New-age tech stocks are on the road to recovery; here's what that means

On November 7, 2023, Honasa Consumer, the parent of beauty and wellness brand Mamaearth, made its debut in the public market, exactly two years after beauty and personal care brand Nykaa’s arrival. Despite the discordant notes in the market, Mamaearth’s initial public offering (IPO) garnered a subscription rate of 7.61 times.

The start-up IPO market came to a near-standstill in 2022, with tech stocks globally experiencing a significant downturn and valuations facing a decline. This was exacerbated by historic lows in venture capital funding, following the frenzied activity of 2021, compelling companies to shift their focus from growth to profitability. With money getting pricier, more start-ups are eyeing the IPO path to gather funds. The strong investor demand for Mamaearth’s IPO and the resurgence of pioneering stocks like Zomato and Paytm might just entice start-ups to speed up their journey to go public. “Indian start-ups have spent 2022 and 2023 [reorienting] their playbooks as they adjust to a high-interest rate environment with more demanding investors. Business fundamentals are now at the forefront as start-ups turn lean, slash experiments and look at monetising their users more aggressively,” says Siddarth Pai, Founding Partner of 3one4 Capital, and Co-Chair of the Regulatory Affairs Committee at industry body IVCA.

Zomato, the first Indian unicorn to go public (in July 2021), marked its second consecutive profitable quarter in September. Profits surged to Rs 36 crore in Q2FY24 from Rs 2 crore in Q1FY24, a significant turnaround from the Rs 251-crore loss in Q2FY23. Its quick commerce arm Blinkit turned contribution positive for the first time in Q2, with an average order value of 2x of Zomato in certain cities. Zomato expects Blinkit to break even in Q1FY25. “At this pace, where Blinkit’s gross order value (GOV) is growing at 80 per cent-plus YoY (year-on-year), we wouldn’t be surprised if Blinkit’s GOV becomes multiple times larger than Zomato’s in overlapping cities, which will more than compensate for the wider geographical footprint of Zomato,” Founder and CEO Deepinder Goyal wrote in a letter to shareholders.

Brokerage Motilal Oswal Financial Services Ltd (MOFSL), in its Q2 note, said it expects Zomato to report a 53 per cent adjusted revenue CAGR over FY23-25. It expects Zomato to turn positive on reported Ebitda by Q3FY24 and deliver 4.1 per cent Ebitda margin in FY25. “Globally, food delivery companies are increasing their revenue and profitability. Discounts are relatively low now, which consumers have accepted, while the platform has also become smart to find more avenues of growth including quick commerce and advertisements,” says Nikhil Choudhary, Assistant VP-Equity Research at Nuvama Institutional Equities.

Meanwhile, paytm clocked a robust 32 per cent YoY revenue growth in Q2 to Rs 2,519 crore; the festive season revenue is expected to be captured in Q3, and not in Q2 as in the previous fiscal. Robust device subscriptions drove total revenue growth, while steady payment margins and an expanding financial business bolstered the contribution margin to 57 per cent.

“Despite the bashing in the market, this company did not divert from the path they have set for themselves. They continued to instal devices, diversify their product offerings, expand loan offerings, and increase their merchant touch base, and all of these put together is helping the company increase its numbers,” says Sneha Poddar, Associate Vice President at MOFSL. She adds that till Q2FY23, they were loss-making at the adjusted Ebitda level, but from Q3FY23 “it turned profitable for them”.

As investors face mounting exit and liquidity demands, late-stage companies are swiftly shedding their ‘start-up tag’ and are aggressively benchmarking themselves to their listed peers like Swiggy to Zomato, MobiKwik to Paytm, Droom to CarTrade, or Ecom Express to Delhivery. “The market has shown a clear preference for studied growth with strong operating cash flows and good margins. Any deviation requires intensive management commentary to convince listed market investors to take a position in the stock, as opposed to waiting for a change,” says Pai of 3one4 Capital.

Yashish Dahiya, Chairman and CEO of PB Fintech—the parent company of Policybazaar and Paisabazaar—indicated strong confidence in achieving profitability in the next quarter during the earnings call for Q2FY24. “I’m extremely confident that this will be our last quarter of losses. Next quarter we will definitely have profits,” he said. PB Fintech narrowed its consolidated losses by 89 per cent to Rs 21 crore for Q2FY24 from Rs 187 crore reported a year ago. Revenue from operations grew 42 per cent YoY to Rs 812 crore.

“At the cusp of profitability, we anticipate a strong growth in our upcoming two quarters... Largely, we expect a 30 per cent growth in the mid-term revenue through our core business,” Sarbvir Singh, Joint Group CEO, PB Fintech, said.

Logistics firm Delhivery has halved its net losses to Rs 103 crore in Q2FY24, with a revenue increase of 8 per cent to Rs 1,941.7 crore, despite a slowdown in its primary customer base, the e-commerce sector, due to higher inflation and a funding crunch. And Nykaa reported a 50 per cent jump in consolidated net profit at Rs 7.8 crore for Q2FY24. The quarter saw a 22 per cent revenue increase to Rs 1,507 crore, partially subdued by a delayed festive season.

The shifting market landscape is poised to inspire those start-ups that have filed their draft prospectuses with the Securities and Exchange Board of India (Sebi), as well as those diligently preparing for their future public market debuts. As many as 80 start-ups may hit the public market in the next five years, per a report by consultancy firm RedSeer. Among those gearing up to launch their IPOs are some of India’s most valued start-ups, such as Swiggy, OYO, Lenskart, and Ola Electric.

Investors, too, are showing renewed enthusiasm for start-up IPOs in 2023, as evidenced by the substantial subscription rates for new-age technology listings such as ideaForge (106x), Yatra (1.6x), Yudiz (4.75x), and Zaggle (12x).

The pull of IPOs for fundraising has altered how start-ups function, shifting from pure growth to establishing core business fundamentals. Plus, start-ups realise that going public means they’ll face some tough questions.

“When the first batch of internet companies got listed, Indian investors thought that this is the internet moment for India, and let me take a risk and play this cycle—from loss-making to break-even to profit to free cash flow—and make massive wealth. Investors now know the pitfalls of these stocks, and they are going to be very particular about those pain points. For the second wave of internet companies, the job is tougher because they have to be ready with a concrete plan on Ebitda break-even, cash flow positivity and a detailed capital allocation strategy,” says Aditya Kondawar, Partner & Vice President at wealth management firm Complete Circle Capital.

According to Manu Rikhye, Partner at investment firm Merak Ventures, the public market bar is higher for start-ups today as the sector-aware investors are looking for proven business models, strong revenues, and a clear path to profitability. “For start-ups aiming for an IPO, the goalpost moves beyond ‘readiness’ to being strategically ahead,” says Rikhye.

He adds that in this environment, start-ups need to transition from being market players to market leaders. “It means having a solid foundation, clear governance, and consistent growth,” he adds.

Mahavir Lunawat, Founder of Pantomath Financial Services Group, emphasises the need for having separate metrics that can help investors understand the sustainability and prospects of growth-stage start-ups entering the IPO market, beyond just valuation. “If policymakers can think of drawing sustainability metrics for such businesses which are far from break-even, that will be very useful for investors,” he says.

Pai says the strong bullish sentiment on India will hold quality tech companies in good stead, and 2024 “should see a record number of tech IPOs come to the market”.

As the winds of change sweep through, the imminent surge of well-governed start-ups entering the public market is poised to ignite the next chapter in India’s bustling start-up ecosystem. 

@binu_t_paul

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