Two topics have dominated the headlines in the past two weeks. China’s intensifying crackdown on its big tech companies– and the tech IPO boom in India. After Zomato enjoyed a blistering start to its IPO, other big tech players in India have quickly followed suit. Paytm, Droom and Nykaa have either announced or gone ahead with their IPO plans, seeking valuations as high as US$25 billion.
One of the main drivers behind this tech IPO boom is low interest rates. The RBI had slashed its interest rates from 6.25% in February 2019 to 4% in May 2020 to stimulate economic growth during the Covid-19 pandemic. It maintains a “wait-and-see” approach vis-à-vis tightening their monetary policies– the policy rate has remained unchanged since (for the sixth time in a row).
While interest rates remain low, retail investors want to take advantage by borrowing funds cheaply and investing in companies. These big Indian tech companies, many of which are household names with stable customer bases, are attractive targets.
The Zomato moment
These retail investors were further buoyed by bullish market sentiments– the NIFTY 50 index rose by 13.32% since the start of the year. There was thus a growing investor appetite for companies such as Zomato and Paytm, but most firms were still unsure about the amount of public funding that they could receive.
Zomato’s spectacular IPO provided them with the decisive answer– it was subscribed 40 times while its share price closed up 65% on its debut day– and opened the floodgate of IPOs. As of the previous closing day (2 August 2021), Zomato’s share price stood at 138.45.
These tech consumer companies in India were not only encouraged by Zomato’s blockbuster IPO, but also desperate to piggyback on the hype that it had generated. Most of them had planned to list on domestic exchanges (BSE and NSE), where retail investors contribute to 45% of total turnover. Since individual investors are more likely to be influenced by public sentiment, it was essential for them to strike while the iron was hot.
For the investors behind these big tech companies, a public listing also fits nicely into their agenda. As many of these tech companies now pursue IPOs, they now have the chance to exit these businesses and reinvest their funds in a growing tech ecosystem– an opportunity that was much talked about, but hardly realised, before Zomato’s IPO.
Still too early to write a verdict
For now, investors seem to remain bullish about their prospects. Whether such investor confidence will lose steam, however, remains an open question. One thing is for certain: while such sentiments remain, more and more Indian companies will be tempted to hop onto the IPO bandwagon.
As for Zomato and other “first-movers” that have already gone public, they are now under pressure to (quickly) become profitable, or keep the high growth while under public scrutiny.
Whether Zomato’s positive unique economics can translate into will depend on how the team executes moving forwards, as well as its macro environment. For now, investors should have the patience.
Thanks for reading The Low Down (TLD), the blog by the team at Momentum Works. Got a different perspective or have a burning opinion to share? Let us know at [email protected]