Will Indian Startup IPOs See Revival As Listed Tech Stocks Rebound?

After a severe lull in the initial public offering (IPO) market in 2022 — particularly for tech startups — which continued even for the first few months of 2023, a reversal of sorts is underway. The recovery is in line with a bull run in the broader Indian equity market. Will this see startups reviving public listing plans? 

The year-to-date (YTD) performance of new-age tech stocks like Zomato, Paytm, Policybazaar, Nazara and Delhivery – who were battered in 2022 – has seen a significant upward rally in a range of about 15%-60%, making up for a lot of the value erosion of the past 18 months. 

So far this year, only one startup, ideaForge, has taken the IPO route. The listing gained an overwhelming response from investors across categories and the drone company made a mega debut on the Indian stock exchanges on July 7, at a 94% premium to the issue price.

Moreover, ideaForge’s public issue was subscribed 106X, highlighting the appetite for new-age stocks in the public markets. 

While ideaForge is obviously a benchmark for tech startups, at least eight other startups that were expected to go public in 2023 are still waiting in the wings. Will this turnaround propel their IPO plans?

The Startup IPO Rollercoaster 

While 2021 was undoubtedly a landmark year for the Indian tech startup IPOs with 11 public listings — including Nazara, Paytm, Zomato, Nykaa, Policybazaar, EaseMyTrip and others — the next 12-16 months saw huge value erosion linked to the broader macroeconomic slowdown. 

Except for Paytm, Fino Payments Bank, and CarTrade, all others were listed at a premium valuation in the market but 2022 led to a bloodbath for all of them. From high valuations, their shares nosedived in a range of 25% to 75% compared to their listing prices as poor financial performance, global inflationary pressure, and tension over the Russia-Ukraine war hurt all tech companies globally.

Call it a ripple effect but only three tech startups – Delhivery, Tracxn Technologies, and DroneAcharya – got listed in 2022, and at least eight startups, including ixigo, OYO, Droom, Snapdeal, PharmEasy, and MobiKwik delayed or withdrew their IPOs.

The IPO trend for the new-age tech startups this year looks worse, with ideaForge being the only tech startup to list. In this context, we must note that ideaForge was already a profitable entity when it went public – quite uncommon among tech startups. Also, most other new-age tech startups that are expected to go public in 2023 are struggling to turn cash flow positive.

On the NSE, ideaForge shares listed at a premium of 93.45% at INR 1,300. On the BSE, the shares listed at INR 1,305.10 apiece – a premium of 94.21% to its issue price of INR 638-INR 672. 

While the listed tech startups have started witnessing improved market sentiment thanks to better financials, several analysts are of the opinion that the positivity will remain only if these companies are able to achieve their profitability and positive cash flow targets as estimated.

Besides, it has now been well-established that there’s hardly any free money in the market. Large institutional funds are actually offloading some of their public holdings to book profits, a trend that may accelerate in the next few months. 

Catching Up With IPO-Bound Startups 

Among new-age companies, the likes of OYO, Navi, GoDigit, Mamaearth, Capillary, EbixCash, PayMate, and Portea, who were cumulatively expected to raise approximately INR 24,000 Cr through IPO, are either awaiting approval of SEBI on DRHP or received the regulator’s nod but have been holding the IPO launch for the market sentiment to recover.

While catalysts such as ideaForge and the broader market recovery have made the path smoother for the upcoming startup IPOs, the positive sentiments in the startup IPO market are highly dependent on positive cash flow of listed tech companies, says Amit Pamnani, chief investment officer for investment banking at Swastika Investmart. 

He pointed to the recent numbers reported by Paytm, Zomato and others, which hint at a clearer path to profitability for these companies. 

Market experts also believe the recent valuation corrections of several unlisted startups and concerns like that of BYJU’S would also impact these IPO-bound startups’ listings and valuations.

Most of the IPO aspirants have resorted to various restructuring methods, including laying off employees en masse, in order to get closer to profitability. And this may not prove to be a success in the long run. 

For instance, OYO recently told its employees that it turned cash flow positive in the quarter ended March 2023. The hospitality unicorn had laid off around 600 employees in December last year.

