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Ahead of mega-IPO plans, Indian unicorns eye new business

A slew of Indian firms, including Flipkart, Byju’s and Zomato, is building a path to profitability and diversifying into newer business segments ahead of mega-IPO plans.

Top Indian internet-based companies, including e-commerce firm Flipkart, ed-tech start-up Byju’s, food-delivery company Zomato and ride-hailing firm Ola, are gearing up for initial public offerings (IPOs) in two or three years that are expected to unlock a total valuation of $100 billion for these firms.

According to industry insiders and analysts, these firms are focusing on building a path to profitability, diversifying into newer business segments and consulting their finance and legal teams for listing overseas or in India.

Walmart-owned Flipkart and PhonePe, the digital payments firm, are planning to go public in the US by 2022.

Sources said Flipkart is eyeing a valuation of about $40 billion for the IPO.

They said PhonePe is planning to go public as a separate entity and targeting a valuation of about $10 billion.

In July, Walmart, the world’s largest retailer, led a $1.2-billion investment in Flipkart, valuing the e-commerce firm at $24.9 billion.

In 2018, when Bentonville-based Walmart invested $16 billion for a majority stake in Flipkart, the Bengaluru-based firm was valued at less than $21 billion.

“The Walmart leadership has told Flipkart and PhonePe about building the path to profitability and it wants them to go public and is providing all the support,” said a person in the know.

To build a path to profitability, sources said that besides e-commerce, Flipkart is going deeper into the Indian financial services market, which could be worth $340 billion in the next few years.

Flipkart’s overall fintech category, which comprises consumer credit constructs, device insurance and seller financing, grew 40 per cent in 2019.

As the company brings the next 200 million consumers online, it aims to significantly multiply the number of users having access to its fintech products and services.

This includes tier-2 and tier-3 cities.

The Covid-19 pandemic has accelerated the shift to e-commerce, as an increasing number of consumers are shopping online in greater frequency.

The gross merchandise value (GMV) of products sold on Flipkart had already surpassed that of the pre-Covid levels.

Upcoming festive sales are expected to push up the annual GMV of e-commerce companies to around $38 billion, a 40 per cent growth over the previous year.

The e-commerce festive sales could alone cross the $7-billion mark.

The season would be a great indicator of consumer spending and Flipkart’s potential to go public.

“However, the question is would they (Flipkart) be able to get the valuation they are seeking,” said Satish Meena, a senior forecast analyst at Forrester Research.

“Because the competition is becoming tougher for them due to Amazon and the entry of Reliance’s JioMart,” Meena said he is more hopeful about Byju’s IPO.

The pandemic has helped Byju’s become a decacorn (a firm valued at over $10 billion) this year.

According to the analysts, Byju’s has a better opportunity to go public, as the firm had almost doubled its revenue, from Rs 1,430 crore to Rs 2,800 crore in FY20.

It is now inching towards the $1-billion revenue milestone.

They said that the Bengaluru-based firm, which is valued at $11.1 billion, may target a valuation of about $25 billion for listing in the US.

What would also support Byju’s IPO ambitions is the acquisition of WhiteHat Jr, which teaches children coding, and US-based educational gaming company Osmo.

In a recent interview, Byju Raveendran, founder and chief executive officer (CEO), said that IPO is a clear option for the company.

“It’s a big aspiration to create a large public company coming out of India,” he had said.

Ankur Pahwa, partner and national leader, e-commerce and consumer internet at consultancy EY India, said investor sentiment in the current geo-political situation is creating barriers for start-ups to access capital at a crucial juncture of high-growth, fast-paced innovative environments.

“IPO listing provides more opportunities to both investors and entrepreneurs to capitalise on the growth potential,” he said.

The Covid-19 pandemic has also accelerated food delivery firm Zomato’s journey to profitability.

Recently, Zomato Co-founder and CEO Deepinder Goyal, in an email to employees, said the firm was planning an IPO next year.

Goyal said the firm had about $250 million cash in the bank, the highest in its history.

Marquee investors such as Tiger Global, Temasek, Baillie Gifford and Ant Financial have participated in its current round, which, he estimates, will take its cash in the bank to $600 million.

In May, hit by lockdowns, Zomato said it would let go of 13 per cent of its staff, affecting close to 520 employees.

But in July, the firm said its revenue for FY20 grew 105 per cent to $394 million, while losses rose about 6 per cent to $293 million. HSBC Global Research recently valued Zomato at $5 billion, a major increase from its earlier valuation of $3.5 billion.

Analysts said Zomato may target a valuation of about $7 billion for its listing.

Meena said for an overseas listing, the benchmark for Indian firms could be the companies in markets such as China and the US.

These include Chinese e-commerce giant Pinduoduo (PDD) and food delivery firm Meituan Dianping.

SoftBank-backed ride-hailing firm Ola is also planning to go public in the next few years in India.

The Bengaluru-based firm competes with US rival Uber, which witnessed a lukewarm IPO last year.

Ola saw a massive slump during the lockdown.

In May, Ola fired 1,400 employees, or over 33 per cent of its workforce, as Covid-19 pounded the transportation industry.

But green shoots are emerging: The firm is now serving over 50 per cent rides in most of the major cities compared to the pre-Covid phase.

Ola was last valued at around $6 billion. Analysts said it may target a valuation of about $12 billion for its listing.

Experts said that by going public these companies will be able to tap into deeper capital pools and access lower cost of capital.

Pahwa of EY said Indian listing norms and regulations, particularly for technology-based start-ups on their journey to profitability, are yet to catch up with markets like the US or EU.

“Listing on overseas markets will also help appeal to a broader investor base, provide more avenues for existing investors to exit, and bring publicity and credibility for the company,” said Pahwa.

However, it is not going to be easy.

There are challenges such as the ability to sustain high valuations these start-ups have come to expect in the public market, ability to remain agile in their function, and scrutiny from regulators and investors.

“There is also the need to respond to market pressures, which may push some start-ups to focus on quarterly earnings rather than take a long-term position,” said Pahwa.

Photograph: Mike Blake/Reuters

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