What’s next for Indian startup IPOs?

The liquidity from the US percolated to emerging markets such as India in 2021, inflating valuations and creating a bubble. As this liquidity dries up, many companies that are highly leveraged will be adversely affected, Nikhil Kamath, cofounder of Zerodha and True Beacon, an asset management firm, said on The Rundown by ETtech, our chat show. He added that most IPOs were focused on the offer for sale (OFS) component, in which existing investors sell shares, rather than raising public money for future growth.

A91’s Abhay Pandey said that the problem also lies in heightened expectations from the market for companies to grow at a certain pace, which will lead to certain ‘reality checks’ for the public market.

In a lively discussion on February 18, Kamath, Pandey, and Pankaj Naik, digital and technology lead, Avendus Capital, offered an unfiltered view on what’s playing out in the public and private markets, and what’s expected for the next crop of IPO-bound companies including Delhivery, Pharmeasy and Snapdeal.

According to data from our Markets team, the prices of new-age companies stocks are well below their listing prices. Nykaa is down 34%, Zomato 29%, Paytm 46%, Policybazaar 37% and Cartrade 59%.

“It’s very hard to equate the numbers (Zomato and Nykaa) are putting out with their valuations even today. To value them today like the future has already happened might be a bit far-fetched. I think where they sit today is overvalued. They are still good companies with interesting use cases [but] I would still be averse to entering these companies,” said Kamath.

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Pandey added, “I think expectations are so high that it’s just hard for companies to meet them. We saw what happened when Shopify delivered pretty strong results and 41% growth. The market said, ‘That’s not enough’. That is a problem. Expectations in valuations are built to a level which are not possible to deliver. I’m not even going to profitability at the moment. It’s all about revenues for now. Next, when the market starts to understand that delivering profitability along with these growth numbers is harder, then some more corrections will happen, some more reality will set in.”

Private market frothiness likely to subside

“I think in the last 18 months, they’ve printed as much money as they had printed in the history of America. A lot of that has definitely percolated down to emerging economies and India, being as large a market as it is, has consumed a lot of that capital. When that happens [interest rates go up] and liquidity dries up. I’m guessing a lot of companies across the globe which are levered will be adversely affected,” said Kamath.

“There is certainly a class of investors that is thinking hard and saying, ‘Hey, I was getting very carried away with the momentum. Let me think about the valuation to the speed at which I was getting deals.’ And there are certain investors who have more capital and who are looking very good because all the past investments are looking very nicely marked up. They’re still running very fast. So I think it’s still a mix,” said Pandey. “But the net result of all of this is certainly there is some slowdown. And even folks who offer term sheets in December and January, if they haven’t yet closed, the investors are somehow wondering: ‘did I pay too much?’” said Pandey.

“Everybody’s expecting that because the public market is strong and connected so much that the private market would have definitely caught a cold. We are not seeing that much of a drastic reaction in the private market as yet,” said Naik.

On the next crop of startup IPOs

“In times like today, when 80% of fresh issues are not capital expenditure-focused but more of an OFS… from a layman’s perspective, these are smart people who know more about the company .. they cannot be so optimistic about the company [if they are selling their shares],” said Kamath.

“The aftermath of the three-four disappointments we have had recently will be evident in the appetite of similar companies at least in the near future. People who were overly optimistic will probably be looking at it a little bit more like a glass half empty when the next IPO comes,” said Kamath.

Pandey added, “A good company has to make the choice whether they are okay to go with a very reasonable valuation, or do they want to wait for better times for a higher valuation. I’m sure they’re doing that exercise as we speak and testing on market investors. But for a good company, even bad markets are okay. They have to kind of digest some bit of a bad valuation or have a worse valuation than expected but I think it’s a function of whether they needed the capital now or was it just being done to keep some insiders happy,” said Pandey.

“Not-so-good companies actually don’t have access to the private market, but think ‘Let me come and sell it to public market investors and continue to do what I was doing’. Those companies definitely are in trouble.There are some really good companies that are focused and continue to grow 30-40%. They can easily manage public market pressures, and will continue to go for IPO,” said Naik.