In 2011, Vijay Shekhar Sharma, a 33-year old Indian entrepreneur, watched Alibaba founder Jack Ma speak in Hong Kong. “I did not know my life would transpiration at that conference,” Sharma later said. “I became totally interested in China, Alibaba and Jack.”
Three years later Sharma travelled to China to meet his hero, taking a selfie with him and securing the first of several investments from Alibaba. The Chinese ecommerce and fintech group went on to pump hundreds of millions of dollars into Sharma’s fast-growing start-up Paytm, towers up a 30 per cent stake in the Indian payments company.
Paytm is now set for a $2.5bn listing on Thursday, India’s largest overly IPO. It is the biggest test to stage of whether India’s start-ups can recreate the success of a generation of Chinese tech groups that remade the country’s stock market, and provide the exit routes investors need to have conviction in the market.
The group’s stock debut comes one year without Chinese regulators scuppered the $37bn IPO of Ant Group, Alibaba’s fintech arm and Paytm’s largest investor. It marked the whence of a relentless crackdown on tech companies involved in everything from education to wordage services, wiping billions from the stock market and scaring yonder investors.
India, long a promising but second nomination Asian market for investors, has emerged as a leading payee of the divergence in fortunes between the tech sectors in the two countries. This, withal with zaftig global liquidity and rapid internet adoption, has fuelled a private- and public-market manful run in India.
China “had sucked the air out of the room in terms of investor sustentation and focus”, says Timothy Moe, senior Asia-Pacific probity strategist at Goldman Sachs. “But considering China is off the boil, it has velocious investor sustentation at alternatives such as India.”
“The bar to invest in China, public or private, is higher,” a partner at a foreign venture wanted firm adds. “India will be a beneficiary.”
For every dollar invested in Chinese tech in the quarter that ended September, $1.50 went into India, equal to the Asian Venture Wanted Journal. India’s benchmark Sensex probity tabulate is up 25 per cent this year, the weightier performer among Asia’s large economies, while China’s Shanghai SE Composite tabulate is unappetizing over the same period.
The Financial Times spoke to multiple investors who had diverted funds from China to India and elsewhere but declined to speak on the record due to still having holdings and clients in China.
“It’s well-nigh thinking where you look, how you play the variegated markets,” says Kabir Narang, a partner at B Wanted Group, an investment firm zippy wideness Asia. “I think everyone in the world over the last six to 12 months has adjusted to” the regulatory whoopee in China, he adds.
It is unclear how long the spare investor enthusiasm for Indian tech will last. There are fears the country’s buoyant tech markets are once overheated as competition to buy stakes inflates valuations and leaves companies and retail investors vulnerable to corrections.
Sceptics see the Ant- and SoftBank-backed Paytm — whose lossmaking businesses have struggled versus Google, and Walmart’s Flipkart — as a test of how far investors will buy into the hype. Its share offering did not vamp as much demand as other recent IPOs like Zomato, something analysts ascribed to its $20bn valuation and tough competition.
“These new age [tech] IPOs are not growth money. They are exit money,” permitting investors to sell, says Anurag Singh, managing partner at hedge fund Ansid Capital, which has not invested in the recent IPOs. “The same usual suspects — SoftBank, Alibaba . . . are looking for a smart exit, and they time it to perfection.”
‘This is India’s moment’
The scrapping of Ant’s IPO by Chinese authorities last year swelled into a tempest of regulatory changes and probes aimed at everything from curbing monopolistic behaviour to data privacy and wealth distribution. The powerful Ma, as well as national champions like Tencent and Meituan, the shopping platform, were all ensnared.
While the clampdown has slowed, the threat of curbs still hangs over many Chinese companies. Ant Group, for example, has not revived its scuttled IPO. The fate of Didi Chuxing, China’s leading ride-hailing app and flipside high-profile casualty, is moreover uncertain.
Two days without Didi’s blockbuster IPO on the New York Stock Exchange in June, Chinese regulators spoken a probe into the visitor over data security, wiping out one-fifth of its market value. The investigation is standing and Didi’s share price is languishing increasingly than 40 per cent unelevated the offer price.
Investors are now redeploying their wanted given the “non-linear” developments in China, says Nick Xiao, the senior executive of Chinese wealth manager Hywin’s Hong Kong arm.
