Podcast: The Frenzy of Technology IPOs in India

The Real Deal Podcast

Tech IPOs in India

This week we are looking at the flurry of Tech IPOs taking place in India. Joining host Julie-Anna Needham is Darshan Rane, deputy bureau chief India at Mergermarket, and Deepak Kumar, ECM editor for Asia at Mergermarket. Dealcast is presented by Mergermarket and SS&C Intralinks.

In this episode, you'll hear about:

  • What's driving the frenzy of IPOs
  • Big macroeconomic factors at play
  • Tech companies trying to emulate Zomato's success


[MUSIC PLAYING] JULIE-ANNA: Welcome to Dealcast, the weekly M&A podcast presented to you by Mergermarket and SS&C Intralinks, I'm Julie-Anna Needham This week, we're looking at the flurry of tech IPOs taking place in India. I'm joined by Dongshan, Rayne, senior financial reporter for emerging markets. And Deepak Kumar, an ECM editor for Asia. Hi, Dongshan, hi Deepak.


DEEPAK: Hi, Julie-Anna.

JULIE-ANNA: So thanks very much for joining me today. Let's start with the big picture what's driving the frenzy of IPOs. And specifically the recent flurry of consumer tech IPOs in India.

DEEPAK: Say three or four reasons broadly driving the frenzy. First and foremost being the COVID-19 accelerated shift in consumer preference towards technology. We see everything from retail to education to banking is moved online. So that is sort of catapulted preference towards consumer-facing technology, which in turn has stood a positive investment appetite in the sector.

Second would be a regulatory relaxation and part of India's market regulator SEBI, Securities and Exchange Board of India. Which has made it easier for tech startups to list on what is called the IGP. So we see amendments like [INAUDIBLE], domestic, and other institutional investors were required to hold 25% of pre-issued capital for two years. SEBI has now reduced that time frame to one year. Then obviously there's an open of a trigger for such companies listing on the platform. Which has been eased from 26% to 49%.

The third and more dominant theme playing out is excess liquidity. Which is exacerbated by money printing by reserve/central banks. This is a theme common across major economies across Asia, Europe, and the US. And it is also a part of the reason for this quote on quote historical record rally across global stock markets. In fact, I read a report that said the U.S. alone is printing about USD 2.8 trillion in 2021. And analysts made an observation that even if 1% of this excessive printed dollars were to find its way into India that number would be $28 billion.

So we're seeing that play out in the current situation. Investors are seeing India as a hedge to China's growing economic dominance. So yeah this swarming wave of liquidity is expected to continue. And seems like there is no near-term end in sight.

The fourth would be this frenzy of retail investors always enthused by prospect of making a quick buck, by via listing gains and so on. If I were to refer to my notes, we saw into a financial year 2021 it's said, we saw the opening of record 14.2 New Medicon Cisco data from National Securities depository and central depository services.

JULIE-ANNA: Great, thanks Dongshan. There is a lot of big macroeconomic factors at play there. And coming to you Deepak there's been a lot of coverage of Zomato recent listing. Can you tell us how well received that has been?

DEEPAK: So according to some market chatters, I think it's been mixed. If we go from the beginning there has been a lot of debate in the post COVID world about whether value investing is seeing its twilight years now. In India at least value stocks have been the preferred choice. Growth stocks usually go make eye-watering prices. And even though many of them probably aren't even making profits. So this has made investors uneasy.

Now if you look at last month's 1.2 billion IPO of the online food ordering service providers Zomato. It has been a hard sell to most of the investors here. If I may give you some perspective on this Rakesh Jhunjhunwala, who is considered India's Warren Buffett. He has been quoted as saying in fact that companies like Zomato should plan ways to increase cash flow rather than just burn investor's money by providing discounts.

Meanwhile Aswath Damodaran, who is one of the world's top sector top stock valuation gurus. He says that the real value of Zomato share should have ideally been half the IPO offer price. So there have been many such statements and heated debate on Twitter. About whether the IPO should have failed or now it may plummet after a few months, when investors realize there's no real value in the Zomato business, especially considering its pricey valuation.

But it listed last month and even post its quarterly results announcement recently, where it reported that the company's losses widened the stock seems largely unaffected. And so far the stock has doubled from its IPO price. So not only have gullible retail investors poured in money but foreign institutional investors are also holding on to it. Mostly for the growth prospects despite the rising losses. It's been a big hit and ushered in a possibility of a flurry of high growth startups and new economy names tapping the Indian market.

JULIE-ANNA: So that leads nicely onto the next question. Does the sort of valuation received by Zomato pave the way for other tech companies, including those so-called tech unicorns to try and emulate that success?

DONGSHAN: Yeah for some perspective here Juliana, India had six unicorns in 2019. A unicorn is a company that has had a billion valuation. So from six unicorns in 2019 the number went to 7 in 2020. This year in the first half itself there have been 14 unicorns. Six of them turned out in one week itself in April. So that should offer some explanation about this mad rush towards consumer tech.

Sure the Zomato IPO was a shot in the arm for companies that are in the widths to go public. We have the likes of Flipkart backed by USS Walmart. There is online retailer Nico then we have Freshworks and Delivery and Policy Bazaar among others. All these companies are waiting or have already filed the draft red heading prospectus with India's market regulator. All of them come on valuations over $1 billion US dollars. Some issues like Flipkart, Policy Bizarre and Nico are looking to raise $1 billion US from the IPO itself.

