We are on the first day of 2022; a year said to be a transition period for the Indian market and world economy.
Media reports suggest that we will see high liquidity easing off, the interest rate going up, and earnings growth improving in India (1).
Last year, India was lagging when it came to recovery. Hence we can expect mid-earning growth in the next three years, with domestic sectors like banking, industrial, real estate, and manufacturing being the major contributors. We can also expect low overall returns compared to earnings growth.
We are at the new economic cycle and expect positive GDP growth for India over the upcoming years to normalize back to the around 6.5% line growth rate.
It would be one of the significant growth in other large economies, with the whole investment cycle gradually picking up over the next three years. The exports are also doing well because of the strong global growth. We can expect it to continue thanks to China’s policies and various measures taken by the Indian government, including PLI schemes (Suggested Reading: Semiconductors PLI Scheme Gets Cabinet Nod; A Better Late Than Never Move for India).
Overall, the market still looks good for long-term investors, while some expected volatilities for short-term investors amid rising global interest rates and inflation. It can be transitory, and the market is already adjusting (2).
Here are three critical factors we believe will fuel the Indian market:
- Business and economic recovery as the pandemic winds down with the increased vaccination drive
- High liquidity in the global market with institutional investors pouring more money into the Indian market
- Intact fundamentals of the overall economy in India and more companies likely to enter equity markets
IPO Frenzy is Unlikely to Continue
There is no doubt that the IPO market was hot in India in 2021, and we saw a lot of new listings with huge retail participation. Many new-age tech companies went public, and the market is now grappling with how to value these companies as we continue to a lot of volatility in some of these tech companies (Suggested Reading: India Witnessed a Record-Breaking IPO Rush in 2021 and Set to Carry the Same into 2022).
Previously, most of these stocks were getting valued in the private market. Hence, the market and investors need to adjust to the right valuation with a learning curve.
For instance, the reception of Zomato shares was stellar, and they are up around 5.44% from their first launch on July 23; on the other hand, Paytm is down over 13% from its debut on November 18.
Another digital payments company, Mobikwik, has delayed its IPO after the disappointing start of Paytm (3). According to media reports, the scrutiny of fintech companies and their ability to make revenue and profits is on the rise.
However, according to Nikhil Kamath, co-founder of Zerodha (4), there will be an appetite for future IPOs, and the bigger question is how these companies will fare in the long term. He further highlighted that many tech startups, including many that have gone public, are overvalued.
“Most of these companies are not profitable and don’t look like they will be profitable in the upcoming five years. Hence it is challenging to justify their valuation,” explained Kamath.
On the other hand, Sandeep Naik, Head of General Atlantic for India and Southeast Asia (5), believes that investors should separate a company’s valuation and its fundamentals when looking at any startup.
“In the last two years, we have seen a number of IPOs, and there are many more companies in the IPO pipeline. The way companies are coming out, we get a great validation that the global capital markets are looking at our country as one of the most attractive markets to invest in,” explained Naik.
Overall, it is likely that the euphoria in the IPO market we have seen will ease off. While we will continue to see new IPOs, investors will be more discerning about where they participate because we have seen both hits and misses in the past three months.
In short, the market will only look at companies with a steady business model and reasonable profits and valuations.
How Does 2022 Look for Indian Startups?
According to a CNBC report (6), Indian tech startups will continue to attract capital from both public and private markets in 2022 as they grow and mature.
In 2021, the Indian startup ecosystem saw a notable shift, with several high-profile startups debuting. These companies include Zomato, Paytm, and Policybazaar. The most awaited startups in the IPO pipeline for 2022 include Ola and Oyo.
Indian tech startups also minted a record amount of funds from VCs and private equity companies (Suggested Reading: How Can Indian Startups Emerge Stronger in 2022?).
As per a recent PwC India report (7), from July to September 2021, Indian startups made over $10.9 million in revenue. It’s more than double the funding received in Q3 of FY 2020 and up 41% over Q2 of FY 2021.
As of October, Indian entrepreneurs had raised a total of 28.5 billion dollars in fundraising, twice the amount raised in 2020 (11.3 billion dollars) and 2019 (13.1 billion dollars).
Seven hundred forty-five startups obtained VC foundations by the end of October 2021, compared to 698 startups in 2020 and above 763 in 2019.
According to Hurun Research Institute data (8), India has overtaken the United States and China as the world’s third-largest startup ecosystem.
We believe that the Indian startup ecosystem is ready to reach a new level in 2022, given the major surge in the number of prospective unicorns and more companies going public.
“Sequoia Capital India is very bullish on the Indian tech startups and their abilities to generate long-term value for stakeholders,” stated Managing Director of the venture firm, Rajan Anandan (9).
