Indian tech unicorns Flipkart, InMobi good contenders for US IPOs

As India's growing base of tech startups decide whether and where to list, experts say the country's larger unicorns could be best suited to U.S. exchanges.

Online insurance aggregator Policybazaar Insurance Brokers Private Ltd., Walmart-owned Flipkart India Private Ltd., online beauty marketplace Nykaa E-Retail Pvt. Ltd, adtech firm InMobi Technology Services Private Ltd., and fintech player One Mobikwik Systems Private Ltd. are preparing for an IPO in the next year or two, according to various Indian media reports. The companies have not confirmed their listing plans or listing venues.

The absence of a profitability requirement and the potential for higher valuations on the Nasdaq could push some of these companies to list in the U.S., tech investors and venture capitalists told S&P Global Market Intelligence.

This is only a realistic option for those who have doubled their valuation since reaching unicorn status, though. "You have to be a sizeable scale to be taken seriously in the U.S. as this will get you analyst coverage and fund attention — a valuation north of US$2 billion," Sandeep Murthy, partner at India-based venture capital fund Lightbox Ventures, said. It is also only an option for Indian companies that have a holding company outside of the country.

Pre-profit listings

Given the U.S. exchanges' track record of floating companies that are not profitable, Rishi Navani, founder and managing partner at tech investment firm Epiq Capital, said many startups that are looking at revenue-driven growth over a profitability-driven growth model will also be better suited for a listing abroad.

"U.S. markets are more receptive to scalable companies that are growing fast but may not be profitable. This makes startups like [customer service software company] Freshworks Inc., [logistics company] Delhivery Private Ltd., [ride-sharing service] Ola and Flipkart good candidates for U.S. listings," Navani said.

One of India's listing requirements is that the company should deliver operating profit from its operations for any two of the three financial years before it applies. There is no mention of profitability in Nasdaq's listing requirements.

Companies with a global presence and a software-as-a-service business model will also consider a U.S. listing, Jayanth Kolla, partner at Indian research firm Convergence Catalyst said.

"Startups like InMobi which have offices in California and global revenue streams will likely look to the Nasdaq for a listing," Kolla said. InMobi provides advertising services in markets including China, the U.S., South Korea, Australia and India.

Tax risk

Listing in the U.S. is not without its obstacles, though.

Companies domiciled in India only cannot list directly on a U.S. exchange. Prospective candidates would have to create a holding company outside of India — a taxable event.

"Unless you have financial investors and founders that are willing to pay the tax and bridge the required finance, a listing outside of India for an India-domiciled unicorn is not really worth it. It is not a small amount and therefore a big hurdle to U.S. listings," Kunal Bajaj, head of capital markets at Blume Ventures, a venture capital firm focused on India's startup scene, said.

Companies that are already incorporated outside of India are more likely to pursue a U.S. listing, Bajaj said.

Flipkart, InMobi, cloud service provider Druva Software Pvt. Ltd. and payments company Pine Labs Private Ltd. have subsidiaries outside of India, while software-as-a-service billing startup ChargeBee Technologies Private Ltd. and customer service software company Freshworks are incorporated and headquartered in the U.S.

"FlipKart, in particular, may want to list in the U.S. as it has a better chance of getting a higher valuation, given that it is part of Walmart Inc. They may also do a dual listing, where they look at India as well. This will help it navigate various regulatory issues regarding e-commerce in India," Madhukar Sinha, founding partner at Mumbai-based venture capital firm India Quotient, said. The fund has invested in TikTok-like social media company ShareChat.

The Indian government is debating an e-commerce law following complaints from physical retailers who say big online players like Amazon.com Inc. and Flipkart do not adhere to federal rules. The draft policy says operators should not favor certain sellers.

Experts say advantages for Indian unicorns listing in the U.S. include access to an investor base that is comfortable assessing companies using the EV/revenue metric, rather than price-to-earnings as used commonly in India, and higher liquidity.

On May 12, Nasdaq's daily trading volume was $274.74 billion, compared to India's National Stock Exchange's $11.58 billion (851.9768 billion Indian rupees).

Home comforts

Even so, many Indian startups may list in India first due to greater brand recognition, the comfort of listing in a home market — fulfilling the aspirations of its founders — and higher valuations because of the "scarcity premium" applied to new economy tech companies, Navani added.

This year, gaming app developer Nazara Technologies Ltd registered its public offering in April, and delivery startup Zomato Ltd. filed its draft prospectus with India's market regulator on May 3 to launch its IPO. The 12-year old company was valued at US$5.4 billion in February, following a $250 million round of investments from Kora, Fidelity, Tiger Global, Bow Wave and Dragoneer.

Zomato's listing in the country will provide an impetus to other startups gearing up for an IPO, Sinha said. He added that if investors in India grow more "patient about loss-making companies going public" and are willing to invest in them, then there will be more interest in India as a listing venue.