Foreign investors have the potential to make or break upcoming tech IPOs in India as domestic funds remain cautious about backing lossmaking young ventures.
In the first half of the year, foreign portfolio investors almost tripled their holdings in three start-ups and now hold 33.3 per cent of food delivery service Zomato, 22.7 per cent of logistics company Delhivery and 16.8 per cent of financial services provider Paytm. In addition, their share of insurance start-up Policybazaar doubled to nearly 30 per cent. For lifestyle company Nykaa, it’s up one-and-a-half times to 10 per cent.
In comparison, domestic institutions in June owned 9.9 per cent of Zomato, 14.6 per cent of Delhivery, 3.5 per cent of Paytm, 15.4 per cent of Policybazaar and 11.6 per cent of Nykaa.
Analysts say this divergence underscores foreign investors’ familiarity with highly valued yet lossmaking public companies, particularly in the US, and domestic investors’ reservations about such ventures.
“Foreign investors are excited about the growing prospects of the Indian economy, and on a longer-term basis, these companies look promising,” said Kranthi Bathini, director of equity strategy at advisory WealthMills Securities. “They are more accustomed to seeing such businesses abroad than domestic investors.”
This article is from Nikkei Asia, a global publication with a uniquely Asian perspective on politics, the economy, business and international affairs. Our own correspondents and outside commentators from around the world share their views on Asia, while our Asia300 section provides in-depth coverage of 300 of the biggest and fastest-growing listed companies from 11 economies outside Japan.
Some richly valued companies such as babycare retailer FirstCry, hospitality start-up Oyo, eyewear retailer Lenskart, mobility company Ola and food delivery firm Swiggy have revived plans to go public. Financial services provider Navi and consumer goods brand Mamaearth have already received regulators’ approval to go public.
These start-ups had parked their listing plans last year amid a stock market meltdown triggered by Russia’s invasion of Ukraine and steep interest rate increases by central banks around the world. Their prospects were also hurt by a general apathy towards lossmaking listed technology companies. Shares of Zomato, Paytm and Policybazaar, for instance, hit all-time lows last year but have since recovered after the companies reduced their losses.
IPO-bound start-ups are now hoping to take advantage of a market rally triggered by a growth spurt that has outpaced Asian peers like Vietnam, Thailand, Indonesia and the Philippines, while China shows signs of falling into a slump.
Foreign inflow will be crucial for some of the IPOs, particularly the bigger flotations such as those of Oyo, Firstcry and Swiggy, where the target to be raised could vary between $500mn and $1bn, according to executives aware of their plans.
IPOs in India peaked in 2021, when 63 companies listed on the main stock exchanges, raising Rs1.18tn. A further 59 small businesses listed on exchanges earmarked for business with paid-up capital of less than Rs250mn. Dubbed SME (small and medium enterprises) listings, these IPOs raised Rs7.46bn.
As for the number of deals, public flotations this year have been dominated by SME listings. Between January and August, as many as 99 of these IPOs raised Rs24.5bn according to data platform Prime Database. During the same time span, 22 companies listed on the main exchanges, raising Rs150.5bn, according to Prime Database.
India’s biggest IPO so far this year has been a Rs43.2bn ($525mn) flotation by Mankind Pharma.
Foreign investors’ appetite for lossmaking or slightly profitable start-ups has been “a function of cost of capital and return expectations”, according to Abhishek Basumallick, chief equity adviser at investment company Intelsense.
“If a fund takes money from Indian investors, the return expectations will be higher than that of a fund which raised money from the western markets,” Basumallick said. “The expectation of foreign investors is lower because in their home market, the returns were even lower, at least until the recent rate hikes.”
Foreign institutions have stepped up investments in India as they turn to emerging markets in pursuit of lucrative returns after central banks hit pause on their rate hike machines. Their investment in Indian equities between January and August stood at Rs1.35tn. The previous year, they were net sellers.
According to Prime Database, foreign institutions in June accounted for 37.85 per cent of the Indian capital market’s free float, while domestic investors held 32.1 per cent. Company promoters, private equity investors, retail shareholders and others account for the remainder.
An IPO revival is crucial for Indian start-ups and venture capital firms. The country has attracted billions of dollars of private capital over the past decade as VCs bet on its burgeoning middle class and growing internet-savvy population. However, a lack of profitable exits has raised questions about the market’s ability to generate meaningful returns.
Consultancy Bain & Co calculates VC exits in India from 2015 to 2020 at $19.3bn. In 2021, an unusually good year, VCs sold shares worth about $9.5bn. The returns shrank to less than $4bn in 2022, with about 47 per cent of that coming from secondary share sales.
“India is a great opportunity, but one cannot make funds on secondary sales,” said Madhu Shalini Iyer, managing partner at VC firm Rocketship.vc. “If we want future start-ups to be built in India, and there is a lot of appetite for that, then we better show returns.”
A version of this article was first published by Nikkei Asia on October 2. ©2023 Nikkei Inc. All rights reserved.
Comments are closed, but trackbacks and pingbacks are open.