India to get over 100 new unicorns in 2022: HDFC Securities

The unicorn wave in India is going strong, with the country adding almost one unicorn every five days in the first two months of 2022, HDFC Securites said in a report, adding that India is expected to get over 100 new unicorns in 2022.

The brokerage said that funding activity continues to be strong in 2022 as well, which will lead to creation of a record number of unicorns.

"...India has come a long way in terms of creating value...With one unicorn being added every five days within the first two months of 2022, India is expected to have 100+ new unicorns for the year 2022," the report said.

India added about 42 unicorns in 2021 as against 37 unicorns created in the previous 10 years together. Globally, India ranks third in the world in terms of total number of unicorns, it said.

"This rapid unicornisation in India is attributable to increased digitisation (accelerated by COVID-19), cheap data rates (led by Jio's disruption), high-speed internet availability (optic fiber and upcoming 5G technology), higher engagement on mobile applications (average hours spent on mobile per user grew 1.5x since 2019), brands shifting advertising budgets to digital platforms, and several people being involved in innovation and start-ups, led by the 'Atmanirbhar Bharat' vision," it added.

The term "unicorn" describes a privately-owned start-up with a valuation of over $1 billion. The term was introduced by venture capital investor, Aileen Lee, in 2013 to describe rare tech start-ups that were valued at more than $1 billion.

Calling 2021 as the "age of the unicorns", HDFC Securities said that an unprecedented jump in funding activity led to the creation of unicorns. 

The total funds raised by the 42 unicorns in 2021 increased 11 times year-on-year (YoY) to $12.8 billion, while valuations jumped 5x to $89 billion. The total transaction value grew from $16 billion in 2016 to $66 billion in 2021, implying a CAGR of 33 per cent, dominated by venture capital (VC) and private equity (PE) investments. The average deal size also increased significantly from $8 million in 2016 to $32 million in 2021, the report said.

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"The growth in transaction value reflects investor's confidence in India's growth story of being one of the fastest growing emerging market economies and can be attributed to large fundraising rounds (Flipkart/ Swiggy/ Dream11 closed large funding rounds of $3.6/ $1.25/ $1.24 billion in 2021)," it added.

Among sectors, fintech and e-commerce accounted for about 50 per cent of total funds, while healthtech, media-tech, foodtech and edtech combined accounted for about 35 per cent of total funds invested. The report attributed the optimism for investing in Indian internet ecosystem to the immense growth potential and problem solving/ disruptive nature of start-ups.

The report said that the valuation of the 42 unicorns on a consolidated basis has risen by about 5 times in a span of two years. "The high growth factor has become a crucial element for the surge in valuations of new age tech companies in India (public companies like Zomato and Nykaa trading at high multiples) and a similar trend can be observed in the private space as well."

HDFC Securities also pointed out that the 42 unicorns have a median P/S (price to sales) multiple of about 18x. The valuation of Indian unicorns are commanding about 3x premium over global valuations, driven by its high-growth opportunity and penetration story.

While the listed internet stocks in India have seen correction in recent times, similar to the one seen in global market, their valuation still remains elevated, the brokerage said. The valuations of unlisted unicorns are at a premium to the listed ones, which it expects to normalise as the companies grow and scale.

"We prefer IndiaMart in the India listed internet space. We expect a revenue/EPS CAGR of 25/18 per cent over FY22-24E," it said.

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