Mumbai: Technology startups from India may tap the US stock markets through initial public offerings over the next 12 to 18 months but they should be ready to face greater investor scrutiny, said Anuj Kapoor, managing director and head of investment banking, UBS India.
“India has immense potential both in terms of technological innovation and the generation and implementation of business models that can challenge the existing paradigms globally. In light of the current economic environment and the stage of evolution of Indian tech companies, IPOs from India into the US could emerge over the next 12 to 18 months," said Kapoor.
Several Indian tech startups have been reported to be eyeing public listings in the next couple of years. These include software-as-a-service provider Freshworks and Druva, ride-hailing company Ola and hospitality startup OYO.
According to Kapoor, as Indian tech companies gear up for public listings in the US, given the recent issues around high-profile tech IPOs in the country, they will have to prepare themselves for stricter scrutiny by investors.
“In the current global economic environment, investors are targeting technology businesses with strong fundamentals, strong unit economics, and a clear path to profitability. This trend is even more pronounced after the aborted WeWork IPO," he said.
Typically, technology companies’ valuations are based on growth forecasts and the size of the opportunity open to them, he said. The investor scrutiny of these growth forecasts and the value-drivers on which they are dependent upon will increase markedly, he added.
Co-working startup WeWork, which faced a strong backlash from investors had to eventually abort its proposed IPO, while ride-hailing company Uber has seen its valuation fall almost 40% since it went public in May.
While tech markets have faced headwinds recently, corporate India too has been facing its own challenges, specifically the liquidity crunch that has impaled the non-banking financial company (NBFC) sector in India. Several NBFCs have found themselves in trouble such as mortgage lender Dewan Housing Finance Corp. Ltd and real estate lender Altico Capital, both of which are undergoing a restructuring process, having defaulted on loans.
UBS expects liquidity pressures to continue over the next couple of quarters and while larger NBFCs, especially those which are part of a conglomerate, may have access to liquidity, their smaller counterparts will continue to struggle to grow. “The system has been building risky assets and the asset-liability mismatch has compounded the problem. There is a lack of trust in the lending system, currently, which will take time to restore," he said.
However, Kapoor said that the appetite for NBFCs which are resilient to macro shocks and have strong credit-worthy lending books remains strong.
“A handful of NBFCs have accessed the US dollar bond markets this year. We expect the trend to continue with new issuers entering the market over the next 12 months. We also expect high-quality NBFCs to tap the IPO and QIP (qualified institutional placement) markets in 2020," said Kapoor.
Amid the liquidity squeeze, the Swiss bank is increasing its focus on lending in India, focusing specifically on the loan against shares product.
“The equity financing market in India has been dislocated for a variety of reasons. This presents us with an opportunity. We have been focusing on clients which meet our rigorous internal risk thresholds. We see this offering as a bridgehead to build relationships with clients, both corporate and private equity, who require IB products and services like M&A and capital raising," he said.
UBS operates the largest equity-linked financing books in Asia, he added.
Kapoor added that the bank expects Indian deal-making to see better days in 2020, after witnessing a drop this year.
According to financial markets data provider Refinitiv, M&A activity in India in the first nine months stood at $61.2 billion, a 46% year-on-year decline after witnessing a record in the same period last year.
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