STONE AGE. BRONZE AGE. IRON AGE. We define epochs of humanity by the technology they use.” These words by Netflix co-founder & co-CEO, Reed Hastings, define the current state of the world as it sits on the cusp of a technological revolution. India, too, is seeing the start of what Prime Minister Narendra Modi has described as ‘techade,’ marked by new ideas birthing new entrepreneurs, also called ‘techpreneurs.’ The new breed of businesses, helped by ultra-low data pricing and deluge of affordable smartphones, are building billion-dollar valuation companies. Some are even going public — 2021 and 2022 examples include unicorns Nykaa, Zomato, PB Fintech, Delhivery and Paytm, reflecting stock market’s growing acceptance of start-ups. Deepinder Goyal-helmed Zomato led the way by listing at over 50% premium. Beauty retailer Nykaa got listed at 80% premium to its issue price, which MD & CEO Falguni Nayar described as a reflection of investors’ desire to “own the stock long-term.” Although Paytm public issue destroyed over ₹35,000 crore investor wealth and Delhivery made a muted debut earlier this year, mostly due to tepid market conditions, there is no doubt that Indian start-ups have come of age. “India is in the middle of a technology revolution as consumers and small businesses adopt technology at a rapid pace. I believe India will become an exemplar, especially in payments and financial services,” says Paytm founder & CEO Vijay Shekhar Sharma. No wonder four new-age tech companies that have debuted on this year’s Fortune 500 India list have reported a steep 183.80% increase in total income.

India Tech Story

The number of start-up unicorns in the country may have crossed 100, but India’s technology story is just beginning to unfold. “Large opportunities in logistics are intact. We see rising e-commerce penetration in Tier-III and Tier-IV cities and further expansion of the market through introduction of new categories,” Sahil Barua, MD & CEO of Delhivery, said during the FY22 earnings call.

Consider this. Smart phone penetration in India is just 36% compared with 63% in China and 76% in U.S. India’s per capita income is $2,000 as compared with China’s $12,000 and U.S.’ $69,000, according to Bain & Company. This means massive room for growth. “India is demonstrating a trend of moving towards mobile payments. From Tier-1 and Tier-II towns, this revolution is now reaching Tier-III towns,” says Sharma of Paytm.

Others agree. “We have 50 million annual transacting customers. Of that, only 15 million order every month. As more people order, we expect our annual frequency to go up multiple times, without spending on discounts,” Zomato CFO Akshant Goyal said during an earnings call.

Image : Photograph by Sanjay Rawat

India’s e-retail market is estimated to touch $150-170 billion by 2027. This means 25-30% annual growth and doubling of market penetration to 9–10% over five years, according to a recent report by Bain & Company. Beauty TAM (total addressable market), for instance, will touch $28 billion by 2025 by growing at 12% CAGR. “The composition is not just dotcom. Organised retail’s share will grow from 19% to 35%,” Nayar said during the company’s FY22 earnings call.

One can expect start-ups to make a massive push to expand the market. To cash in on the broadening slate of opportunities, the listed start-ups are drawing up ambitious growth plans.

Nykaa: Diversification Is the Way

Nykaa’s strategy is simple — customer acquisition and retention via diversification. After launching its core BPC (beauty & personal care) business, it has forayed into fashion while exploring segments such as men’s grooming and B2B through its Superstore. “In 2019, 98% business came from beauty, and our GMV (gross merchandise value) was ₹1,650 crore. We have now grown it to ₹6,933 crore. Our year-on-year growth is now 71%, achieved through Fashion, which now accounts for 25% GMV. We are pursuing a similar growth ambition by introducing Superstore and Nykaa Man,” Nayar said during the FY22 earnings call. While Superstore is a B2B platform that sells beauty, personal care and wellness brands to retailers, Nykaa Man is an online BPC platform for men. Superstore and Nykaa Man verticals, collectively referred to as “new businesses,” contribute ₹120 crore to GMV, Nayar said. The company is building an omni-channel strategy which executive director and CEO of beauty e-commerce Anchit Nayar believes is the “only solution for a country like India.”

Zomato: Chasing New Frontiers

Food delivery major Zomato is also experimenting with new offerings, the latest being delicacies from other cities or what it calls ‘intercity legends.’

“Once the business reaches a certain scale, it becomes even more expensive to acquire customers. It makes sense to start new service lines to address same customers or reactivate dormant customers instead of spending too much on customer acquisition,” says an analyst on condition of anonymity.