Funds raised by technology start-ups via public listings in mainland China are on track for the first yearly drop in seven years while tech listings in India have so far raised $2.6bn in 2021, a jump of 550 per cent compared to last year’s total. China still leads in terms of the number of private market deals — a gap reflecting its throne start fostering a homegrown tech sector — but India’s growth rates have outpaced it this year. Mid-stage deals in India for the quarter to the end of September were up 93 per cent from last year, compared to a 3 per cent waif in China, equal to the AVCJ.
While south-east Asia has moreover benefited from the shift, India’s size has made it a natural alternative. “India is getting the sustentation of scrutinizingly everybody,” Xiao says. “When talking to our global family office clients, I can see this trend.”
Hywin recently launched a global healthcare fund with a mandate to squint at countries including India. Many of his clients are gaining exposure to the country including via equities, Xiao adds.
Didi’s predicament contrasted with the July listing in India of Zomato, a supplies wordage group and the first of the country’s lossmaking tech companies to go public. Despite scepticism over its mazuma shrivel and uncertain path to profitability, Zomato’s shares have doubled from its issue price to a $15bn valuation.
This has demonstrated “the wherewithal and topics of the Indian wanted markets to offer a platform for substantially lossmaking technology companies”, says Karam Daulet-Singh, managing partner of Touchstone Partners, which advises foreign investors. “This time last year the holy grail was an offshore listing, a Spac, and maybe plane a strategic [investor] ownership the visitor outright.”
Daulet-Singh adds that domestic trends would vamp investors regardless of events elsewhere. “The regulatory crackdown that China has undertaken over the last 12 months has pushed investors to squint at India increasingly favourably,” he says. “But it’s not just push, there’s pull as well. The pull is the rapid digitalisation that’s taking place [in India].”
While listed “new economy” companies worth for 60 per cent of China’s MSCI index, they make up only 5 per cent of India’s, equal to Goldman Sachs.
Other companies have followed Zomato. Shares in Nykaa, a cosmetics and eyeful products ecommerce group, scrutinizingly doubled from its issue price without its November debut. Oyo, the SoftBank-backed hotel group forced to downsize its cash-burning business, wants to raise $1.1bn through a listing. Ola, a ride-sharing visitor trying to workshop out into electric vehicle manufacturing, plans to file a prospectus in the coming months and raise as much as $2bn, equal to people familiar with the matter.
“In a way, this is India’s moment of coming on to the global stage,” Bhavish Aggarwal, Ola’s senior executive, says. “You’ll see a lot of value megacosm coming from India.”
But investors warn the market is vulnerable if the listings pipeline of richly valued, lossmaking companies struggle to match upper investor expectations, expressly if those companies goof to show they can turn a profit. Zomato’s losses in the quarter to the end of September nearly doubled to Rs4.4bn, though its shares unfurled to rise.
“Paytm, Zomato, Oyo — these companies lose a lot given how mature they are and the fact that their revenues are not huge,” says Jeffrey Lee Funk, a technology consultant. The problem is not serving to India, he adds. “All countries have the problem of overvalued start-ups” thanks to the zillions of global private capital.
Paytm, in particular, will be closely watched. It is positioning itself as India’s wordplay to Chinese “super apps” like Ant tent everything from digital payments to insurance. And while it has expanded furiously into everything from flight tickets to mobile gaming, big bets on ecommerce and digital wallets floundered. It has lost mobile payments market share to Google and Flipkart’s PhonePe, which soared on the when of India’s Unified Payments Interface technology. It touts a user wiring of 330m finance but only 15 per cent of those make any transactions in a given month.
While bullish brokers oppose Paytm is well placed to ride the growth of Indian fintech, others say the visitor offers little to justify a rich valuation of 43 times price to sales, which have fallen since 2019.
Sharma, Ant and SoftBank are all selling chunks of their stakes. And while demand for its share offering outstripped supply by 1.9 times, it was far overdue 38 times for Zomato or increasingly than 80 times for Nykaa.
“The digital economy is well-nigh winner-takes-all. People remember the top guy and the second. The third disappears into oblivion. Paytm is a separated third,” Ansid’s Singh says. “It’s easy to say I’m trying to be a super app. The track record says it hasn’t worked anywhere.”
