At a time when startups and new-age firms are garnering huge investor interest along with robust responses for IPOs, the Reserve Bank of India (RBI) has said that the interest would sustain only if the firms are able to breakeven, increase cash flow and turn profitable.
In its Bulletin for August, RBI has lauded the recent IPOs of tech-based firms such as Zomato which received enthusiastic investor interest and said that 2021 could well turn out to be India's year of the initial public offering (IPO).
Debut offerings by Indian unicorns -- unlisted start-ups -- kicked off by a food delivery app's stellar IPO that was oversubscribed 38 times, have fixed domestic stock markets on fire and global investors in a frenzy.
"Yet, this explosion of interest in these companies will only be sustained if they are able to convert innovative ideas into metrics such as breaking
even at the level of earnings before interest, taxes, depreciation and amortisation (EBITDA) level without expensing business development costs, followed by cash flows and profits," it stated.
Expanded and dynamic exploitation of innate advantages like data and logistics would be essential to live up to investors' starry-eyed expectations, as per the Bulletin.
"The jury is still out. Investors will closely scrutinise their stories. Analysts will put it down to stock markets' idiosyncratic behaviour, investors' greed and bandwagon effects, including myopic pursuit of listing day gains."
It noted that there are already warnings of systemic risks to financial stability that monetary policy authorities should not ignore as the unicorn IPO party keeps going.
The bursting of the dotcom bubble in 2001 showed that many startups could go bust, but risk management practices have changed to diffuse this risk over many newcomers, it said, adding that, those that survive can go on to turn the Googles, Facebooks and Amazons of the future.
The RBI report also noted that IPOs of new age firms arrive as bullishness about India mounts, especially around Indian tech.
"These listings coincide with a broader rush by Indian companies to tap the market and the fomo (fear of missing out) factor driving investors, which have taken the benchmark indices to records."
It is estimated that India has 100 unicorns, with 10 new ones created in 2019, 13 in 2020 in spite of the pandemic and 3 a month in 2021 so far, it further said.