Case Study on how 2021 could be the year of Indian Startup IPOs

Situation

• On July 14, 2021, Indian restaurant aggregator and food delivery startup Zomato went public with a 3-day Initial Public Offering for a price band of Rs.72-76 per share.
• The IPO was oversubscribed 38 times, with 2,751.25 crore bids against the 71.92 crore shares that were on offer, making it India’s biggest IPO since March 2020.
• Investors are seeing the potential in Indian startups who are disrupting the traditional way of doing business and getting the backing of global venture capital investors like Tiger Global, Sequoia Capital and Bessemer Venture Capital.
• Buoyed by this promise and the success of Zomato, there are many other startups waiting in the wings to make a splash with their debut on the stock market. We pick and analyze 3 such Indian startups who could create ripples with their IPO.

Observation

The Securities & Exchange Board of India (SEBI) recently set up the Innovators Growth Platform, encouraging Indian tech startups to list themselves on the market for IPOs. This is seen as a welcoming move by the Indian government and the markets.

Apart from Zomato, 3 other Indian startups who have been eyeing the IPO pie in 2021 are Policybazaar, Nykaa and PharmEasy.

Policybazaar

• Founded in 2008 by Yashish Dahiya, Alok Bansal and Avaneesh Nirjar, Policybazaar is currently India’s biggest privately-held online insurance aggregator with a reported value of $2.4 billion after its latest round of funding.
• They started out as an insurance comparison website and an information portal offering knowledge about various types of insurances. They further expanded towards insurance sales, by having major insurance providers listed on their platform as sellers.
• As of now, they are being backed by the following investors:
• The company is eyeing a valuation of $3.5 billion with their IPO.

Nykaa

• Falguni Nayar-founded Nykaa is an omnichannel lifestyle, beauty and wellness products retailer. It started off as an online ecommerce platform in 2012, and in 2015 it ventured into offline sales with 76 stores across the country. It is currently valued at $1.2 billion.
• They market their website and stores majorly through digital marketing, targeting the young, internet friendly audience consisting of college going youth, young professionals and entrepreneurs. The average cart size of Nykaa ranges anywhere close to Rs.1200 to Rs.1500. They recently acquired fashion jewellery retailer Pipa-Bella.
• Nykaa’s major investors include Fidelity Management, Steadview Capital, Sharrp Ventures, TPG Growth, Lighthouse Funds, Katrina Kaif and Alia Bhatt.
• The company is eying a valuation of $4 to 5 billion through their IPO.

PharmEasy

• A privately-held healthcare aggregator and e-pharmacy founded by Dharmil Sheth and Dr. Dhaval Shah in Mumbai, PharmEasy offers delivery of medicines and diagnostic tests. It is currently valued at $4.1 billion.
• While online pharmacy is not something new to the Indian markets, what made PharmEasy standout and become the largest player is their acquisition of Medlife and Thyrocare in 2021, which made their valuation skyrocket from $1.8 billion to $4.1 billion.
• PharmEasy’s current set of investors include Temasek, CDPQ, LGT Lightrock, Eight Roads and Think Investments, Prosus Ventures, TPG Growth, Bessemer Venture Partners and Kotak Mahindra Bank.
• The company plans to raise close to Rs.3700 crores with their IPO.

Challenges

While all 3 companies plan on listing their IPOs in Mumbai, they might consider dual listing with countries with friendlier public listing rules like the USA or Singapore for a global reach. But it could be a challenge for Policybazaar as India continues to prohibit this for sensitive sectors like financial services.

Dual listing might also lead to a wider spread of their liquidity. This could lead to higher taxation and compliance costs.

Poor financial health could act as a deterrent to investors. All major tech-based Indian startups, including Zomato, PharmEasy, Nykaa and Policybazaar continue to record losses despite their revenues seeing a massive jump.

While SEBI allows loss-making entities to go public, the Issue of Capital and Disclosure Requirements (ICDR) regulations requires these companies to allot at least 75% of their shares to qualified institutional buyers, including insurance, mutual fund companies, and alternative investment funds. This means only 25% remains available to HNIs and other investors.

Benefits

With increased funding, these companies can invest worry-free into newer technologies and explore innovative solutions to challenges faced by their markets.

Injection of additional funds means these companies can cut their losses and break even sooner than their targeted time period.

With investors from varying fields coming into play here, the IPO opens up many new markets for these companies. With more and more people getting to know about these companies, their customer base will increase and they can further reach out to smaller cities.

With IPOs driving up investments into these startups, they can further explore valuable collaborations with similar brands and service providers to introduce new products and services to their customers. And companies like Nykaa who have their own inventory and branded products too, can boost their production and push their products more on their platform.

Higher valuation and new investments mean the companies are going to expand their operations to newer cities. And to serve these new bases, they’ll grow their teams, creating new jobs and increasing the employment rate of these cities and states.