Analysis of Tech IPOs in India
Let us start by defining IPO, Initial Public Offering (IPO) is the process by which a company can go public by sale of its shares to the general public. After this a company would be listed on the stock exchange. The company goes from being owned by a small number of people to possibly having thousands of shareholders.
IPO is used by businesses and startups to acquire new capital. With this money it becomes easier for the firm to expand and improve. The founders and initial investors get a chance to exit and possibly profit when a company goes public. The idea is that even the general public would benefit by buying shares and keeping them as long term investments.
In India 11 tech companies went public in 2021 raising almost 7.3 billion USD. In 2022 many more plan to take this route. This leads us to the question — How does this affect our tech ecosystem, who does it benefit, and what will be the trend in the future?
Currently amongst the 11 tech IPOs in 2021 only 4 are trading above their original prices. The biggest IPO of Indian history Paytm’s parent company One97 Communications has gone down by 42.16% in the past 6 months.
Observing this data we can see that that only CMS Info System Ltd., Rategain Travel Technologies Ltd., Nazara Technologies Ltd. and Easy Trip Planners Ltd. have had an increase in their CMP (current market price) with respect to the original listing day price.
The above data poses the question- are firms aggressively pursuing IPOs by selling shares at exorbitant prices and unclear business models? Are they rushing into this process due to the desire or potential pressure from investors to earn more money without properly analysing the current market scenario?
Due to such cases SEBI (Security and Exchange Board of India) has changed its regulations for IPO to combat extreme stock price volatility of companies.The new rules for Offer of Sale (OFS) include that shareholders with more than 20% stake in the company before the IPO are not allowed to sell more than 50% of their shares. Before this these shareholders could exit the company by completely selling their shares. With the new age tech companies whom don’t have a track record profit prominent investors leaving leads to the public loosing confidence in the company.
Dynamics at play in an IPO
Let’s continue using Paytm as our example. Paytm demanded 47x price to sales during its IPO. For the last three years the revenue of Paytm has been around 3500 crore and has shown no signs of increasing yet it kept its valuation as 1,40,000 crore. This high valuation was asked despite stiff competition in each of its business segments and did not have market leadership in any of them. The company had lost hundreds of millions of dollars in the prior year and was no where close to making profit. Even before trading started, Macquarie Capital Securities had an ‘underperform’ rating for Paytm. Hence, even though Paytm is India’s biggest IPO, maybe it should have waited for the company to mature more before going for this route.
In 2021 many firms raised money without specifying a reason or for acquisition purposes without identifying a clear target. Now the new norm dictates that the amount meant for unidentified acquisitions shall not exceed 25% of the amount being raised. Another concerning trend being seen so far in 2022 is the spike in offer for sale (OFS) in the IPO market.
Data shows that only 45% IPOs listed since 2000 have given positive returns to investors. The rest are either trading below their issue price or have been delisted or merged with other entities.
Not all companies are suited for going public and founders should analyse the potential risk versus benefits before jumping on this trend. Recent market struggles prove that IPO is not a direct path to extreme success. Many famous companies are still private, one famous example being the Swedish furniture giant, IKEA.
Future of Tech Startup Ecosystem
The market roll out following such debut from companies has lead many to raise doubts around the upcoming IPOs of companies like OYO, MobiKwik and especially fintech firms. If this continues the general public will grow to become extremely hesitant in investing their money on IPOs. This will lead to many deserving firms in the future being unable to raise capital and India would get delayed or miss out on such possibly incredible goods or services. In some cases these entrepreneurs might decide to go abroad for better opportunities. This fallout has already started having it consequences. Many experts feel that it is unlikely that even top companies like Ola and OYO could have a stellar debut with the current mindset of public.
A direct effect of this can be seen on the recent IPO listing of AGS Transact Technologies which had lower than expected subscription demands. According to Prashanth Tapse, Vice President (Research) at Mehta Equities Ltd the muted market is a result of the fallout after what happened with Paytm and Policy Bazaar.
Some feel that companies are rushing into this competitive pursuit of IPO before the company has had the chance to mature and grow. The founders seem to put aside long term goals for the betterment of the company and are instead seeking profit or a way out.
History has shown that every record IPO fundraising year is followed by a bear market. This cycle seems to continue to carry on in the future of rise and fall. Investors and fundraisers in 2022 will have to make a tough decision and may have to proceed with optimistic caution.
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