RUSH FOR INDIAN TECH IPOs

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 RUSH FOR INDIAN TECH IPOs

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• The story: Indian investors want to be a part of any success story they can lay their hands upon. The mad rush for food delivery firm Zomato Ltd’s initial public offering (IPO), whose valuation was expensive at around 12 times estimated FY23 revenue, proved it. The loss-making firm’s IPO was subscribed about 38 times, with investors banking on a listing at a $10 billion valuation.
• Many more waiting: This is not the end, as many more are about to launch their IPOs - Paytm, PolicyBazaar, Nykaa and MobiKwik. There are some clear reasons why market is giving a good response.
• The factors: Of all major factors driving the excitement, a critical one is global liquidity remaining high, with central banks continuing to stay accommodative with their monetary policies. Higher liquidity is allowing more leverage and risk-taking. Interest rates are low too, and there is enough appetite in the market for IPOs of tech-plays. 

1. No one wants to miss out on the next big story. Who knows who'll be the next Google, or Facebook or Netflix.
2. The Chinese government is quite upset with its own Big Tech firms, and is tightening the screws there. So a lot of liquidity is now moving towards countries such as India and Indonesia. If that continues, then it'll be a trend.

• Interest in interest: But the moment US Federal Reserve starts raising policy interest rates, valuations of tech companies may correct sharply. Any investor thinking of these new firms as potential Googles, should remember that Google owns its entire space and, hence, the economics are different. 
• It's all hope: Since 2015, there was hope in many stocks that eventually disappointed. But with internet firms, the beauty is that no one even talks about losses or cash burn (in the near term)! The great potential in the long term is all everyone looks at. A comparison with China is often done, but it is misleading as at the same level of per capita income, China pulled ahead very fast. 
• Sell more: A hope that investors have is that once crores of users log onto an App, they can then be sold other products too. Global companies such as Meituan did it, which used deliveries and payments as a hook to cross-sell/upsell other use cases/services. Zomato isn’t worth $10 billion in the eyes of some investors simply because of the prospects of its food delivery business. These investors are also betting that it will offer its millions of users other ‘adjacent’ services such as grocery. 
• What is valuation: It is a function of discounting future cash flows, and for tech startups, the visibility on this is too far into the future. From a cash-flow valuation perspective, one can justify anything. What may look overvalued can look undervalued if one assumes entire future growth to materialize in, say, 10 years instead of 20 years. While there is a general exuberance about tech IPOs, companies with better profitability are the biggest beneficiaries. They always get better valuations.
• Summary: Many tech firms fail eventually. But it is the salivating prospect of a potential Facebook, Google or Alibaba, that keeps investors going.

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