Zomato, Nykaa, Paytm led the IPO boom in 2021, but failed. Can the tide turn?

In a year of historic deal-making, as much as $40 billion was raised by Indian start-ups in 2021. A bulk of these investments was pre-IPO (initial public offering) rounds going into a bunch of growth-stage start-ups looking to ride on the pandemic-induced digital euphoria in the public markets. Subsequently, food delivery major Zomato became the first internet unicorn to hit the public markets in India, and it created such a buzz around start-up listings that a bevy of high-growth—but unprofitable—internet companies lined up to grab their share of fortunes at the bourses.

“The Zomato IPO opened the floodgates. It signalled to the market ‘ki apna time aa gaya (Our time has come)’. Its Rs 9,375-crore IPO got bids of over Rs 2 lakh crore, and it [valuation] almost doubled on the listing date. The company even went for an accelerated listing. At that time, markets were euphoric all across the globe,” says Aditya Kondawar, Partner & Vice President of Key Accounts at Complete Circle Capital.

As the global economy reopened in 2021 after the Covid-19 restrictions, the digital economy boomed like never before and friendly monetary policies saw an influx of private capital into start-ups. Along with the growth of investments into start-ups and a less volatile market in 2021, a number of hyper-growth start-ups saw it as an opportunity to nab sky-high public market valuations. Consequently, 2021 marked a record-breaking year for IPOs globally, raising a total of $608 billion across 2,682 IPOs.

However, every start-up that jumped on to the IPO bandwagon is facing a reckoning now as the global economic environment looks strikingly different from where it was earlier. Start-up valuations have begun to plummet and tech stocks across the globe are suffering. Back home in India, after its stellar debut in July, Zomato’s stock has mostly been on a slide. Its stock price touched a record low of Rs 46 on July 25 as the one-year lock-in period for its pre-IPO shareholders came to an end. Neither the company’s Rs 4,447-crore acquisition of quick commerce platform Blinkit, nor its initiatives such as instant delivery or intercity services seem to have cheered investors up.

“We are really positive about food delivery. It’s a duopoly and it will remain a duopoly. However, initiatives like 10-minute and intercity delivery are not long-term strategies, but marketing ploys. Blinkit is a big strategic bet. Depending on how they are able to execute, Blinkit could be a material value creator for them over the long term,” says Rishi Jhunjhunwala, Senior Vice President and Lead Analyst of Technology at IIFL Institutional Equities.

Searching for profit

Another vaunted start-up that made history as India’s biggest IPO is Paytm. Its Rs 18,300-crore IPO was the largest ever stock market listing in India. But its reckoning was immediate too. Listed at a discount of 9 per cent from its issue price of Rs 2,150 apiece, its stock closed over 27 per cent lower on the first day. A report from Macquarie Research just hours before its listing termed the firm as a ‘cash guzzler’, and added that its business model lacked focus and direction.

Now, the Vijay Shekhar Sharma-founded company has managed to narrow its losses sequentially to Rs 571 crore in Q2FY23 and is hoping for a rebound in its stock. The company has also witnessed its revenue jump 76 per cent year-on-year and 14 per cent quarter-on-quarter to Rs 1,914 crore, with a rise in lending, expansion in merchant subscriptions, and momentum in commerce and cloud, among others growth drivers. Per various brokerages, several growth levers including cost-effective acquisition of customers and merchants, steady loan disbursements, new device additions and a thriving digital payments industry should work in its favour. Besides, the company is slowly adding monetisation features to more and more verticals. However, its focus is spread too broadly, which continues to worry investors.

“For Paytm, it’s not about growth. It’s about what they want to do. Payments is a very difficult space to make money as it comes with a lot of regulatory risks. They have tried to become a one-stop-shop for payments. But, they will have to cut down on the many things they do to become a profitable payments super app,” says Jhunjhunwala.

However, JPMorgan, in a report, said Paytm has built more sources of monetisation across payments, commerce and financial services, which gives the company a unique ability to drive profits across several segments at lower CAC (customer acquisition cost) than its peers.

Cosmetics play

Unlike the heavily loss-making Zomato and Paytm, Nykaa was the only profitable unicorn to enter the public markets recently. However, it too had its share of troubles as its stock hit an all-time low in October. The Falguni Nayar-led company’s public market troubles can be tied back to a long-pending correction of the astronomical valuations that start-ups had managed to achieve in the past few years. Besides, macroeconomic factors that were spooking global equity markets were also affecting Indian investors. Nykaa—that was valued at close to $2 billion in its last pre-IPO round—sought a valuation of $8 billion with the IPO—and its market cap soared to $13 billion following a blockbuster debut.

