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Indian tech firms, especially in the consumer internet and SaaS sectors, are currently focused on three main priorities: reducing operational burn/increasing profitability, securing exits for early investors and re-incorporating back in India (dubbed Ghar Wapsi) in order to list on the Indian stock exchanges. It might be interesting to dig deeper into the evolution of selecting listing venues in the tech ecosystem.
Flashback to the early 2000s – Indian Tech Services companies emerged strong on the back of the offshoring wave. Seeking to establish legitimacy, they listed their ADRs in the US market. Others, such as Cognizant and much later WNS, EXL and Genpact chose to incorporate outside India and list directly in the US. Due to scarcity and low float, ADRs prices enjoyed a premium (Infosys ADR once traded over a 50% premium to its own Indian shares), leading to higher valuations compared to their Indian listed peers.
In the technology and internet universe, there was a widespread belief that the US market better understood the nuances of tech stories. Rediff, Satyam Infoway (before dot com crash of 2000) and much later MakeMyTrip (2010) chose to list in the US for the same reason. US tech investors were ready to value the high growth and long-term market potential, often overlooking current business losses. They were (and still are) used to looking at valuation methodologies like EV/Sales as compared to P/E or EV/EBITDA that were (and still are) prevalent in the Indian stock market. This trend continued when India entered its consumer internet and SaaS era of 2009-2019. For SaaS companies targeting their largest customer base, a US listing made perfect sense. However, even during this evolution, some tech companies like Infoedge, JustDial, Indiamart, Newgen and Affle chose to list in India.
Of course, a US listing is an expensive affair. For a $200-400 million offering, issue expenses can reach 5%-7% of gross proceeds, compared to 3-4% in India. The cost of ongoing compliance, quarterly filings and potential legal liabilities for company management are significantly higher in the US. Additionally, Indian shareholders face higher capital gains tax on selling US listed stocks. Despite these challenges, venture capitalists on boards continued to guide the companies toward US or Singapore incorporation with the aim of listing in the US.
As the float grew and the breadth of the Indian stock markets widened, ADR premiums shrunk over time. TCS became the poster boy, crossing $100 billion market capitalization. For new age tech companies, the penny really dropped when companies such as Zomato, Nykaa and Policybazaar listed in India with great success.
Post 2021, as technology stocks corrected globally, the Indian listed universe stood out. They did not suffer as badly, both in terms of absolute price correction as well as multiples, compared to their global peers. The booming Indian stock markets, continuous flow of SIPs and increasing FIIs benefitted well-performing listed technology companies. Particularly in SaaS, the glut of listed stocks made it very difficult to differentiate any story vis-à-vis 200+ listed companies in the US. Being a <$10bn market cap story in the US meant less research coverage, less float and eventually less trading interest and valuation multiples. In contrast, Indian tech valuations remain far more attractive. For example, Zomato trades at 10x EV/NTM revenue vs 3.8x for DoorDash, as on July 05, 2024. Even SaaS companies are trading at 35-40X next year EV/EBITDA multiples. Tech investors also realized exits touching $3.9 billion via a series of block and bulk trades on Indian exchanges in these companies.
Boards have realized that Indian fund managers are sophisticated enough to understand enterprise technology and consumer internet stories. For Indian technology companies, where almost 80% shareholding is by financial investors, a successful IPO is just the beginning of the exit journey. Wide research coverage, float and trading activity are crucial for a series of block trades that will provide eventual exits for al VCs and PEs. Premium valuation in the Indian market is an added advantage for both internal investors as well as founders.
Hence, boards are encouraging founders to consider Ghar Wapsi. They are investing significant time and money to evaluate structures to minimize tax losses while redomiciling in India. Companies in regulated sectors like payments, brokerages, insurance and NBFCs have led this trend, with consumer internet, SaaS and platform companies now following suit, even at the cost of high taxes.
In the long-term, as more companies list on Indian stock exchanges, the scarcity premium is likely to come down. Although, the overall Indian market valuation could continue to command a premium over the US market. Companies that continue to demonstrate market leadership and consistent performance will outperform, while those who don’t will perish, irrespective of the listing venue. Both markets have seen examples of companies fading into oblivion due to lack of performance after an initial IPO pop. Early investors will exit after making their returns, but founders must carry the torch for the long-haul.
(This article was first published in The Economic Times)