2024 Ahoy! Tread cautiously towards startup IPOs

As the year 2023 winds down, it is essential to shine light on the Indian startup landscape which has shown resilience and recovery, and surged past the challenges of the previous year. Notably, the initial public offerings (IPOs) of Indian startups experienced somewhat of a turnaround, marking a shift from the subdued sentiment witnessed in 2022.

Despite facing challenges from global geopolitical tensions and macroeconomic headwinds, the domestic IPO scene has experienced a slow but evident revival fuelled by a strong bullish sentiment across the broader market.

In a contrast to the lacklustre performance of 2022 wherein only three companies- Delhivery, Tracxn Technologies, and DroneAcharya - made their mark on the bourses, 2023 saw five startups going public, signifying a shift in investor sentiment and market dynamics.

Honasa Consumer, parent company of skincare brand Mamaearth, became the 40th Indian mainboard IPO of 2023 in early November. While Mamaearth's IPO journey commenced slowly, it gained momentum to become oversubscribed by the end. The debut into the market saw a modest increase of 1.85%. The skincare brand displayed robust financials, notably in Q2 of FY24, marking a massive 94% surge in profit after tax (PAT) to ₹29.4 crore compared to the previous year, while sales also grew impressively by 21% to ₹496.1 crore.

As of December 15, Mamaearth's stock price escalated by 25% from its IPO price. “This reveals substantial investor confidence in the company's strong performance post-IPO and particularly after an impressive Q2 in FY24,” says Suman Banerjee, chief investment officer, US-based investment firm.

In the same tune, Yatra's IPO also began sluggish but garnered momentum towards the end, ultimately becoming oversubscribed. However, when it entered the trading market, it did so at a discount of 8.45%.

Banerjee opines that post IPO Yatra's financial performance depicted a mixed trend; transitioning from profit to reporting a net loss in the second quarter. Despite the revenue from operations exhibiting growth compared to the previous year, Yatra's current stock price stands at 140.6, slightly lower than its issue price, primarily due to these reported losses post-IPO.

Meanwhile, Zaggle's IPO also had a slow start initially but drew significant interest on the final day, largely from Qualified Institutional Buyers (QIBs). Upon its market debut, although it garnered considerable attention, especially from QIBs, the listing did not exhibit any gains.

“Nonetheless, Zaggle showcased improved financials in Q2, with enhanced net profit and a substantial 55% surge in revenue from operations,” says Banerjee.

As of December 15, Zaggle's shares closed at ₹245.65 on the BSE, marking a remarkable 49.78% rise from its listing price.

2024 Incoming

In light of the ongoing bullish trend in the domestic stock market and a robust lineup of startups gearing up for public offerings, 2024 is geared to see a sharp surge in new-age tech IPOs. Emerging from a period of stagnation spanning the past 12-16 months, where macroeconomic concerns dampened market potential and led to diminished valuations for key startup IPOs like Nykaa, Paytm, and PolicyBazaar, nearly 40 new-age companies are preparing to go public or become IPO-ready by the fiscal year 2024-25.

Sectors like SaaS, B2C product companies, and Fintech have come up as promising areas due to their substantial revenue streams, sustainable growth trajectories, strong EBITDA, and resilient business models.

However, the IPO performance in 2024 is expected to evoke a mixed bag of sentiments among investors and analysts.

Investors are proceeding cautiously when it comes to tech startup IPOs, particularly considering high valuations and little profitability. They are closely evaluating how much these companies are worth and if they are on the right path to make profits.

There is a preference for startups with lower initial values upon entering the stock market, explains Banerjee while adding that investors favour companies that are profitable or have clear strategies for profitability, especially in the current environment marked by high interest rates.

This cautious approach stems from recent disappointments from overvalued stocks like Paytm, prompting investors to seek safer and more promising options for potential returns.

BYJU'S - once hailed as the undisputed leader in the edtech realm -- is now confronting significant challenges and if it does get listed, it will be due to a miraculous turn of events. Despite its strong brand and market recognition, the company faces staggering losses amid a fiercely competitive edtech landscape.