Similarly, after turning profitable in FY21 with a profit of INR 71 Cr, Navi Technologies reported a loss of INR 362 Cr in FY 2022 on the back of surging expenses. Its key subsidiaries including Navi Finserv and Navi General Insurance too recorded a loss of INR 67 Cr and INR 61 Cr, respectively.

The Sachin Bansal-led company has become the latest startup to resort to layoffs to cut costs – it has fired around 200 employees across multiple departments.

Beauty ecommerce brand Mamaearth turned profitable in FY22 with a net profit of INR 19.8 Cr on a standalone basis. However, in order to sustain profitability, the startup is taking various restructuring measures. Recently, the startup shut its loss-making venture Momspresso MyMoney.

“Startups like OYO and Navi will need to demonstrate their companies’ profit and development prospects if they want to raise funds at appealing values,” added Aamar Deo Singh, head advisory at Angel One.

Meanwhile, startups including Capillary and Pine Labs have also deferred their IPO plans. On the other hand, after deferring the IPO of its ride-hailing business Ola since 2022, Bhavish Aggarwal is reportedly mulling to make its emobility entity Ola Electric public by 2023 end.

The Hurdles On The IPO Trail

Swastika Investmart’s Pamnani observed that in the last few days, many unlisted startups in their pre-IPO stage have seen a valuation correction of around 35% and 80%, hurt by the funding winter in the last one-two years.

It is pertinent to note that in September last year, OYO’s largest investor SoftBank cut the internal valuation of the hotel chain to $2.7 Bn. In 2019, the startup was valued at $10 Bn. 

In March this year, OYO also reduced its IPO size to $400 Mn-$600 Mn. Earlier, it was looking to raise $1.2 Bn through the public listing.

On the other hand, several investors like Invesco, Fidelity, and Janus Henderson, among others have cut valuations of startups including PharmEasy, Pine Labs, Swiggy, and the beleaguered BYJU’S in recent months.

Pamnani said that one of the main reasons several of these ventures have postponed their planned IPO is because of their poor performance on the unlisted market due to their bloated valuations and unstable financial health.

“Not only this, but many firms have postponed their IPO ambitions even after receiving approval from the market regulator SEBI due to the high level of uncertainty in the nation’s startup ecosystem,” Pamnani told Inc42. 

On the contrary, the unlisted market is doing well for established businesses like Chennai Super Kings, Hero Fincorp, NSE India, and Tata Technologies, he observed.

Echoing a similar tone, Angel One’s Singh said that startups will face hurdles if VC funding becomes scarce and stratospheric valuations fall precipitously, as this makes investors nervous about future growth and scale. Startup funding plunged to $5.4 Bn in H1 2023 as against $19 Bn in the same period last year. 

“One cannot ignore the impact of BYJU’S problem in recent months. It has caused a lot of concern with regard to governance issues at startups, so investors will be very selective and take a cautious approach towards new-age tech startups unless they see material evidence of the startup delivering something that really matters,” he added.

The recent tension at BYJU’S board, among the founder and its investors, as well as criticism around the company’s business ethics and governance is indeed something that has received widespread attention around the world. Even the central government is said to be stepping in to look into the company’s accounting and books. 

Market Timing Is Everything

While the market is appropriate for tech startups to take the IPO route now, there are clearly some big hurdles for startup IPOs. After being burnt by the sharp correction of Paytm, Zomato, and Nykaa last year, upcoming IPOs will heavily depend on their respective pricing, said Dr V K Vijayakumar, chief investment strategist at Geojit Financial Services.

It’s not just the Indian IPO market that has faced a downturn in the recent past. As per an EY report, in Q1 2023, 299 IPOs took place globally, raising $21.5 Bn, which declined 8% and 61% year-on-year (YoY), respectively. 

However, in Q2 2023, there has been a slight improvement with 310 IPOs raising total proceeds of $39 Bn, down 3% and 5%, respectively, as a new EY report suggested.

In a recent EY report, Dr Martin Steinbach, an IPO leader at the Big Four firm, said, “After a slow start to the year, IPO activity could rebound in the second half. With major risk factors fading, volatility back to a reasonable level, and interest rate hikes priced in, IPO-bound companies are seeking the right window with higher market liquidity.” 

Will the second half of 2023 give us more concrete signs of the startup IPO window opening? 

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