Last week marked a watershed for technology start-ups in India, as a record bout of fundraising shifted attention to the world’s second-most populous market, just as investors were becoming spooked by a crackdown on Internet companies in China.
Food delivery app Zomato Ltd became the nation’s first unicorn to make its stock market debut, raising US$1.3 billion with backing from Morgan Stanley, Tiger Global and Fidelity Investments. The parent of digital payments start-up Paytm filed a draft prospectus for what could be India’s largest IPO at US$2.2 billion, while retailer Flipkart Online Services Pvt raised US$3.6 billion at a US$38 billion valuation, a record funding round for an Indian start-up.
“Indian entrepreneurs have been quietly building start-ups for a decade now, the country’s Internet infrastructure has vastly improved in that time and there’s a very good appetite for tech stocks globally,” said Hans Tung (童士豪), the Silicon Valley-based managing partner of GGV Capital, which manages US$9.2 billion in assets. “Investors are beginning to see the huge upside, and they expect India to be a China.”
Unlike China, where online usage is much more developed, many of India’s 625 million Internet users are just dipping their toes into the world of video streaming, social networking and e-commerce. Opportunities in online shopping are particularly attractive, as e-commerce accounts for less than 3 percent of retail transactions.
India’s population is expected to overtake China’s this decade, and the mood among investors could not be more different in the neighboring nations. China is reining in its tech companies, wiping over US$800 billion off market valuations from a February peak and shaving billions off the net worth of its most famous entrepreneurs. The clampdown is expected to continue, as regulators curb the power of Internet companies and wrest back control of user data.
Indian tech companies “can attract global investors who’ve burnt their hands in Chinese tech companies,” said Nilesh Shah, group president and managing director at Kotak Mahindra Asset Management Co in Mumbai.
The successful listing of a few loss-making start-ups could lead to re-rating of many existing companies and send the market higher, he said.
India had a record US$6.3 billion of funding and deals for technology start-ups in the second quarter, while funding to China-based companies dropped 18 percent from a peak of US$27.7 billion in the fourth quarter of last year, according to data from research firm CB Insights.
Optimism about India is tempered, as one of the worst COVID-19 outbreaks in the world threatens to erode decades of economic gains, with more than 31 million infections and 413,000 deaths in the country. At least 200 million Indians have regressed to earning less than the US$2.30 minimum daily wage, Azim Premji University estimates, while the middle class shrank by 32 million last year, according to the Pew Research Institute.
Nor are investors in India free of political risks. Technology start-ups also face a tightening regulatory regime with government clamping down on foreign retailers, social media giants and streaming companies. A new bill on data ownership and storage is expected to be presented in an upcoming parliament session. If passed, it would restrict the ways they can handle user information.
Some analysts are also concerned that stock markets are in a bubble waiting to burst, and that many company valuations are far above their fundamentals. They caution that retail investors in new-age companies that have yet to generate profits should look beyond traditional value measures such as EPS and P/E, and must be able to assess factors such as investment in building a loyal customer base as the start-ups scale up.
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