The company’s operating efficiency in the beauty and personal care (BPC) category has given it a strong market share of about 25 per cent, Japanese brokerage firm Nomura stated in a report. The company has a strong moat led by higher scale, exclusive brand tie-ups, a BPC-focussed app, omnichannel sales and a strong influencer network, the report added. Nykaa is also the only profitable large online BPC retailer among peers like Myntra, Purplle and MyGlamm. Led by high repeat customers and a large user base, Nykaa is likely set to grow its BPC revenue at a fast clip of 32.4 per cent between CY20 and CY25 and is likely to maintain its dominance in the segment with a 26.8 per cent market share, an Elara Capital report said in October.

“They [Nykaa] have a compelling play in BPC where they have a first-mover advantage, a sizeable market share, a premium customer base and a proven unit economics model with strong margins. Going ahead, online BPC margins can… even double in the next three years. Effective execution of the fashion vertical, given competition intensity and high discounting, is a major challenge,” says Karan Taurani, Senior Vice President at Elara Capital. Nayar, during the Q2 results, said the company is building a unique customer proposition in fashion aided by investments in a differentiated product mix, collaborations with global brands and expansion in the breadth and depth of its owned brand portfolio.

Slip sliding away

PB Fintech, the operator of Policybazaar, is yet another company with a solid business model and a clear path to profitability that has suffered due to the intense selling pressure on the bourses and global headwinds. With a handful of products and services across its insurance and lending verticals such as the main tech platform for corporate and SME insurance; healthcare division DocPrime; online loans marketplace MyLoancare; and credit platform PaisaBazaar, the company targets a pretty underpenetrated digital insurance and consumer credit market (with 93 per cent and 50 per cent market share, respectively) and enjoys a first-mover advantage in the regulated insurance sector, an IIFL report said. The complexity of products and need for after sales servicing future-proofs its business model across verticals. IIFL expects the company to likely break even by FY25 at the profit after tax level.

Logistics firm Delhivery’s decision to go ahead with its IPO in May this year—when several companies were deferring their plans—was seen as a bold move. The company had slashed its offer size by about 30 per cent and had a flat market debut. However, a combination of the factors mentioned earlier, including the sell-off pressure on stocks, saw its share prices fall by 50 per cent from its all-time high in October.

The company, meanwhile, operates on an asset-light model and boasts of one of the lowest cost structures in the market, because of its focus on leveraging scale, tech and automation. Delhivery has been working on extending its B2C (business-to-customer) model to other verticals, especially the B2B (business-to-business) space. Towards that end, it acquired Bengaluru-based Spoton Logistics to strengthen its B2B play, besides foraying into other verticals like express partial truckload, full-truck-load, integrated supply chain and cross-border services.

With an aggressive pricing strategy across segments and with 85 per cent variable or semi-variable operating costs, IIFL, in its June report, said it needs to be seen how Delhivery will walk the tightrope of growing revenues, cutting costs, passing on a chunk of the benefits to the investors, and yet report profits.

According to a Jefferies report released in October, the potential of B2B growth with the acquisition of Spoton, cost rationalisation and low e-commerce penetration are being underestimated. B2B being a high-margin business, Jefferies estimates that the vertical will likely rise to 48 per cent of sales by FY26 versus 40 per cent earlier.

The steep fall in share prices of these internet firms is making their peers take a long hard look at their planned public market outings. Unicorns from OYO to Snapdeal, boAt and MobiKwik to Droom, Yatra Online, and PharmEasy, all have put off their IPO plans indefinitely and are focussing on cutting costs, extending their runways and embracing a profit-oriented approach.

Nitin Jain, MD of consulting firm Protiviti India Member Pvt. Ltd, says he is working with a few start-up clients with IPO plans, whose focus now is to improve margins, build a sustainable profit and loss statement, and then go to the market with strong investor confidence. “The investors are more informed today and have realised that for any IPO to give strong returns, the fundamentals of the business need to be strong. ‘Valuation’ as a business matrix is losing its sheen,” he adds.

From initially being seen as a year of bumper start-up IPOs, 2022 is turning out to be a year of extreme caution. Several leading start-ups and tech giants have laid off their employees in a bid to prepare for a long, gruelling funding winter, and economic uncertainty. “In the current scenario, liquidity has tightened, problems have been identified in these companies, and the growth that their investors forecasted didn’t happen. And with interest rates going up, equity valuations have come down automatically. People are shifting their money from equity to debt markets. FIIs have been continuously pulling out money from the Indian markets. Also, the underlying fundamentals of the listed start-ups haven’t been strong,” says Complete Circle’s Kondawar.

Clearly, it’s a hard learning curve that start-ups, both listed and unlisted, are climbing, and the ongoing corrective phase of the market will surely separate the best from the rest.

@binu_t_paul