Many new digital consumer brands have come up and these are going to last and not just because of Covid. Many of themIPO would probably be tapping the IPO market, says Venugopal Garre, MD, Bernstein.
Just yesterday, Policybazaar which is a IPO-bound company, was talking about good growth coming in and how they saw growth in the last few months of the pandemic. Have you analysed this new window which is opening up in terms of the business models on offer?
A lot of these consumer tech companies would probably be tapping the IPO market. It is not that these are new companies. Quite a few of them probably are more than a decade old. They have been trying to grow with India’s demand and India’s infrastructure. Covid has done two things: One, demand has accelerated for quite a few of these companies over the last 12 months. Another thing is the consumer’s acceptance of going online for a lot of things. We are utilising fintech models or using a B2C side. Many new digital consumer brands have come up and these are going to last and not just because of Covid.
A lot of these business models would have thought about tapping the IPO market before but they are now coming in now because it is not just about liquidity and valuations. It is also because they are now much closer to reaching a certain scale for some profitability as well as top line perspective, where they would have wanted to list in the public markets.
It is fairly exciting from a growth perspective for a lot of these consumer tech companies.
We are witnessing big dollops of liquidity coming into some of these companies. In fact just this week alone, we have seen four or five new unicorns being born. It seems big money from overseas is making new investments into Indian consumer tech plays. How are you analysing some of these companies on the valuations front?
This is very interesting and also a tough question which a lot of investors especially in the public markets would have to approach when a lot of these companies come up for listing. Now let us look at the private market itself. The rate at which unicorns are getting created in India has increased tremendously and it again boils down to the global PE. The world is also looking at the prospects of some of these technology companies a bit more closely in terms of a scale up potential.
Number two, last year India tried to focus a bit more on trying to ring fence certain geographies and certain Indian companies. The perspective here is that it does look like a gold rush. The valuations even in the private markets are seeing a lift. So there are two ways to approach it. If you look at the private market, there are a lot of mature companies with numbers of years of operation and probably decent track records in terms of the consumer base and the revenue run rate that they would have created. Their listing may be 12 to 24 months away.
So what is happening is that there is a rush for these entities. The private funds are participating in the so-called pre-IPO rounds which may not necessarily be the public pre-IPO round but general pre-IPO rounds and we are seeing valuations lifting 30% to 40%. When private equity invests in companies with elevated valuations, the perspective would be that time horizons are no longer 8-10 years for exit. They are pretty sure that in one-two years they would have exit options in these companies and that is why you are seeing a rush towards these companies.
The second thing is of course that lots of start-ups which have been there in different areas are also getting funding. They are very small but some of them are becoming unicorns without actual revenues of businesses. This is where the PE funds are taking calls on individual end markets and probably individual founders in terms of what they have delivered in the past. These calls tend to be high-risk calls and quite a few of them are still some time away from listing.
So, these are the benefits that the Indian startup industry probably will get. They should participate in such opportunities. Let us see how many of them scale up. It is not that all of them will and we will see those challenges as things pan out over the next four-five years.
There are so many sub themes which are emerging in the consumer tech space. One theme centres around electrical vehicles. Out of edtech, foodtech, insurtech, energy and renewable which are the ones with major scale up opportunities?
There are two things here. The important one is scale up potential and the number two is competitive potential. How many competitors potentially can succeed or exist in each of these areas? The third thing is about how to look at valuations for such entities? If you look at the long list of areas in which start-ups would emerge, especially in the tech space, I would say B2C ecommerce has a pretty large STEM potential. We are in a very early stage with about $35-40 billion revenue. Over a decade, we are expecting that to go up to $300 billion.
The second thing is B2B which is not just Reliance but a couple more companies participating in retail digitisation. So this is one area.
The second area is again consumer linked. It is food delivery. Food delivery has seen pretty tremendous scale up globally in terms of the revenues and GMVs for a lot of companies in a lot of geographies. This is an area which tends to be pretty important even where I live. This is another area where you are going to see a scale up.
In both B2C as well as the food delivery, usually there are two or three players who tend to dominate which is good in terms of the potential for them to eventually turn profitable quickly over a four, five-year period or a three-year period.
The third where I am actually excited though I have not really built in a very large STEM is education. Education or Edutech is something which all of us probably are using in some way. It is more like IT services where I think India has a significant role to play.
We will see a lot of B2C models like food delivery models globally but when it comes to edtech, India offers an opportunity because it is primarily a significantly good cost model. Given fairly good bandwidths, teachers and educators in tier-2, tier-03 cities could be utilising their talent to teach students outside India. This tends to be a fairly high margin industry if executed well. So this is the third area I would be excited about. These are the three areas where I see potential to scale up.
Outside these, gaming, shared mobility are okay but they bring their own risks in terms of individual business models. This cannot be purely a top down play and one has to look at them a bit more closely. Also the electrical vehicles or EVs are at a very early stage, even globally. Plus, EVs are primarily competing with established organised players. So a disruptor has to emerge, which scares everybody and makes everybody jump into the wagon. This is where we need to see how Ola Electric does when it launches the product this year. So it could be the starting point perhaps for some market share shifts in the overall industry.
