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India emerges as China’s tech challenger with record run

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India is rapidly closing the gap with China in minting new unicorns — privately held start-ups valued at $1bn or more — highlighting growing investor appetite for tech start-ups in the country as the pandemic accelerates the adoption of digital services.

Over the past year, 15 companies from India raised capital at a valuation of $1bn or more for the first time, according to CB Insights and company announcements gathered by Nikkei Asia. Ten of them became unicorns in 2021. By comparison, only two of the 15 companies from China that joined the list over the past year did so in 2021, according to CB Insights.

A successful listing of online food delivery company Zomato, which recently filed a draft prospectus with India’s securities regulator, would set the stage for many of these unicorns to follow suit. Zomato, a lossmaking company operating in a nascent industry once considered too risky to invest in, is planning to raise Rs82.5bn ($1.1bn), including through a pre-IPO placement.

“Indian internet has always been a story on the horizon,” said one investor in Zomato. “But it’s finally here.”

India’s new breed of unicorns are mostly purely online businesses that have benefited from the flood of consumers and businesses that have flocked to their services during the Covid-19 pandemic. Investors are watching whether they can maintain the momentum as India grapples with a deadly second wave — new coronavirus cases have topped 300,000 every day since April 21, the highest rate of infection in the world.

New unicorns in India in 2021

“Every business has been forced to figure out a digital way of selling online,” said Harshil Mathur, co-founder and CEO of fintech start-up Razorpay. “A lot of small traditional retailers who used to sell through offline channels have gone online. We also saw a large number of both individuals and freelancers starting to sell things on WhatsApp, Facebook and Instagram.”

This article is from Nikkei Asia, a global publication with a uniquely Asian perspective on politics, the economy, business and international affairs. Our own correspondents and outside commentators from around the world share their views on Asia, while our Asia300 section provides in-depth coverage of 300 of the biggest and fastest-growing listed companies from 11 economies outside Japan.

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Transactions on Razorpay, which processes payments for online services like food delivery apps, surged to an annualised rate of $35bn-$40bn from $12bn a year ago, Mathur said. The company was valued at $3bn in a recent funding round, just six months after it reached the $1bn mark in October last year. The latest round was led by its existing shareholders, Singapore sovereign wealth fund GIC and Sequoia Capital.

Other start-ups that became unicorns include: Chargebee, which sells software that helps companies manage their subscription services; Meesho, which operates a marketplace for individual business owners that want to sell goods on social media; and Cred, which gives reward points to credit card users who pay their bills on time.

India has lagged China in the size of its digital economy but is rapidly catching up. Investors say this is thanks to a surge in mobile phone users as well as government-led policies like the 2016 launch of the Unified Payments Interface, a real-time payments system that enables instant transfer of money between banks. UPI now accounts for the majority of online payments, and transactions surpassed Rs5tn in March, more than double the figure of a year ago, according to the National Payments Corporation of India, which operates the system.

China still dominates the overall list in Asia with 138 unicorns, more than four times the number in India, according to CB Insights. Some of China’s biggest unicorns are also much larger in size, such as TikTok operator ByteDance, which has a valuation of $140bn. India’s biggest is One97 Communications, the owner of mobile payments app Paytm, worth $16bn.

India’s One97 Communications, which runs the Paytm mobile payment app, is also said to be preparing an IPO © Kosaku Mimura

Still, the rapid rise of India’s unicorns signals a shift in investor appetite.

“We are considering allocating more capital to India in the future,” said Ryu Muramatsu, founding partner of GMO VenturePartners, an early investor in Razorpay and south-east Asian fintech start-ups. “There may be a correction in valuations in the short term. But compared to the past, companies have strong fundamentals.”

Zomato’s IPO will be an important indicator of whether the tech boom can gain momentum. With no record of multibillion-dollar IPOs, sceptics say prospects of a profitable exit are highly uncertain. China, on the other hand, can point to a strong record of homegrown tech companies going public, such as Alibaba and Tencent, which have grown into some of the world’s most valuable companies.

One bottleneck for Indian tech start-ups seeking to go public has been a regulatory rule that generally requires companies to be profitable for three years before they can sell shares to retail investors. But lossmaking companies can go public if they allocate at least 75 per cent of the offering to qualified institutional investors — the route that Zomato, which posted a Rs23.6bn loss for the year ended March, chose to take. If Zomato is successful, less sophisticated investors will be more confident in backing lossmaking companies.

New unicorns in Asia

“It’s a structural shift,” said Rahul Malhotra, an analyst at Bernstein. “Regulation has improved, companies are scaling, fundamentals are there. And the market is still underpenetrated.”

Chinese investors and companies are the most likely to lose out if India’s tech boom gains momentum. Once among the most active investors in India, companies like Ant Group, Zomato’s second-largest shareholder, have been mostly forced to watch from the sidelines due to a new regulation that requires companies from India’s neighbouring countries including China to seek government approval before making an investment. Leading the latest wave of funding rounds are US investors like Tiger Global Management and Sequoia Capital, which have raised billions of dollars for new funds in recent months.

