Why tech start-ups are riding the IPO wave sweeping across India

Roadside vegetable vendors in Mumbai accept digital payments through Paytm. The company's $2.5bn IPO last week was India's largest ever. Reuters

A flurry of technology start-ups are listing on stock exchanges in India, driven by a boom in the maturing digital sector – and the rush is set to gather pace, according to analysts.

“Certainly, Indian tech start-ups have come of age,” says Anup Jain, the managing partner at Orios Venture Partners, an early stage venture fund that invests in companies including India-focused consumer tech businesses. “It's not going to be a flash in the pan. What we are seeing here in the listing of these tech companies is the recognition of the growing digital penetration.”

Companies that have launched initial public offerings in the past couple of weeks include beauty and fashion e-commerce site Nykaa, online insurance comparison firm PolicyBazaar and digital payments giant Paytm.

These follow stock market listings earlier this year of food delivery app Zomato, mobile gaming platform Nazara Technologies and online auto classifieds platform CarTrade.

Indian start-ups have raised about $10.9 billion in funding in the third quarter alone, according to data by Bloomberg.

The Covid-19 pandemic has helped the technology start-up sector by pushing more transactions online amid lockdowns and other precautions.

Other drivers include India having some of the cheapest data rates in the world and an increase in smartphone ownership, which has enabled technology start-ups – many of which were founded about a decade ago – to tap a much larger pool of customers.

With a young population and an internet penetration that is still a long way off its full potential, there is room for much further growth for these companies.

The number of internet users in India is projected to grow 45 per cent to reach 900 million by 2025, up from 622 million in 2020, according to a report by the Internet and Mobile Association of India and consultancy Kantar Group.

“The whole phenomenon has now become completely mainstream,” says Mr Jain. “Technology companies which are leaders in each of these segments – whether it's agri, auto, marketplaces, health – they've now have become household brands.”

This is also fuelling keen investor interest in the sector, Mr Jain says.

“We see requests coming into our fund everyday from such investors wanting to seek investments into some of our companies which are headed towards IPOs,” he adds.

Online chemist PharmEasy, travel booking portal Ixigo and digital payments firm MobiKwik are among the companies his venture fund has invested in, all of which have filed IPO prospectuses.

When technology companies are listing, they are not only attracting institutional investors – both global and domestic – but also a large number of middle-class retail investors, many of whom are new to equity investing, Mr Jain says.

There has been a surge in the number of trading accounts opened in India since the pandemic began thanks to low interest rates, which make regular savings less attractive, and people having more time on their hands as they work from home.

“Most of the new investors are young and they have increased risk appetite,” says Gaurav Garg, the head of research at CapitalVia Global Research. “These investors are also tech-friendly and have been using the products or services of the companies which are coming up with IPOs. Hence, they are finding potential in these start-ups.”

PolicyBazaar's IPO was oversubscribed 16.59 times when bidding closed on November 3. Nykaa's IPO was oversubscribed 81.7 times at the end of its three-day offer, while its shares have surged more than 100 per cent on its issue price after it made its stock exchange debut on Wednesday.

Paytm's $2.5bn IPO last week was India's largest ever. However, it seemed to have received less enthusiasm compared with other tech listings and was oversubscribed 1.89 times. Analysts say this was partly due to the size of the issue, along with concerns about its valuation and the path to profitability of the loss-making firm.

Vijay Shekhar Sharma, the founder and chief executive of Paytm, told a Bloomberg Economic Forum on Thursday that Indian start-ups were not overpriced, stating that “many are underestimating what India's opportunity will be”.

Looking at the trends in the US and China and other parts of the world, “India is an opportunity which will dwarf many other countries’ start-up or technology ecosystems”, he added.

Paytm's respectable subscription level reflects a strong appetite among investors for the country's digital sector. India's digital payments market grew 30 per cent in the financial year to the end of March, according to data from the Reserve Bank of India, and it is expected to expand further over the coming years.

“Companies are looking forward to use the capital from fresh proceeds to fuel expansion as the demand is expected to grow multifold in the post-pandemic world,” says Mr Garg. “Overall, this is a very positive sign for the future potential of the Indian economy.”

There are several more technology start-ups that are planning to list on stock exchanges by next year. These include Ola, a ride-hailing app which is Uber's biggest rival in India, and online education provider Byju's. The Bengaluru-based e-commerce company Flipkart, which is majority-owned by American retailer Walmart, is also gearing up for a listing overseas.

But new regulations announced by the Securities and Exchange Board of India in August, which include adopting the globally accepted concept of controlling shareholder accountability, and the rally in stock markets in India are making it more attractive for companies to list at home.

The benchmark BSE Sensex index has risen almost 27 per cent from the start of the year to reach 60,686.69.

“Many companies that are getting listed or planning their IPOs are either pioneers or continue to offer a unique proposition,” says Harshad Chetanwala, the co-founder of MyWealthGrowth.com, a mutual fund online investment and research platform.

“Historically, IPOs in India have always come during the bull market and it is not surprising to see the number of companies lining up their IPOs at present.”

The funds from IPOs are required by India's established tech firms as they target further expansion.

“Many start-ups, which started their journey seven to eight years back, have reached a matured stage where they have built massive size and scale and now looking for next level of growth,” says Piyush Nagda, the head of investment products at stock broking firm Prabhudas Lilladher.

“The current market environment is conducive and an IPO will help them raise further capital and also offer an exit option to early stage investors. This is the main reason we are seeing an influx of IPOs from New-Age tech-enabled matured start-ups.”

The strong demand that is being seen for these IPOs “is extremely encouraging” as it is “contrary to popular belief that traditional investors won’t invest in loss-making companies”, Mr Nagda says, adding that these companies have an opportunity for tremendous growth.

“Consumer-facing businesses in FinTech, HealthTech and educational tech space with demonstrated size and scale are high on investors' radar as the market size is huge in India and internet access across small towns and villages is helping,” he says.

Meanwhile, the success of recent listings is likely to boost the country's start-up sector in the years to come.

“The Indian start-up ecosystem has evolved as one of the most promising ones globally,” says Mr Nagda.

“With these IPOs, the ecosystem is further getting strengthened. These success stories will inspire more entrepreneurs to start new ventures and encourage more investors to fund start-ups.”