“The Indian tech ecosystem has validated that India can build large companies and build significant shareholder value. And with many promising IPOs lined up for 2022, we can expect this trend to continue,” added Anandan (10).
Even though startups are likely to continue to attract capital in 2022, the pace of fundraising and growth may slow down compared to last year.
According to Amit Anand, a founder partner at Jungle Ventures (11), “it is because there was a lot of stifling in 2020 around funding rounds that were scheduled to happen that year but were postponed because of the pandemic. The picture looks different if we take all the fundraising that has happened this year and spread that across the past two years.”
The picture still indicates India as a growing market. However, it also indicates a gradual, long-term growth instead of a one-off surge, explained Anand. For international investors like Jungle Ventures based in Singapore, India is a strategic market, and bets are generally made for the long term.
“It is because of the domestic investors and entrepreneurs that have built the entire ecosystem to a point where it can attract global capital because there are growth rates and business maturity,” said Anand.
In addition, the Indian market is also getting deeper, and the overall talent quality has also improved. The coronavirus pandemic accelerated digital adoption, which led to many startups growing at a much faster rate. And as long as these startups can show scale, funds will continue to follow, added Anand.
Yet, we believe that there are some headwinds that startups will have to overcome when it comes to raising capital and entering public markets. Those challenges include slow economic recovery and inflation pressure. There is also a need to navigate policy normalization from worldwide central banks such as the US Federal Reserve (12).
Indian Tech Industry Will Continue to Prevail in 2022
The year 2021 was driven by technologies like AI, ML, Cloud, among others who pioneered some of the most advanced tools and applications focused on accelerating worldwide economies. And amid all the industries worldwide, India has emerged as the global leader in adopting these advanced techs (13).
In fact, many tech experts believe that India will lead the global disruptive tech market in 2022 and beyond (14).
The Indian tech industry witnessed unprecedented growth over the past years, and even the subsectors witnessed massive growth. The tech industry witnessed a speedy growth in all markets, starting from ecommerce to cloud computing in 2021.
“We believe that the innovation and growth we witnessed last year will continue in 2022 and drive the overall IT industry forward. With more than 82% of the Indian enterprises prioritizing cloud investments this year, the industry is set for exponential growth,” believes Kumeet Bawa, MD, and President of SAP India (15).
Moreover, cloud technologies will keep on evolving as they incorporate and adapt to new developments like 5G (Suggested Reading: 5G Technology: Advantages, Facts, Concerns, and Myths). The advent of these new technologies will pace up the migration towards cloud platforms. Bawa also believes that sustainability will be another key factor as industries worldwide continue to embed in their businesses to address climate issues.
Businesses that rely on technologies with zero emissions, zero waste, and total inclusivity will win big in 2022 and upcoming years.
Furthermore, the Indian IT sector is also developing at a high growth rate, which contributes greatly to the country’s GDP.
Overall, the Indian tech industry is steadily proceeding towards disruptive technology and will continue to grow in 2022.
Five Trends Supercharging Indian Industries
Ever since Facebook changed its name to Meta, there has been an inexorable pull towards the metaverse. The amalgamation of metaverse and Web 3.0 has increased the possibility of a seamless merge of physical reality and virtual reality.
Many startups working with VR/AR technologies extend the concept to entertainment, gaming, tourism, health, and education. It will be thrilling to witness how large capital pools accelerate their adoption.
Blockchain and Cryptocurrency
NFTs saw significant development last year and have emerged among the hottest sectors worldwide. Even though the possibility of using cryptocurrency instead of fiat money is still remote in India, blockchain technology is already being used to build many products, businesses, and services for banking and other mainstream markets (Suggested Reading: Web 3.0: Marking an End to Monopolistic Tech Giants?).
Vertical Ecommerce (VEC)
VEC platforms are specialized tech platforms for product groups where people can easily access products of their choice at competitive prices.
VECs are built on extreme specialization to offer their loyal customer bases exciting services. With Nykaa witnessing an outstanding market debut, the discussion around VEC has increased even further. And we expect to see more buzz around them in 2022.
As internet offerings become prominent in the mainstream market, financial services are embedded in every app we use. From micro-savings to BNPL, Buy Now Pay Later, to creator economy and payments for gaming, fintech is becoming a natural part of the internet.
Consolidation is common among big techs as they aim to raise more capital and take out their competitors. We saw it happening across several sectors, including health tech and edtech. And as IPOs become attainable goals for more tech startups, we see it inevitable in 2022.
In the fintech industry as well, with rising capital infusion, there is room for companies for rapid growth as winners compete for more market share. We expect players in every vertical and offer consolidated services to their consumers (16).
The year 2021 closed successful decade-long democratization of technology. It is a movement we need to cherish, and we look forward to seeing what 2022 and the years ahead hold for India.