With the evolving global macro environment of higher interest rates, there are questions around the business models of Indian new-age startups and their ability to be value-creating public market companies. However, there are two reasons why this narrative doesn't hold water, according to Kumar who is CEO and Agarwal who is partner at Redseer Strategy Consultants
Indian economy grows, there is significant room for expansion for the public markets.
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The internet is almost ubiquitous in India. India has the second-largest internet user base globally, and by 2030, it will likely have more than a billion internet users. By then, Indian new-age companies are expected to be valued at $5 trillion, as they clock a gross merchandise value (GMV) of $1 trillion. Having started from selling books, the internet has penetrated sales across almost all consumption categories, including both goods and services. Today, digitally native brands account for approximately 40 percent of all consumer internet sales. Within the next five years, except groceries, online is likely to contribute at least 25 percent of sales across prominent categories like fashion, beauty and personal care, and home and living, and significantly higher proportions in categories like electronics, and large and small appliances.
Through rapid innovation, numerous Indian consumer internet companies have become household names. Having matured, a few of them listed on public markets. While many of them were well-received at listing, most of them have corrected significantly. These companies grew when capital availability was high due to low interest rates. They focussed more on growth than profitability. While the need for habit-building among consumers demanded such spends, profitability was less urgent. Cash flow has been the most important metric for all businesses, and it continues to be so. With the evolving global macro environment of higher interest rates, there are questions around the business models of Indian new-age startups and their ability to be value-creating public market companies. However, there are two reasons why this narrative doesn’t hold water.
First, as the Indian economy grows, there is significant room for expansion for the public markets. India’s total market capitalisation as a percent of GDP is among the lowest among comparable economies. This indicates there is plenty of room for good companies to create more value as well as opportunity for newer, innovative companies to access the markets. For instance, the National Stock Exchange has about 2,000 listed stocks compared to more than 7,000 on the US’s New York Stock Exchange. The kicker is the fact that tech/new-age stocks represent 25 percent of all public market capitalisation in the US compared to 1 percent for India. With all demand and supply trends mirroring that of the larger economies, the prominence of new-age companies in the public markets is only a matter of time. While IPOs might be less frequent now, they always bounce back.
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(This story appears in the 27 January, 2023 issue of Forbes India. To visit our Archives, click here.)