Start-ups and IPOs: Here are the lessons from the last three decades

It is the season of talks about Indian start-ups planning to go public after building a healthy consumer traction and raising millions (billions for some) from private markets, namely seed funds, venture capitalists and private equity investors. And it is not just the hugely successful tech start-ups such as Paytm, Zomato, Grofers or PhonePe, even old-world entities such as restaurant chain Barbeque Nation, mortgage provider Aadhar Housing, realtor Lodha Developers, Kalyan Jewellers to country’s numero uno retailer Reliance Retail are reportedly lining their initial public offerings or IPOs, if not in 2021, then certainly in the next two-three years.

Understandably, there has been huge interest in these IPO-bound firms. According to media reports, as collated by a recent Bank of America Securities’ Global Research, Flipkart’s valuation is close to $25 billion, Paytm’s is at $16 billion, Reliance Retail ($62 billion), Zomato ($3.9 billion) and Nykaa at $1.8 billion. The still private 37 tech unicorns in the country, or start-ups with over a billion-dollar valuation, tot up a combined valuation of around $129 billion (Rs 9.4 trillion) or 5 per cent of total market valuation of around Rs 188 trillion of all listed firms on Asia’s oldest bourse, BSE (as of Dec 31, 2020). According to estimates, over three-fourths of investments in Indian start-ups currently come from overseas investors.

It is a matter of speculation how public markets will finally value these start-ups, given many are still burning cash and are far from being profitable, or more fundamentally, whether Indian bourses have the capacity to absorb such a huge offering. Many are awaiting government guidelines for direct listing in overseas markets. We will know better once these firms officially apply and make their financials and projections public in the process of accessing the stock markets.

In this context, it is instructive to delve on how IPOs have fared at the stock markets in the last three decades. A decadal study of IPOs from 1991 onwards reveals some interesting insights. For the decade ending 2000, essentially the economic liberalisation decade following the balance-of-payments crisis in 1991, Bloomberg data for BSE shows around 325-odd successful IPOs hitting the market, accounting for almost 6 per cent of total market valuation of  Rs 6.9 trillion as of December 31, 2000. Though many of the firms listed in the 1990s no longer exist due to delistings, acquisitions or regulator-led suspensions, those that remain command a valuation of over Rs 11 trillion now (December 31, 2020), again accounting for around 6 per cent of total market valuation of Rs 188 trillion, pointing to the fact that valuation of new firms listed between 1991 and 2000 just about managed to grow in step with total market growth.

The public markets were more generous, albeit only initially, to IPO firms that came in the following decade (Jan 2001 to December 2010). Over 436 firms tapped markets during this period, accounting for almost a fourth of total market valuation of Rs 73 trillion at the end of the decade (December 31, 2010). Total market valuation almost tripled between 2010 and 2020, but these IPO firms could not even double their valuation in the same period, though it was a different story for stars of this decade like Maruti Suzuki (valuation almost quintupled), TCS (quadrupled) and Adani Ports (3.5 times). There are a host of firms that have seen a huge erosion in valuations in 2010s — from GMR Infra, Suzlon to Jaypee Infratech.

Over 734 new companies came in to raise money at bourses in the decade of Jan 2011 to Dec 2020, and their valuations account for over 10 per cent of all listed universe valuation as of end of last year. If you take the three-decade perspective, the number of firms listed have come down from a high of over 5,800 in December 2000 to just over 5,000 in the decade ending December 2010 and December 2020. Taken together, the 1,500-odd new firms that tapped the market between 1991 and 2020 together now account for around a third (Rs 63.8 trillion) of combined market valuation (Rs 188 trillion) of all listed BSE firms.

From these 1,500 IPO firms if you take out the government-owned companies/banks and private banks and financial firms, the rest still account for over a fifth (Rs 41 trillion) of combined market valuation as of end of December 2020. Look at it another way. With the combined market capitalisation of BSE-listed firms almost equal to the country’s gross domestic product (at Rs 190 trillion for year ended December 2020), these non-govt/non-financial firms have created value equal to a fifth of India’s GDP. And it took them almost 30 years to do it. Going by huge valuations commanded by current unicorns and some mega private businesses, it will possibly take a third of the time to add equivalent market captalisation value even if just half to two-thirds of the big ones here were to list in India.   


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