IPL’s over, but now its IPO season in India

Mugunthan Siva

India Avenue

IPO's have been all the rage in 2021 across the US, Australia, China, Taiwan etc. Global IPO volumes have risen by 87% so far in 2021 according to EY. 72 of 1635 firms to IPO were in fact based in India. The S&P BSE IPO Index has outperformed the Nifty-50 Index (top-50 by market cap) quite significantly in 2021, illustrating the huge demand for these companies. Markets are witnessing a boom in tech start-ups that cater to online activity given the significance of rising smart phone and internet penetration in India.

India’s Central Bank, the RBI, in its August report suggested India’s tech boom had long been awaited and sighted strong demand from local and global investors buying world class business in exciting growth markets. The RBI estimates India has 100 unicorns in the country, predominantly in the tech space, where companies are focusing on significant growth and building a presence rather than immediate profitability.

Over the last 6 months, as avid watchers of the Indian equity market, we have witnessed several businesses listing on India’s stock exchanges. Traditionally, a significant number of India’s companies have been MSME’s operating in the unlisted space, with little or no need for capital and given adequate but limited capacity to grow within their own neighbourhood markets. The need of the hour has changed given the financialisation and digitalisation infrastructure planks which have been put in place (over 80% of India is banked, 1 billion have mobile phones, 750 million on the internet) which has reduced customer acquisition costs, given India’s high logistics cost-to-GDP.

In 2021 capital raising has been significant relative to prior years, as businesses seek to participate in growth opportunities afforded by India’s evolving ecosystem. Increasing digitisation and diversification of global supply chains is broadening addressable markets which is requiring the funding of growth-seeking capital. 

Active managers who understand the local ecosystem in an equity market like India’s are poised to benefit significantly by early investment into these companies.

Zomato (38x oversubscribed)

Commencing in 2010, Zomato’s core business is food delivery in India. However, more broadly the business connects customers, restauranteurs and delivery partners via a technology platform. In the quarter ending June 2021, the company reported it had now delivered 1 billion orders over six years of operations and experienced q-o-q growth of 35% over the last five quarters, despite COVID disruptions to its supply chain.

Given legacy consumer preferences of food being prepared at home for over 90% of consumption, this company has established itself in an industry which has a significant runway for growth over the next decade given urbanisation, nuclear changes in household structure, young population (targeting 18-35year old’s) and an increasing participation of women in the workforce.

The company’s gross order value rose by 37% in the last quarter to US$605m. This was driven by number of orders, transacting users, active restaurant and delivery partners. Additionally, the value per order placed is also rising. Zomato is present across 24 countries (including Australia) and 3,200 cities with over 32 million active monthly users. The company has 45% market share in the food serving business.

Clean Science & Technology (93x oversubscribed)

The company has been in existence for over 18 years and is focused on chemical manufacturing and exporting. Its focus is to develop eco-friendly and sustainable manufacturing processes of specialty and fine chemicals, which it exports to many countries around the world. The company’s manufacturing facility in India is automated to maintain a high level of efficiency and accuracy.

Clean Science and Technology exports its products to over 30 countries all over the world and is truly benefitting from high efficiency and diversification of global supply chains in an industry which has traditionally been the domain of China (in terms of supply). The company’s speciality chemicals have a wide range of applications that cater to a diverse base of customers across the industries globally.

The company's focus has been on product identification, process innovation, catalyst development, scale of operations and strategic backward integration, which have all contributed to its fast growth and being one of the most profitable speciality chemical companies globally.

Nykaa (oversubscribed 82x)

The business was founded in 2012 and is an Indian e-commerce company selling beauty, wellness and fashion products across websites, mobile apps and via 76 offline stores. The company is one of India’s unicorns and sells over 2,000 brands/200,000 products manufactured locally in India and overseas, across its platforms.

Nykaa will be the first beauty and wellness company to list in India. It generated US$320m of revenue in FY21 and is already profitable (US$8m FY21). Again, the addressable market growth potential is significant with an increasing focus on fashion and cosmetics as wealth levels increase and the number of women entering the workforce rises.

Playing rising addressable market size

India’s equity markets, along with China's are likely to produce the next evolution of companies which have laid the blueprint for success in their era such as McDonalds, Dow Chemical and Priceline.  Investors now have the opportunity to participate again, with the benefit of hindsight and a playbook of the US Industrial/Consumer revolution over the last 50 years. The next 12 months should see significantly more IPO’s come to market in India, which will participate in India’s upcoming economic and corporate revolution.

An actively managed single country fund is more likely to be able to selectively participate in IPO’s such as those mentioned above, which offer access to India’s unfolding growth story.
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Mugunthan Siva
Managing Director
India Avenue

Mugunthan Siva is Managing Director of India Avenue, an Australian based boutique asset management company with offices in Sydney and Mumbai. He has over 25 years experience in Australia and is lead portfolio manager for the India Avenue Equity Fund.

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