Furthermore, if I were to cite some research reports. There are around 190 technology companies that are expected to enter the billion club by 2025. And over 250 private tech companies with valuations over $100 million could sort of charter back to public listing. On the bio front on the private equity/funds front we have large investors the likes of Japan's SoftBank, you have South Africa's Naspers. Then there's the likes of Tiger Global and so on.

Which are significant dry powder to invest and these startups seem to be offering potential promise. And the world's second largest consumer market. Then there's a large Indian conglomerates who are looking to have a piece of the action India's consumer tech play. I mean the world is no stranger to reliances dealmaking in 2020 for its stake platform Gio. Though oil sort of telecom conglomerate raised over $20 billion from the likes of Google and Facebook Saudi Arabia's PIF and so on to strengthen the dominance in the sector.

There's also a [? data ?] group which has announced plans of launching what is called a super that would cater to retail tech segment and rival its peers, right. So dealmaking in this sector, including an IPO is M&E and funding activity in consumer tech definitely looks green at least for the foreseeable future.

JULIE-ANNA: And Deepak did he have something you wanted to add on this?

DEEPAK: Yeah, if I may add to what Dongshan said if he according to what we're hearing from market participants. The success of Zomato and the expected lineup of more such companies tapping the IPO market, it could be very well attributed to investors around the world wanting to get into the rising Indian middle-class population. So when you look at Zomato while the valuation seems expensive compared to global competition. Investors are betting big on India's rapid growth expectations.

If I may give you some perspective on that, so Zomato is relatively so the food delivery market in India is currently relatively untapped at just about 10% penetration compared to China 20%. And Zomato's revenues are expected to grow at CAGR for about 40% to 50%. Versus Global Peers at 20% to 30%. But still I may add some caution to this, I may point out that some investors are a little wary on how far the stock can move.

Recently and other consumer tech names called listed called Chytrid. It's an online portal to buy and sell used cars, it got listed in August. And it was listed at a certain discount to the IPO price despite having been subscribed more than 20 times. So India has gone through a devastating COVID situation. And locked down in their homes people are using online services. But now investors wonder what will come of such companies when people actually start moving out to their offices and going to malls, this is a major threat.

JULIE-ANNA: OK, so we want to keep an eye on. And it seems like there's a lot of interest internationally in kind of tapping into India's tech scene. Staying with that kind of international theme, how is the US-China economic hostility benefited India's consumer tech industry, if at all?

DEEPAK: US and China have been trading blows for over two years now. And the recent going on between the two countries over national security concerns, whether they are expected to be a positive for India and its consumer tech peace. Earlier this year, US delisted three Chinese telecom firms supposedly for their ties with the Chinese military. These were the first such delisting or more to come.

But fast forward to today even China has grown wary of the might of its own US listed tech giants. According to news reports the cyberspace administration of China has started probes into a new cyberspace procedures enacted in June. That give oversight on companies operating critical information technology infrastructure, which could affect national security. This started with Didi Chuxing a ride-hailing company in China.

So what really troubled regulators about its IPO is that the company has so much data on Chinese citizens. And one of its shareholders is Uber. So protecting users' personal details becomes a threat to national security. And now this has become a full-fledged crackdown on Chinese tech companies with the biggest of names seeing their market capitalization evaporate. China has so far seen a whopping $1.5 trillion sell-off in tech stocks. With datas now entering more short positions as they expect a further Beijing clampdown.

So this about oil has made investment into Chinese companies extremely uncertain. These sell-offs could possibly result in inflows into India is what we are hearing from market participants. Stock market they say that this is the most opportune time for Indian consumer tech names to get listed as international investors have shifted focus towards India. Zomato has kind of been like a litmus test for Indian tech IPO. And I think it has passed with flying colors.

JULIE-ANNA: Great, thank you and it's certainly something we've been following on this podcast the China-U.S. relations particularly in relation to technology businesses. And kind of the crossover between the Chinese and the U.S. tech companies. It is interesting to hear how India fits into that picture. So finally a question for you Dongshan is there an expectation that all this positive momentum in India is sustainable. It feels a bit like we're getting into a kind of bubble territory.

DONGSHAN: Yeah, so the wider consensus says yes, the momentum is expected to continue for the better part of the year. The optimist bunch believes that this barrage of consumer tech IPOs will spill into 2022. Optimists also believe that current high premiums as commanded by Zomato are justified. And subsequent listing gains in the territory of 40% to 60% will be replicated in other consumer tech IPOs that are planning to go public. The more wary ones though however draw parallels with the or of current tech IPOs. And dealmaking situation with US dotcom euphoria of late '90s.

They are of the opinion that anything with the word technology attached to it has investors interested these days. In fact, one of my sources was joking like he told me to pick out a word and I said, Coten. He said OK, say a name your company Coten Technology and you see investors making a beeline to sort of invest in your company. So that is where the euphoria is at currently.

JULIE-ANNA: Great, so we'll be keeping a close eye on it Deepak was there anything else you wanted to add just to round up.

DEEPAK: Yeah, I mean as expectations what we're seeing in the market is that these kind of companies might start flowing in with their IPOs. It's just starting and we'll see more such activity which will keep investors busy in the months to follow.

JULIE-ANNA: Great, Deepak and Dongshan, thank you very much.

DEEPAK: Thank you.

DONGSHAN: Thank you Julie-Anna.

JULIE-ANNA: That was Dongshan Rayne, and Deepak Kumar speaking to me Juliana Needham. Thank you for listening to this week's episode of Deal Cast presented by Merger Mergermarket and SS&C Intralinks. Please rate, review, and follow the podcast. You can find us on Apple Podcasts, Spotify, or look out for your Mergermarket newsletter. For more information, check out our show notes. Join us next week for another episode.