The growing number of deep-pocketed start-ups will also intensify competition between Chinese tech companies. Those operating in India have already been hit hard by the Indian government’s ban on more than 200 Chinese apps last year following a deadly border clash.

Chargebee, which has offices in the Indian city of Chennai as well as San Francisco, says the majority of its 3,500 customers are already from the US and Europe. After raising $125m at a $1.4bn valuation, it plans to expand its footprint to Asian markets like India, Japan and south-east Asia, according to a spokesperson.

A version of this article was first published by Nikkei Asia on May 3 2021. ©2021 Nikkei Inc. All rights reserved

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Spain’s Acciona eyes €9.8bn valuation for renewable energy IPO

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Spanish conglomerate Acciona is hoping to achieve a valuation of up to €9.8bn for its renewable energy arm, arguing it “might as well” get a flotation of the unit “over and done with” despite a sell-off in green stocks since the start of the year.

Acciona Energía had previously been expected to be among a rush of flotations in the renewables sector in Europe over the next 18 months, but the decline in climate-related stocks since January led to its Spanish rival Opdenergy cancelling its planned listing in May. 

On Thursday, Acciona priced an initial public offering of a 15-25 per cent stake in Acciona Energía at a range that implies a valuation of between €8.8bn and €9.8bn for the renewable energy entity. The group is seeking to raise funds to nearly double its renewable energy capacity in just over four years.

In an interview with the Financial Times, Acciona’s chair and chief executive José Manuel Entrecanales acknowledged the recent market volatility. Stocks such as Orsted, the world’s biggest developer of offshore wind farms, rose to an all-time high in January but investors have since pulled back amid concerns over a “green bubble”.

But Entrecanales maintained the downturn in valuations was no reason to hold off from the IPO, arguing that the listing was necessary to tap financing and improve the ESG ratings of Acciona’s activities in the renewables sector by making them a standalone business.

“There’s no absolute need to do it now, but . . . you can’t wait to find the absolute top of the market, the peak moment: this is a 20-year project,” he said. “The most important reason [for the listing] is funding and rating.”

He added that the IPO was “quite disruptive for the company”, leading Acciona’s management to “defocus very much from our main objective, which is growing the business, so we might as well get it over and done with”.

Entrecanales’s family controls around 55 per cent of the Acciona conglomerate, whose activities range from real estate to water treatment.

Entrecanales, who took over Acciona from his father in 2004, also argued that renewables valuations had improved in recent weeks. “Some of the reduction in prices that occurred . . . it’s kind of moderating lately,” he said. He dismissed other recent planned green IPOs as “an attempt to tap the market . . . [with] kind of start-up-like projects”, while not directly naming any other competitors.

By contrast, he depicted Acciona Energia as “a very seasoned . . . very conventional cash flow-generating company with a great deal of potential growth.”

The renewables group has 11GW of installed capacity but aims to reach 20GW by the end of 2025 and 30GW by 2030 through expanding in onshore wind and solar in particular. Spain remains its main market, although it also views countries such as the US, Chile and Australia as important growth areas.

Entrecanales maintained that, despite the recent downward shift in the sector’s valuation, longer-term factors that led to its surge last year still applied. These included European governments’ plans to spend much more on the energy transition, President Joe Biden’s election in the US and growing public concern about climate change.

Spanish oil major Repsol has also been looking at a possible listing of its low-carbon business while Italian rival Eni said in April that it plans to list or sell a stake in its renewable power business in 2022.

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Wise to go public in direct London listing

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Wise, the fintech company previously known as TransferWise, has announced its intention to go public in London through a landmark direct listing.

Kristo Kaarmann, co-founder and chief executive, said a direct listing “allows us a cheaper and more transparent way to broaden Wise’s ownership” than a traditional stock market launch.

It does not involve raising any new capital or bringing in new investors, but means shares held by Wise’s existing shareholders will become tradable on the London Stock Exchange.

The company’s decision to list in London rather than New York will be seen as a boost for the UK government, which has been trying to make the country more attractive for fast-growing tech businesses.

Its efforts suffered a setback this year when the high-profile initial public offering of Deliveroo was described as the “worst IPO in London’s history” after the stock fell 26 per cent on its opening day.

Like Deliveroo, Wise said it would use a dual-class share structure. However, while Deliveroo’s set-up gave co-founder Will Shu 57 per cent of voting rights, Wise said it would offer enhanced voting rights to all existing shareholders, including earlier institutional backers such as Baillie Gifford and Fidelity.

Kaarmann said the dual-class structure, which expires after five years, would allow the company to “keep focusing on the mission we’ve always been working on, focusing on customers the way we have and transition smoothly into broader public ownership.”

Matt Briers, Wise’s chief financial officer, added that “we are incredibly mindful of the views of shareholders” and “if it’s not for everybody we understand”, but stressed that such structures were common among successful tech companies in other countries.

Wise, which was valued at $5bn in a secondary share sale last year, did not provide any guidance on pricing, which will be determined through an extended opening auction when it joins the market in a few weeks.

“Part of the reason to do a direct listing is to avoid this speculation and let the market set the price on the first day,” Briers said.