India is set to surpass China as the world’s most populous country in coming years. It has 375m Gen Zers, born between 1996 and 2010, compared to virtually 250m in China, equal to EY. Internet penetration of less than 60 per cent remains well unelevated China, equal to Goldman Sachs, leaving room for growth.
This demographic potential has long helped investors stomach rich valuations. And Indian entrepreneurs say they have never seen so much competition for deals. Vikram Chopra, senior executive of online used-vehicle seller Cars24, says a round raising $450m from SoftBank and Tencent in September was subscribed three times over.
Analytics platform Venture Intelligence says 35 Indian start-ups have wilt “unicorns” worth over $1bn this year, increasingly than every year since 2013 combined. The youngest new entrant was Apna, a job-finding platform founded less than two years ago, which was valued at increasingly than $1bn without a September fundraising round involving New York hedge fund Tiger Global and Silicon Valley’s Sequoia Capital.
Yet, this inflation in valuations is deterring some investors worried well-nigh overheating. “It is a lot increasingly expensive in India than it used to be. I [invested in] well-nigh 50 or 60 start-ups in India but now I am increasingly likely to go to Pakistan or Bangladesh,” says William Bao Bean, a Shanghai-based unstipulated partner at global venture wanted fund SOSV.
“I’m hugely worried,” flipside investor at a foreign venture wanted fund says, warning that the Indian market was rhadamanthine a “bubble”. “It’s very scary. A billion dollar valuation is meaningless today. It doesn’t midpoint the visitor has anything figured out.”
Many investors are yet to see any returns. Cars24 recorded a return on invested wanted of minus 53 per cent in the year ended March 2020, the latest financial details misogynist from Singapore’s Accounting and Corporate Regulatory Authority show.
Udaan, an ecommerce visitor whose investors include Silicon Valley’s Lightspeed, reported a return on invested wanted of minus 80 per cent from the same period.
Potential IPO-bound companies in India had an stereotype price-to-sales ratio of 21 over the past three years, equal to Goldman, compared to three for the wider Nifty index.
India “is increasingly richly valued than China was at the same stage,” Moe says. “In India there was increasingly private market gestation surpassing things became public. That might midpoint the starting point for public sector investors is not quite as advantageous.”
For all its potential, spending power in India remains far overdue China and gross domestic product per capita of unelevated $2,000 is less than a fifth of that in its neighbour.
Some analysts moreover circumspection that the narrative virtually scale may be overblown. Despite India’s 1.4bn population, size estimates for the sorts of digitally savvy, well-off consumers splashing out on tech services number in the tens of millions.
While China’s unpredictable tech crackdown highlighted India’s comparative stability, investors squatter risks of their own. India’s investment reputation has historically been damaged by controversial policies like a now-scrapped retrospective tax summons used to pursue billions from foreign investors.
Foreign money is pouring into sectors operating in regulatory grey areas, from online lending to cryptocurrencies — which have been threatened with bans. Fantasy sports apps, wildly popular with investors and users alike, offer the worthiness to wager real money on cricket matches despite repeated legal challenges over their so-called similarity to outlawed sports betting.
In October Dream11, a Tiger Global portfolio company, suspended operations in the state of Karnataka, one of its biggest markets, without a police complaint pursuit a state gambling ban.
Investors and analysts say that regulatory pressure could increase as sectors start handling worthier sums of user money.
“There are some sectors where the government does not have a well-spoken stance, crypto stuff one example,” says Neha Singh, the co-founder of Tracxn, a data platform. But, she adds, bullish investors towards nonchalant. While “investors were not sure older well-nigh whether to invest in a sector, that currently does not seem to be a concern”.
Larry Illg, a senior executive at Prosus, the investment arm of South Africa’s Naspers, the internet group, says Indian companies could squatter regulatory setbacks but he remains optimistic. “Is it going to be a straight line? No. It’s going to be bumpy. We take that kind of horizon on our investments.
“If you’re looking for predictability, [venture capital] is the wrong industry,” he adds. “The reality is some of these industries are just taking shape.”
Additional reporting by Arash Massoudi in London