Internet start-ups are marking a new trend in profitability in India, with many planning their IPOs.

Ten years ago, the word internet start-up probably did not exist. It was certainly not heard of. As with all things related to the coronavirus pandemic, however, that has changed and how. The penetration of smartphones and availability of affordable data had already initiated digitalisation in India; however, it wasn’t until the coronavirus pandemic hit that businesses and industry went online full scale.

India’s start-up sector, especially, has been keen to ride the digital wave, with young entrepreneurs’ keen to expand the consumer base. In fact, the rampant digitalisation in India and the rise of Tier 2 and Tier 3 cities has spawned several start-ups in in demand sectors such as edtech, food delivery, online insurance, online food and retail shopping amongst others.

In fact, India's internet start-ups leaders are now on the cusp of listing putting their combined value at USD 180 billion by 2025, according to a recent report by HSBC research.

"The growing scale and maturity of India's internet economy is starting to create more value and investment opportunities. More than USD 60 billion has been invested in India's internet start-ups in the past five years, with around USD 12 billion in 2020 alone," HSBC Global Research said in a report of India's internet.

Opportunities in the internet era

According to the report, e-commerce is the largest opportunity, worth an estimated USD 67 billion by 2025. Amazon and Flipkart control over 80 per cent of the industry today but the contours of the competitive landscape are still evolving.

"For example, Reliance Jio is set to emerge as a significant competitive threat, along with multiple vertical e-commerce players and hundreds of brands that are now delivering direct to consumers," it said. "We see e-commerce logistics companies such as Delhivery as a lucrative opportunity." The report said.

In India, 48 per cent of retail spending is on grocery, compared to 15 per cent in China and 10 per cent in the US. Ed-tech is the second-largest opportunity with a market size of USD 48 billion by 2025. Although still quite fragmented, it is one of the most profitable segments and has one of the largest total addressable markets. Food delivery is getting back on track, with gross merchandise value almost back to pre-pandemic levels. "We expect 6 million online food orders a day by 2025. This is well behind China where 40 million orders are delivered every day," the report said.

Are Indian start-ups ready to list?

On February 22, Zomato announced its latest round of funding of $250 million from five investors, including Tiger Global Management and Kora Management taking its valuation upto $5.4 billion, a 1.4x jump from its valuation of $3.9 billion in January 2020. The company is reportedly gearing up for an IPO this June. And Zomato isn’t the only one. India’s internet-based companies such as Flipkart, Nykaa, PolicyBazaar, Pepperfry and Paytm are also planning their IPOs in the coming year or two.

According to the report by HSBC, more than $60 billion has been invested in India’s internet-based start-ups over the past five years, with around $12 billion in 2020 alone.

However, unlike traditional profit-making companies that list on Indian exchanges, these start-ups continue to be loss-making ventures. The Securities and Exchange Board of India (Sebi) keeps a close watch on pricing and valuations of IPOs, and the kind of companies coming into the market, with profitability being a key factor. But with the emergence of internet-based ventures over the last 10 years, things are changing.

Pranav Haldea, managing director of Prime Database told Forbes, “These companies, which are funded by private equity [PE] and venture capital [VC] investors, require a huge amount of capital investment before they turn profitable. In line with that, Sebi has been modifying its regulations to encourage such companies to get listed in India.”