TransferWise opened in 2011 offering cheap cross-border consumer money transfers. Kaarmann and co-founder Taavet Hinrikus developed the business as a way to reduce the amount of money they were spending sending money between London and their native Estonia. They are now the Baltic country’s two wealthiest men, according to local business newspaper Aripaev.

The company renamed itself Wise in February in an effort to highlight a shift towards a broader product offering. Wise has been seeking to attract more profitable business customers and introducing more complex banking services such as multicurrency current accounts.

Wise’s core money transfer business targets wealthier customers than other specialists such as Western Union, and the company says its main rivals are mainstream banks.

It reported revenues of £421m in the 12 months to March, up from £303m the previous year. Pre-tax profit doubled to £41m.

Direct listings have become increasingly popular among technology companies in the US. Spotify started the trend when it joined the New York Stock Exchange in 2018, and has since been followed by groups such as Slack, Coinbase and Roblox.

Wise would be the first technology company to complete a direct listing in the UK. Although the LSE has long allowed companies to be “introduced” without raising capital, introductions have usually been reserved for demergers or secondary listings. Wise would be the largest company to be introduced without already being listed elsewhere or separated from another group in more than two decades.

Stephen Kelly, chair of government-backed entrepreneur network Tech Nation, said: “I hope Wise has opened an alternative avenue to the public markets for other UK technology businesses.”

Briers said the company considered alternative locations such as New York and Amsterdam, but was attracted to London because it had existing infrastructure to facilitate a direct listing and offered access to a global investor base.

He said recent government initiatives to encourage tech listings “helps with our conviction, but we’ve had this plan for quite some time”.



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Made.com’s first-day flop is another case of pandemic IPO opportunism

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It will be no surprise to its customers that Made.com’s prospectus arrived late and left a lot to unpack.

Shares in the self-assembly furniture retailer had been trading for more than five hours by the time the public were given a chance to examine the business in detail. An 8 per cent drop from the issue price, which at 200p apiece was at the very bottom of the indicative range, had already suggested some institutional jitters about what they had bought.

And no wonder. Made.com somehow contrived to lose £1.8m in the first three months of 2021.

The prospectus blurb leans heavily on how its model of taking orders before paying suppliers delivers superior cash flow. Yet even the pandemic-fuelled home improvement boom has not been enough to prove a business that in its 11th year of operation has yet to turn an annual profit.

Made.com’s handlers blamed the flop on IPO fatigue. It’s a weak excuse. Dealogic data show that the year to date has been quieter than average for London market floats and, while Deliveroo and Alphawave were both well publicised disasters, plenty of new issues including Moonpig, Trustpilot and Darktrace have headed northwards.

Made.com’s bigger problem is that it is an old-economy play from a sector whose fortunes remain tied to housing transaction volumes and supply chain management.

Furniture is notoriously difficult to sell profitably. Only Ikea has built a global presence in a fragmented market that remains hemmed in by national borders. Swapping a store fleet for a website does not fix inherent fragility of scale and seasonality that pushed companies including MFI, Habitat and ScS Upholstery into administration in 2008 when their suppliers pulled credit insurance.

Success stories since have mostly been marketplaces such as Wayfair, the $33bn-valued sector gorilla. It plugs 22m products from more than 16,000 suppliers into a distribution network that is built to handle the kind of bulky and unwieldy parcels that are a hindrance to its rivals’ delivery times.

Breadth and speed matter because pricing power is weak and customer switching costs are nil. Marketplaces live in fear of Amazon, whose pages are already filled with no-brand Chinese knock-offs, so they try for scale by throwing money at marketing. Wayfair has spent an average of 11 per cent of sales on advertising over the past five years, outspending its bricks-and-mortar rivals approximately fourfold.

The idea behind Made.com and its closest European peer, Frankfurt-listed Westwing, is to offer something more differentiated: a private-label collection in a magazine format that takes cues from Terence Conran. It is a niche helped out over the past year by a drop in marketing expenses as leisure industry closures diverted disposable income to homewares.

Benefits now look to be unwinding — Made.com’s administrative expenses before flotation costs rose 14 per cent year on year in the first quarter — and the formula is unproved in normal times. Westwing warned repeatedly throughout 2019 that ad spending was not boosting sales and entered the pandemic trading below cash value, having slumped more than 90 per cent from its float price in 2018.

Then there is what Made.com calls its “innovative, data led just-in-time supply chain”. It is also unproved. Recent freight line disruption meant lead times were up to eight weeks behind target levels, which pushed the recognition of about £8m of operating earnings from 2020 to 2021. Customers were already being asked to wait up to 16 weeks for delivery and can cancel free of charge at any time. Their requirement for patience has become a meme.

Brent Hoberman, Made.com’s co founder and highest-profile backer, marked the top of the dotcom bubble perfectly in 2000 with the IPO of Lastminute.com. With Made.com his exit was much earlier, coming as part of a refinancing in 2015 that culled most of the board. Taking the company public cuts Hoberman’s remaining stake from 7 per cent to less than 5.5 per cent.

That fellow backers chose this moment to sell down leaves the unavoidable feeling that the market is being delivered less than it bargained for.





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