There is a lot of buzz around startup IPOs lined up in Indian bourses. And questions abound. How should Indian retail investors assess and value the investment opportunity? Aren’t valuations of loss-making startups unreal?
For me, one of the biggest aspects of the IPOs is potential for Indian investors to participate in the wealth creation. So far, most of the startup success and resultant capital gains have gone to foreign investors.
Now, with the IPOs, Indian investors will benefit from the rise and scale of these companies – similar to companies like Infosys and Wipro that created huge wealth for Indian investors.
Globally technology platforms are getting stronger, all pervasive and growing exponentially. This is due to the disruptive power of digital technology in our everyday lives. Irrespective of the sector, technology is making things easier to scale, convenient to use and cheaper to service consumers.
And it is just beginning – we have seen the benefits of internet, smartphones, apps, geo-tagging, digital transactions and payments already. Newer technologies like crypto, blockchain, AR/VR, AI, and fields like genetics and robotics are yet to play out.
Technology makes even more sense in India as the country is large, there is not enough capital to build offline businesses across the vast country. The future is technology and Covid has only accelerated this.
Just look at the international examples – how Amazon, Google, Apple, Facebook, Tencent and Alibaba have scaled and created value for shareholders.
India is a huge market – the third largest consumer market in the world. It is an underserved market due to its vast size and distributed population.
Most of the people beyond top cities don’t have access to top brands. It is inefficient for traditional brick and mortar businesses to serve them. But ecommerce, technology-enabled delivery, digital payments, new logistics and reverse logistics platforms, as well as social media to reach, educate and transact – all of this has changed the game and levelled the playing field.
Learning for Investors
Indian market analysts are used to traditional yardsticks of price/earning multiples, earning per share, and guidance on profit and revenue growth. New Age companies have completely different levers and metrics they need to be judged on.
They are valued for their scalability, ability to dominate the market. They become stronger as they grow. Not linearly but exponentially. This is called the flywheel effect or a virtuous cycle.
Take, for instance, Uber or Ola, where lots of drivers and immediate availability and attractive prices make consumers choose the service over other alternatives. Lots of consumers attract more drivers to join the platform as they earn more through more rides and less idle time, consumers get better prices as the drivers and the vehicle are better utilised.
Such a model is possible only with technology, smart devices and all related tools. No surprise that the valuation of Ola in the private market and Uber, Didi and Lyft in the public market far exceeds the combined valuation of all car rental companies.
Indian stock market indices are dominated currently by banks and FMCG companies in the traditional sector, with IT and New Age technology companies accounting for barely 14% of the total market cap of NSE. Moreover, they are overvalued compared to global peers since technology companies without profitability could not list so far.
In the US, technology companies account for more than 30% of S&P 500. This will happen in India in the coming years – startups will have a big share of Sensex and Nifty. It’s a great opportunity for Indian retail investors to ride the upside, as US investors have done.
The Indian retail investor needs to re-educate himself on the key drivers of the new business – customer acquisition cost, virality coefficient, lifetime value, retention, churn and network effects.
There will be some blips, learning through mistakes along the way. But it is no worse than buying a severely overpriced FMCG or bank stock at insane multiples and regretting later when it corrects. The upside at the beginning of the current wave of exciting new IPOs lined up is very promising.
This is a real prom night moment when the entrepreneur steps out of the shadows into the public eye. Hitherto answerable to a handful of investors and board members, now he/she needs to satisfy larger stakeholders, regulatory bodies, shareholder activists and independent directors. How the Indian entrepreneur measures up to dealing with new corporate governance mechanisms will be watched closely.
Here is hoping the prom night proves to be as exciting for the boy as for the girl – the company and the retail investor, respectively.
Views expressed above are the author’s own.
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