Like Nykaa, Zomato is betting on new businesses. In early 2022, it spent ₹4,447 crore for acquisition of quick commerce player Blinkit, a deal not received well by the market, thanks to the cash-guzzling nature of the quick commerce business. However, Zomato is banking on quick commerce to widen customer base and increase average order value as well as monthly order frequency given that Blinkit is present across a wide range of essential spends. Adjusted EBITDA losses for the quick commerce business fell to ₹259 crore in Q2 FY23 from ₹326 crore in previous quarter, says Zomato, adding that the core food delivery business has hit adjusted EBITDA break-even. “Out of 50 million customers, 1.8 million are ordering once a week. That number going up to 10, 15 or 20 million will bring meaningful growth in our business,” Goyal said in FY22 earnings call.

Paytm and Policybazaar: Digital Wave

Yashish Dahiya, chairman & CEO at PB Fintech, which owns Policybazaar and Paisabazaar, says he runs a ‘boring’ company. “We educate consumers about need for life and health insurance and try to build the best possible funnel for buying policies and filing claims. We don’t intend to do anything new,” he says. Rising inflation has not dented the business much. Also, there’s not much competition in online insurance, where Policybazaar claims over 90% share. “Insurance is an acyclical business,” he says. “If you look at 2020, our revenue was ₹500-600 crore. This year, it’s ₹2,400 crore. That is four and a half times growth in three years. Policybazaar has been profitable for four-five quarters. Paisabazaar should break even next quarter,” says Dahiya.

Paytm, on the other hand, is banking on payments. “We are leveraging payments for disbursing credit. I believe credit, which is in its infancy, has started showing that it is a long-term sustainable space and is going to become pretty large for us,” Sharma said during the FY22 earnings call. Paytm claims its super app continues to see “heightened consumer engagement” for payment offerings. The average MTU (monthly transacting users) for quarter ended September 2022 was 79.7 million, a growth rate of 39% over same period last year. Paytm’s net consolidated losses rose 21% in Q2 FY23.

Image : Photograph by sanjay rawat

Delhivery: Sectoral Tailwinds

Delhivery, which reported ₹7,200 crore revenues in FY22, is set to become a long-term player in logistics, thanks to sectoral tailwinds such as award of infrastructure status to logistics and government initiatives such as Make In India and PLI Scheme. “Rapid adoption of digitisation through GST, e-way bills and e-invoicing is reducing inefficiencies of logistics companies and shippers. New axle load norms have allowed us to increase utilisation of trucks in last two years. And new initiatives by government such as ONDC (open network for ecommerce) and data privacy law will drive merchants to have a more direct relationship with logistics partners,” Barua said during FY22 earnings call.

“The sector continues to be critical to the economy. It’s a $200 billion opportunity. We are not only the largest independent player in this space with differentiated infrastructure and technology but also the best-capitalised in the industry,” says Barua. He says in FY22, the company delivered an adjusted EBITDA profit (proforma) of ₹72 crore and in Q1FY23 and Q2FY23, adjusted EBITDA profit stood at ₹217 crore and ₹125 crore, respectively.

Road Fraught with Challenges

Public markets give start-ups access to a wider pool of capital but listing comes with its own set of pressures—public investors want profitability and not just market share growth. This should worry promoters as, barring Nykaa, all listed start-ups are in the red. While Nykaa posted consolidated net profit of ₹5.19 crore in Q2 FY23, Zomato, Paytm and PB Fintech reported consolidated net losses of ₹251 crore, ₹571.5 crore and ₹186.63 crore, respectively. “As soon as you go public, the most important thing in minds of retail investors becomes PAT and its growth. This is not a focus of private companies in the Internet space who look more at topline and contribution margins. Companies need to relook at unit economics, check unnecessary costs, let go of a lot of discounts and do a lot of productivity improvement,” says Aryaman Tandon, co-founder & managing partner at Praxis Global Alliance. “Firms can’t have the VC mindset as well as the publicly listed mindset. They can’t take aggressive bets which are not profitable, line up too much costs and run a majority unprofitable portfolio for too long. If one can have a stable 20%, 25%, 30% or late 18%-19% CAGR stable growing business, which can turn profitable, it may be a good idea to spin that off,” says Tandon.

This will decide whether public markets reward these start-ups.

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