By December, more than $15 billion had been raised in Mumbai through initial public offerings, a record amount, according to Dealogic. About $6 billion, or nearly 40%, went to tech companies — another record.
This year was historic for another big reason: It’s the first time any of India’s tech unicorns, or startups valued at more than $1 billion, have gone public.
Most of these high-profile startups are losing money, which was making retail investors leery, Piyush Nagda, head of investment products at Mumbai-based brokerage Prabhudas Lilladher, told CNN Business.
But that all changed after food delivery giant Zomato made its red hot debut this summer. Nagda said the IPO sent a clear signal that “perception is changing” among investors.
Why the party could keep going
There are a few reasons to remain hopeful about the Indian tech sector.
Many of the country’s digital startups saw a big jump in growth during the pandemic, both in terms of customers and funding.
Coronavirus-related lockdowns have encouraged people outside of major cities to spend money online, speeding up digitization of businesses and opening up more opportunities for technology entrepreneurs.
Tech firms in India have raised nearly $25 billion this year, the highest annual amount ever, according to data platform Tracxn. Some 34 companies have reached unicorn status.
As a result of those regulatory actions, “growth investors have shifted funds to India” said Tom Masi and Nuno Fernandes, co-portfolio managers of the emerging wealth strategy at GW&K Investment Management. They told CNN Business that the performances of the two countries have diverged this year, “with India up about 20% and China down 20%.”
Nagda also said that interest in Indian tech from global investors has made the sector more attractive to India’s tech-savvy millennials. He estimates that India added about 20 million retail investors since April 2020, and between 30% to 40% of them are under the age of 40.
They’ve been piling into the stock market since the pandemic started, and are eager to invest in the country’s internet giants, he added.
Young investors don’t look at companies in a “traditional” manner “where profitability and those kind of ratios were heavily looked at,” Nagda said, adding that there is a “revolutionary change” underway in stock trading in India.
A wake-up call
Even those investors may have their limit, though.
Paytm raised $2.5 billion during its IPO, with almost half of that coming from foreign investors.
The company was valued at $20 billion when it launched its public offering — even though it lost hundreds of millions of dollars last year and seemed far from ready to turn a profit.
“Paytm was overpriced,” said Masi and Fernandes. “It required investors to make growth assumptions well into the future for a business model that has not been firmly established.”
Some analysts describe Paytm’s flop as a much-needed wake-up call for companies that need to rethink their valuations.
“Some rationality will prevail,” Nagda said. To see Zomato-like “success stories,” you need to “price the stock rightly,” he added.
After Paytm’s historically terrible debut, some companies in fintech sector are rethinking their IPOs. Paytm’s smaller rival Mobikwik said it would defer its IPO, originally planned for November, by a few months.
“The company is witnessing strong business growth, has a clear path to profitability and will list at the right time,” it told CNN Business.
Some tech entrepreneurs have urged caution while chasing big money in public markets.
“We are in a world where companies are getting priced to perfection based on all the future growth potential. For a stock to do well, you have to outperform,” he wrote. “As CEO, I dread to think how you can outperform the already really high expectations that growth companies have today.”
Along with managing overwhelming expectations, startups that go public will also have to adjust to the amount of company information they’d be expected to regularly reveal to their new shareholders.
Privately held tech giants are less beholden to such transparency. And many investors think those requirements would be a welcome change.
There will be “visibility into this for the very, very first time,” said Karthik Reddy, co-founder of venture capital firm Blume Ventures. “Even I don’t know what was going on in all these companies, even though I’m an industry person.”