97 Communications. The expected valuation of the IPO is around USD20-USD22 billion. While the 75 percent of IPO is reserved for Qualified Institutional Bidders (QIBs), more than INR 10,000 crore of the proceeds will be used for providing exit to existing shareholders whereas around INR 8300 crore will be for fresh issue of shares.
Oyo, the hospitality start-up, has filed its DRHP with SEBI for an initial public offering of INR 8,430 crores. Of which INR 7,000 crores will be a fresh issue and remaining will be an OFS. The company that has been making losses since inception, seeks a valuation of USD 10 to USD 12 billion. However, there have been hurdles in the company’s public way, as Zostel, the Federation of Hotel and Restaurants of India (FHRAI), and a Bangalore based Hotelier have approached SEBI to suspend Oyo’s IPO, claiming misrepresentation of facts in the company’s DRHP. The company has already been battling with several litigation issues.
Necessary due diligence/check points before investing in an IPO
IPOs have their fair share of risk, and an informed investor should do the necessary due diligence before putting in their hard-earned money.
- Check the utilization of funds – If the sole purpose of raising funds is to repay debt or to reward existing shareholders, promoters and employees, then it might not be an attractive investment. However, if the company intends to utilize the proceeds for expansion and general business purposes, it might be a promising investment.
- Understand company’s business and fundamentals. Don’t invest in the stocks if you don’t understand their business. Invest in Systematic Investment Plans (SIP) instead.
- Assess the company’s growth prospects and future potentials.
- Subscribe to some good equity research reports and read them from time to time to understand how the stock markets work.
- Check Promoters’ background and management team, as well as existing institutional investors such as private equity and venture capital investors. They often provide necessary direction to the company to increase shareholder value.
- Financials and valuation –Adequate and growing margins, sound capital structure and stable leverage ratios, earnings per share (EPS), cash flows, return on capital employed, etc. are some of the key financial metrics to check the company’s financial health. In addition, the company’s valuation also matters.
- Peer/Comparative analysis – Check if the company’s valuations are in line with its peers.
- Other risk factors such as litigations, contingent liabilities, operational challenges, market risks, etc.
- ‘Grey market premium’ is also an important indicator that shows the interest level of investors and whether an IPO will perform or not.
Investment Signals:
Innovative and modern business model, potential growth prospects, sound profitability, global market reach and potential and discounted valuations as compared to industry peers are some of the promising KPIs which attract investment in start-up IPOs.
However, the pandemic changed this general norm. Zomato is a loss-making company, but the valuation it got and the kind of response its IPO garnered, says a different story. This shows how our Indian stock market has evolved in recent times. With the rise of intangibles that drive a company\’s value, it is the time when investors bet on the company’s future value, digitally disruptive business framework, the promoters and the growth potential.
However, stock offering larger than the company’s size; high leverage, low promoter holding, low brand coverage, and high valuations compared to industry peers, are some of the risk factors which an investor should watch out for and avoid investing in the particular stock.
Recently, there has been signs of extreme market euphoria from retail investors’ side, which is flashing warning signals. There has been a sharp rise in the Indian primary market, with benchmark indices surging exponentially. Company valuations have been astronomically high, while investors are super excited. The year 2021 is flooded with IPOs, which may eventually lead to distortion of market liquidity. However, as the economy is recovering from the devastating impact of the pandemic, stocks with strong fundamentals and growth potential are likely to sustain in the long run.
Are Start-up IPOs still hot and attractive?
An idea capitalized into a unique solution to a problem, gave birth to a startup. Innovation, technology, customer focus, marketable value proposition and the valuation of ‘USD1 billion’ made it a unicorn. And now it is all set to lead the surge by going public. It is the era of disruptive digitalization; it is the era of startups. The kind of response that Indian start-up IPOs received in 2021, shows the evolving mindset of the Indian investor, who is looking at the bigger picture and market timings. Today’s investor is well informed and doesn’t miss a chance for any opportunity available to make big bucks. However, investment requires careful assessment, good information and appropriate timing to make money. It doesn’t take long for a bubble to burst and when it does, it does bring devastation among individuals. As we write this article, the markets have started showing a negative trend, investors have not been celebrating the listing gains and uncertainty continues on the direction of the markets in the near future.
As Jack London said, “Life is not always a matter of holding good cards, but sometimes playing a poor hand well”, which may turn the whole game.
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Disclaimer: The article does not intend to endorse any investment in any particular stock or company. Please conduct your research and/or consult your investment advisor before making any investment decisions. Omnifin or its associates may have conducted valuation or provided other services to some of the companies mentioned herein. We may or may not have investments in the companies mentioned herein. Companies were not contacted specifically before writing this article and most information is taken from public domain or our proprietary research.