Enthusiasm may be lost on ‘beacons’ in India’s unicorn storm as their valuations are tied to future earnings
Earlier this month, India’s largest ever initial public offering (IPO) Fell flat on its face on first day of listing On the stock exchange, shares are traded at prices less than 27% of the IPO price. The timing of this IPO is flawless as investors have reacted enthusiastically in the recent past and posted huge gains in the range of 60% to 100% at the end of the first trading day.
Naturally, questions arise on the valuation of the firm and the IPO. The firm, along with an educational technology start-up, is seen as a ‘shining beacon’ among the growing list of unicorns in India. But the tacit response to the huge IPO raises doubts about the valuation of Unicorn in India. Are they really up to expectations? Or are they exaggerated?
miscellaneous area
India has been a unicorn storm in recent years, covering a diverse range of sectors from fintech to cloud kitchens. By the end of 2021, India is expected to produce 40 more unicorns, averaging over three months. An ecosystem that combines thriving digital payments, a growing smartphone user base and a digital-first business model adopted by many start-ups has driven investor expectations, resulting in massive funds flowing into new business ventures. it happens. Expectations are high as the country has around 640 million internet users, of which 550 million are smartphone users. Digital payments have seen a growth of 30.19% till March 31, 2021 and as of end-September 30, Unified Payments Interface (UPI) has registered 3.5 billion transactions amounting to 6.54 trillion.
fintech lead
This growth in digital payments is reflected in the fintech sector which has contributed the most to the Unicorn list. For the period 2011, when the first fintech unicorns were reported in India, as of 2020, there were six fintech unicorns in the economy. However, this year seven fintech companies have joined the Unicorn list. American investment firms Tiger Global and Sequoia Capital have been major investors, providing very early follow-up funds across all stages and sectors. The bulk of these deals are based on potential market opportunity and the expectation that these firms have the ability to sustain initial levels of hyper growth. The fundamental financial performance of the business is not taken into account in these decisions which can lead to a biased valuation.
Ever since Clayton M. Christensen popularized the idea of disruptive technologies in his 1997 book, innovator’s dilemma, it has become a topic of discussion to mark the start-up. The idea was that start-ups with limited resources could take aim at technology disruption by finding an entirely new way of doing something. The firm, which came out with the huge IPO, was regarded by many as a technology disruptor and game changer – which garnered hype and overvaluation.
However, in reality, the firm doesn’t do anything that other big players don’t. In fact the proliferation of UPI has rendered the core business of the firm’s wallet redundant, and it is losing market share as more and more people are opting for UPI-based payments to transfer money directly from their bank accounts.
“Its business model is no different from that of many other fintech and ecommerce businesses”, says a report. Nevertheless, the firm’s IPO was valued at 26 times the projected price-to-sales ratio for 2022-23, which assumes significance as the global benchmark has a 0.3-0.5 of the price-to-sales growth ratio for fintech firms. is fold. These valuations should be viewed in the light of 11% reduction in consolidated revenue and loss of ₹1,701 crore for the financial year 2020-2021.
EdTech Parallel
To make matters worse, there is an inherent weakness in the group’s structure that stems from the fact that there are 39 subsidiaries and more than half of these together contribute only 5% of its revenue. These were clear warning signs for brokerage firm, Macquarie Capital Securities (India) Pvt. Ltd, which the firm calls a “cash guzzler” with a loss of funding, burns 70% of the money it has raised since its launch. Furthermore, valuation expert Ashwath Damodaran called the company “India’s leading cash burning machine” in his valuation of the firm.
The story is also similar in educational technologies (edtech). In fact the Novel Coronavirus pandemic has been a boon for edtech firms, as it is the external environment that is propelling the industry, giving it momentum for four to five years.
The increasing penetration of the Internet is also shaping the fortunes of the region. Here we have the case of an edtech firm known to be a shining example of entrepreneurship in the new economy, with valuations increasing by 30% every six to nine months without a change in fundamentals. This firm acquired nine other firms in one year. Too many acquisitions with big ambitions to grow inorganically put pressure on the balance sheet in the coming years as some new acquisitions are likely to fail. Even, edtech firms with fairly good business models are highly valued due to abundant liquidity.
Almost every second ad on primetime television is either from a digital payment firm or an edtech platform. That’s because one of the first things technology companies usually try is to inspire behavioral change for customers who live in a particular style. Firms new to services will have to engage in this process for a longer period of time than firms in other industries such as transportation because these firms will have to bring about a special kind of change that makes the customer service comfortable enough to use. This journey of behavior change begins only when more and more consumers use such services. But such behavior change is costly for new firms as they have to incentivize customers. “Firms burn cash to offer huge discounts to customers, in the hope that people will become so used to these platforms that they will remain active even when prices go up”.
To some extent this works in the context of mobile telephone services as Indians have been linked to mobile phones and spending has been re-oriented to buy more sophisticated smartphones and data. But in other services it doesn’t work so smoothly.
guess error
One mistake that firms and valuation experts make is that they overestimate the Indian economy’s ability to consume services because they assume exponential demand growth over a long time horizon. Data from the Center for Monitoring Indian Economy (CMIE) points to this flaw in over-optimistic demand projections as there are around 23 million households earning more than ₹5 lakh per year, i.e. less than ₹42,000 per month, which It is approximately 7% of all Indian households. Only this class can agree to behavioral changes – that is, those who can afford a variety of goods and services. If firms want to go beyond this 7% households they will have to offer more discounts, burn more cash, with the possibility that once the discount is reduced, customers will leave.
Given the current state of the economy and the employment situation, we have “the landscape of consumer-facing tech companies already reaching the saturation point of their true customer-base; those who can consume without rebates”. . It is in this environment that we see new unicorns emerging every month, the product of increased valuations to tap more money to burn more cash. These valuations are based solely on future earnings, with virtually no profit to show at present. The ecstasy and glee on these unicorns should be based on illusion rather than reality.
M. Suresh Babu is Professor of Economics at IIT Madras. views expressed are personal
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