BY UNA GALANI

India’s newly listed startups are set to discover their limits. Buyers of stocks in the giant emerging market will increasingly give money-losing digital companies a short leash on dizzying valuations. Some mix of rampant competition and higher mobile data tariffs will crash the party.

A pandemic-induced flood of easy money and mom- and-pop investors have lifted stocks around the world, but Indian tech companies hit extremes in 2021. One97 Communications’ financial super-app Paytm, Falguni Nayar’s online beauty retailer Nykaa, and food delivery giant Zomato fetch more than 30 times sales as of Dec. 8, per Refinitiv, after listing their enterprises in Mumbai.

Peers elsewhere point to rich valuations in India as a benchmark to insist their businesses are cheap. Other companies, including ride-hailing giant Ola Mobility, budget lodging chain Oyo Hotels & Homes, and Delhivery are eyeing debuts. All three are backed by SoftBank, the Japanese investor arguably most responsible for bidding up private company share prices.

Newcomers will find it harder to maintain premium valuations than traditional consumer-facing giants like Indian lender HDFC Bank and Hindustan Unilever; both are richly rewarded for their healthy margins, consistently trading on close to 4 times trailing book value and over 60 times earnings, respectively, per Refinitiv.

One obstacle is the sheer raft of newcomers jostling for users. Although there’s plenty of room to grow online, India’s fierce competitive landscape contrasts with China, where Alibaba and its affiliates dominate in e-commerce and payments, or Southeast Asia where all-singing super-apps like Grab and GoTo dominate in ride-hailing, delivery and digital financial services. Just-profitable Nykaa competes with Walmart’s Flipkart, Amazon.com and Goldman Sachs- backed Purplle for example.

Maintaining the current growth rates will become costlier as onboarding customers and merchants in far-flung towns can be a painstaking process requiring boots on the ground. A difficult regulatory environment, which bans charges for basic retail money transfers, is one reason adoption of digital payments by customers is slowing.

And while rising tariffs for using mobile data on Bharti Airtel and Vodafone Idea’s networks will hurt video streaming and online gaming the most, higher subscription charges of up to one quarter will prompt customers in the value-conscious market to think twice before spending hours browsing for products online. India’s tech story is strong, but its valuation bubble is poised to deflate.

First published December 2021