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IPO

Zomato market debut ignites India's tech stock listing boom

B2B startups make compelling case ahead of IPOs amid strong investor appetite

People shop at a vegetable market in Ahmedabad, India on June 15.   © Reuters

TOKYO -- India's equity market appears headed for its first tech stock boom.

Shares of food delivery service startup Zomato listed on both the Bombay Stock Exchange and the National Stock Exchange on Friday. They opened at a 52.6% premium to their offer price, gaining a market valuation of about $12 billion as the company became the first Indian unicorn to go public.

In Zomato's initial public offering, its shares opened for bids from July 14 to July 16 and were 40 times oversubscribed.

Some of Zomato's Indian peers feel they are up to replicating its success.

Paytm, India's biggest startup by valuation and one of the country's largest mobile payment services, run by One97 Communications, filed an IPO prospectus earlier this month with the Securities and Exchange Board of India. The IPO is expected to raise as much as $2.2 billion, which would be the largest debut ever on an Indian bourse.

Other unicorns -- startups valued at more than $1 billion -- are also preparing for IPOs, like homegrown e-retailer Flipkart -- majority-owned by Walmart of the U.S. -- and Policybazaar Insurance Brokers, backed by Japan's SoftBank Group, Singapore's Temasek and others.

But global investors should not overlook business-to-business online startups that are also eyeing IPOs later this year or in 2022.

E-commerce logistics provider Delhivery and online B2B marketplace Udaan, both already valued at around $3 billion, are probably the most notable. They have something in common: Each has identified a huge unserved market that will drive the modernization of Indian commerce.

A Delhivery agent waits with orders on the outskirts of New Delhi on June 6.   © Getty Images

Established in 2011, Delhivery carved out a niche in the country's nascent market for fast delivery services for e-retailers. Big shippers, including global players like FedEx and DHL, were focused on large corporate accounts, forcing e-retailers to resort to moribund local delivery agents.

Delhivery filled the void by offering reliable tech-based services to e-retailers in the Delhi metropolitan area, uncovering hidden demand across the country. Their last-mile delivery gained popularity in one city after another.

While serving e-retailers, the company also discovered unmet demand for warehousing, inventory management and packaging. These "fulfillment" tasks are done at warehouses and were key to Amazon's early edge in the U.S.

But Amazon failed to build nationwide fulfillment capacity in India, due mainly to government protectionism. Delhivery filled the gap. Now the Delhi-based logistics provider is helping retailers build asset-light e-commerce businesses by outsourcing fulfillment tasks.

"We started out as a simple, last-mile delivery service," said Delhivery co-founder and CEO Sahil Barua in an online interview. "Today we are providing a whole e-commerce logistics platform as a service to any retailer who wants to go online."

Delhivery's network now comprises 15,000 vehicles and 3,000 delivery centers in more than 2,300 locales, serving 600,000 sellers and delivering 1.5 million packages a day. Since its establishment, the company has delivered to 300 million households.

Delhivery raised $277 million in May from a group led by Fidelity Investments, which joined existing shareholders SoftBank Vision Fund and Tiger Global Management at a valuation of about $3 billion. On July 16, FedEx and Delhivery announced that the two companies had entered into a strategic alliance, including the purchase of $100 million in Delhivery shares by the U.S. logistics specialist.

In the meantime, Barua said in a June media interview that the company plans an IPO "within six to eight months" on the Indian stock market.

Udaan is India's answer to Alibaba.com, which drove B2B commerce modernization in China by building a transparent online marketplace coupled with reliable escrow protection and financial services.

Alibaba founder Jack Ma used to say that before his company existed, Chinese merchants had never traded with strangers in distant regions because they were afraid of being cheated. But on Alibaba, they started trading across China because money is only exchanged after sellers and buyers are happy with the deal, Ma said to me in 2007.

The key to Udaan's rapid growth lies also with the transparency of its online marketplace, escrow protection and financial services.

A shopkeeper tends his store in Kolkata, India. Tech startups in the country are driving the modernization and formalization of India’s e-commerce sector.   © Reuters

Before Udaan hit the market, many small shop owners had no choice but to buy from wholesalers in urban areas, and be prepared for tough bargaining due to information asymmetry. City sellers leveraged their inside information to drive prices up for less-savvy buyers.

On Udaan, even inexperienced small-lot buyers can see price and supply movements, and time purchases accordingly.

Udaan also provides low-interest cash loans to buyers in exchange for a copy of the purchase order. This allows buyers to obtain goods at lower cash prices. The loans are unsecured, but the risk of default is low as loans are nearly always spent on purchases, which eventually generate revenue.

Udaan also offers warehousing for sellers and buyers.

If a retailer uses Udaan and Delhivery, he can launch a mobile phone-based e-tailing service for local customers, selling anything from toothpaste and tables to shirts and biscuits. Udaan says that more than 3 million retailers buy items from its marketplace of 25,000 merchants and 500,000 items, including electronics, fashion items and food staples.

India is believed to have 13 million micro retailers, most of whom are unregistered and have no tax IDs. Many wholesale traders also belong to the informal sector. Because Udaan requires every user to have a tax ID, its high penetration marks a shift from under-the-table merchants toward a more "formal" economy.

Udaan executives expect the company's gross merchandise value to grow 80% to 100% for the current fiscal year ending March 2022. Udaan's last fundraising was a $280 million round valued at $3.1 billion in January, led by Tencent Holdings of China and GGV Capital of the U.S. It is expected to go public by 2022 at the latest.

India's B2B startups are building commercial institutions that have been absent -- but sorely needed -- in the country for many years. There is competition, but their first-mover advantage looms large in the underserved B2B markets.

With the players' compelling business models, India's first tech stock boom seems promising, unlike the U.S. dot-com bubble, which burst in 2001.

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