IPO frenzy may be over but new-age Indian companies have potential to go public: Redseer's Anil Kumar, Rohan Agarwal

Indian economy grows, there is significant room for expansion for the public markets. Image: Shutterstock

 
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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Second, there is a sizeable pipeline of new-age companies with IPO potential over the next five years. There are approximately 100 Indian new-age companies that are either profitable now or are on the path to profitability. That is, they are expected to be profitable within the next five years. Around 60 of them are unicorns and around 40 of them are soonicorns. These are internet-oriented and highly innovative companies, run and supported by a maturing ecosystem of experienced operators and business enablers like the India stack, new-age logistics networks and cloud-based solutions. Of these, there are around 80 companies that are unlisted. Most of these are at least eight years old, which is the right time for them to look for the next steps in their journeys. In the US, most tech/new-age companies have listed within 10 to 12 years of incorporation. With so many startups at such a critical juncture in their lifecycles, the current global macro environment is a blessing in disguise. It has enhanced the focus of these companies on profitability, thereby, accelerating their journey to IPOs.

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With the tailwinds of rapid economic growth and internet adoption, there is no reason to believe that many new-age Indian companies will not become the next faces of the Indian public equity markets. India is a large market with sizeable total addressable markets across various consumption categories. And, as the Indian market is largely unorganised, growth is unlikely to be a problem. Therefore, with the renewed sense of discipline and focus on profitability, the Indian new-age companies have the potential to become extremely attractive, large-scale, cash generating assets.

However, while the picture at a macro level is quite unambiguous, every company must fight its own hard fight to deserve the trust of public market investors and be ready to uphold fiduciary duties.

A lot of the 80 companies mentioned above still have at least a year or two to go before they IPO. They need to prepare for it from now. It must be a goal-based, process-oriented, deliberate approach. The key is to identify the right North Star metrics which mostly prominently communicate the strength of the company to investors and be best-in-class in those metrics. While there are numerous metrics which vary across companies of various scale and industries, companies should strive to win in areas like market leadership, sizeable TAM, moats, diversified revenue streams, consumer love, predictable revenues, high operating leverage and profitability.

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To achieve this, the companies must set goals, track them, identify gaps and improve over time. While this approach solves for business fundamentals, the aspect of investor relations and trust is often under-appreciated. It starts with a CFO that the investor community trusts and who is perceived as being strong, with a firm handle on the job. Further, it is almost mandatory for companies to win the trust of the investor community as they list. The simplest, yet most potent tool herein, is communication. Taking the time to communicate on the business performance, about industry developments, being honest about risks and challenges while demonstrating proactiveness and innovation in solving for them go a long way in building trust and fostering good relationships, while decreasing the likelihood of corporate governance lapses.