#StartupsVsCovid19: With Wealth Erosion In Public Markets, Can Indian Startups Still Go For Planned IPOs?

The coronavirus pandemic has decimated world markets, but the focus at the moment is on the healthcare and public infrastructure to prevent the situation from worsening. Even in the Indian market, the first priority is healthcare, given that India ranks 140th in the world in terms of healthcare infrastructure. But one cannot ignore the economic slowdown that is about to hit India.

Public markets are crashing with the National Stock Exchange and Bombay Stock Exchange indices seeing a downward trend. Will this have an impact on how Indian startups plan for their respective initial public offerings (IPO)?

Several Indian startups had plans to go public in 2020 and 2021. However, this looks like a delayed plan now. The international stock markets are also crashing and at the same time, startups are being advised to plan their runway by taking a conservative approach towards cash. It is being repeatedly emphasised that the businesses should manage inflows and outflows keeping in mind the negative demand which may come due to the pandemic.

Speaking to Inc42, Aditya Agarwal, cofounder of wealth management startup Wealthy said that although digital businesses have an inherent advantage over traditional, offline ones, they won’t be immune from loss. “Given the disruption, the risk appetite has reduced and it is not business as usual. For many months now, the stock markets were overheated, something which was evident from the high PE ratios despite an economic slowdown,” he added.

Agarwal said that coronavirus has triggered a correction which has left nobody untouched. “Shares of India’s biggest companies by capitalisation, be it TCS, RIL, or HDFC Bank, have taken a hit this month. In our estimate, the current situation will lead to a postponement of startup IPO plans, at least by a few months,” Agarwal added.

Further, Nandini Sankar, founder and CEO, TOPPEQ, which supports ESOP and equity management for startups, told us that the market has already accounted for lower earnings for the next quarter, but it is expected that subsequent quarters will experience a steep decline because of the network effect of smaller suppliers going out of business, delayed inventory and weak customer sentiment.

“The IPO pipeline will dry up completely. Companies will need to re-evaluate their reserve price and delay entering the market. Investors will demand a lot more transparency and detailed forward-looking statements,” TOPPEQ’s Sankar added.

Experts have said that valuations of Indian companies were on the higher side for quite some time, given lack of earnings growth and flight to quality large caps, making a part of the market quite expensive. The recent fall seems to have corrected valuations of several companies, presenting an attractive entry point for long term investors.

However, it is being said that the current fall is not because of financial crisis like before, but due to the market uncertainty. Further, in the initial days, few companies were hopeful of the positive impact of this outbreak considering the manufacturing priorities shifting towards India while China recouped with the outbreak.

At present, the market watchers are counting on containment of coronavirus cases, incremental incidents falling and the spread of the pandemic reducing to see improvement in the public markets.

The experts have said that even economic recovery and earnings growth in India is likely to be a bit derailed. This is because of the wide-eyed impact of coronavirus on sectors like travel, tourism, hotels, manufacturing and services having global dependence. Further, this is combined with the need for scaling down operations and tackling productivity challenges due to work-from-home.

Indian financial sector lawyer Sandeep Parekh has also emphasised on why is it important to keep the markets open amid the lockdown. “Capital markets are working even in these impossible times. YES Bank and many others continue to raise capital, bringing capital relief. ESOPs continue to be valued and exercised, exits continue to be provided in trades, risk allocation continues shifting risk and capital in tens of millions of trades, values continue to be assigned,” Parekh added.

FICCI in its impact of coronavirus report said that greater uncertainty about the future course and repercussion of Covid-19 has also made the financial market extremely volatile, leading to huge crashes and wealth erosion, which in turn is impacting consumption levels.