Investors are cautious due to market saturation and increased competition, prompting a demand for a clear turnaround plan. They seek evidence of BYJU'S ability to address financial losses, chart a course towards profitability, and distinguish itself strategically amidst a crowded market.

On the other hand, positioned within the competitive ride-hailing sector, Ola has spotlighted its focus on electric vehicles (EVs) and profitability, standing out from the sector's history of extensive spending. Investors express optimism for Ola's shift towards EVs, but concerns linger regarding their ability to navigate the tumultuous fuel market and outpace entrenched industry rivals.

“The success of Ola's EV strategy and their capacity to reduce reliance on fluctuating fuel prices will largely influence their IPO performance,” shares Banerjee.

Riding the wave of success within Flipkart's ecosystem, PhonePe has rapidly ascended in the fintech space, boasting robust growth and leadership.

However, as the industry matures, challenges emerge. Banerjee feels that regulatory uncertainties within the fintech landscape coupled with reliance on Flipkart's ecosystem can possibly raise questions about PhonePe's autonomous trajectory. Investors are keen to see PhonePe diversify revenue streams, establish a distinct identity, and exhibit adeptness in navigating regulatory complexities to bolster investor confidence.

On the digital payments sector front, Mobikwik has been on the path to get listed for quite some time. “We are very much an IPO-bound company by being strong on governance and announcing our quarterly results timely. We are very systematic in our growth journey,” Upasana Taku, founder of Mobikwik, tells Fortune India.

However, she adds that the reason for the delay is the unpreparedness of the market. Meanwhile they have been focussing on increasing their revenue and becoming profitable.

“The fintech is aiming to disengage from its reliance on Flipkart and carve out an independent path. Their strategic focus on profitability and expansion into credit cards reflects promise,” opines Banerjee.

Although, fierce competition in the fintech sector and lingering reliance on Flipkart for utility payments pose challenges. Investors are cautiously observing Mobikwik's journey, seeking evidence of a unique market niche, a clear roadmap to profitability, and adaptability in navigating regulatory changes to assess their potential IPO performance.

What’s next

Looking back, the Indian new-age startup IPO landscape marked a pivotal year in 2021, with 11 public listings. Yet, the following 12-16 months witnessed substantial value erosion attributed to a macroeconomic downturn that affected tech companies worldwide.

However, in 2023, the global IPO market landscape also swung back, with improved Western market sentiment counterbalanced by China’s cool-down, as well as a contrast between hot emerging market small-cap deals and lacklustre large offerings. The global IPO market ended 2023 with 1,298 IPOs raising US$123.2b, according to an EY global report.

The emphasis on profitability, spurred by an extended period of limited funding for Indian startups, has been a driving force behind this shift in the IPO scenario.

According to consultancy Redseer’s report a trend of gradual recovery, with a projected estimate of 90 new-age companies getting listed by FY28.

“We have a strong belief in the ability of new age businesses to create value. 2024 maybe a bit short term to predict performance, but by 2033, we expect 250+ publicly listed new-age companies with a total market cap of more than $1 trillion,” says Kanishka Mohan, partner at Redseer Consultancy.

Several factors contribute to this optimistic outlook, such as a thriving tech ecosystem, heightened investor interest, rapid digitisation, favourable policies, and accessible global market opportunities.

On the contrary, some analysts believe that the anticipated recovery of listed startups in 2024 hinges on a confluence of intricate factors. Macroeconomic indicators like global economic trends, interest rates, and inflation will significantly influence investor confidence and decisions. Sector-specific dynamics such as venture capital availability, technological advancements, and overall market sentiment will also play pivotal roles.

“Individual startup performance, notably emphasising profitability, will wield considerable influence on recovery prospects. Startups that judiciously assess their valuations, opting for a prudent and balanced approach, stand a greater chance of success,” shares Banerjee.

Furthermore, there’s a considerable opportunity for value generation within India's tech industry, given that India's tech contribution to public market capitalisation stands at only 1%, compared to approximately 25% in the USA.

Moreover, India is home to a 100 unicorns alongside over 150 'soonicorns,' demonstrating a collection of tech companies that form a sturdy pipeline for startups poised for potential IPOs.