India’s tech bubble is about to deflate

A man wearing a protective mask blows soap bubbles following the easing of measures against the spread of the coronavirus disease (COVID-19) in the suburb of Faliro, near Athens, Greece on April 3 2021. REUTERS / Costas Baltas

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LONDON, December 28 (Reuters Breakingviews) – Newly listed Indian startups are about to discover their limits. Buyers of equities in the giant emerging market will increasingly give losing digital companies a short leash on skyrocketing valuations. A mix of fierce competition and higher mobile data rates will cause the party to fail.

An easy influx of money and pandemic-induced family investors has driven stocks worldwide, but Indian tech companies have reached extremes in read more in 2021. One97 Communications Paytm’s financial super-app ( PAYT.NS), online from Falguni Nayar Beauty retailer Nykaa (FSNE.NS) and food delivery giant Zomato (ZOMT.NS) had more than 30 times sales as of December 8, per Refinitiv , after listing their businesses in Mumbai.

Peers elsewhere cite India’s rich valuations as a benchmark to insist their companies are cheap. Other companies, including transit giant Ola Mobility, budget accommodation chain Oyo Hotels & Homes and Delhivery (DELH.NS) are planning to debut. All three are backed by SoftBank (9984.T), the Japanese investor arguably most responsible for the rise in private company stock prices.

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New entrants will have a harder time maintaining premium valuations than traditional consumer-oriented giants like Indian lender HDFC Bank (HDBK.NS) and Hindustan Unilever (HLL.NS); both are widely rewarded for their healthy margins, trading consistently at nearly 4 times book value and over 60 times earnings, respectively, by Refinitiv.

One of the obstacles is the large number of newcomers scrambling for users. While there is plenty of room to grow online, India’s fierce competitive landscape contrasts with China, where Alibaba (9988.HK) and its subsidiaries dominate in e-commerce and payments, or in Asia. Southeast where super-apps like Grab and GoTo dominate. in ridesharing, delivery and digital financial services. Nykaa, just profitable, competes with Flipkart from Walmart (WMT.N), and Purplle backed by Goldman Sachs (GS.N) for example.

Maintaining current growth rates will become more costly, as integrating customers and merchants in remote cities can be a laborious process requiring start-ups in the field. A tough regulatory environment, which prohibits fees for basic retail money transfers, is one reason customers’ adoption of digital payments is slowing.

And while higher tariffs for mobile data use on the Bharti Airtel (BRTI.NS) and Vodafone Idea (VODA.NS) networks will hurt video streaming and online games the most, higher subscription fees up to a quarter will drive customers to take advantage of the value. market conscious to think twice before spending hours researching products online. India’s technological history is solid, but its valuation bubble is about to deflate.

(This is a Breakingviews prediction for 2022. To see more of our predictions, click here.)

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– Indian companies Bharti Airtel and Vodafone Idea increased their mobile rates by up to 20% in November.

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Editing by Rob Cox and Thomas Shum

Our Standards: Thomson Reuters Trust Principles.

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