100 Unicorns: India Inc.’s Billion-Dollar Club Is A Lot Bigger Than Thought

India may have nearly three times the number of unicorns than estimated, going by a new method Credit Suisse has used to scout for firms with at least a billion-dollar valuation.

“While some standard unicorn lists, which count unlisted firms valued above $1 billion mention 30-35 companies, a more rigorous investigation reveals as many as 100 unicorns in India," Credit Suisse said in a recent report. These, it estimates, has a combined valuation of $240 billion.

The research house did two things differently from the traditional way of looking at unicorns. It cast a wider net beyond the internet and technology sectors—that are more associated with unicorns—to identify firms in conventional sectors like textiles, industrials and non-bank finance. Besides, it also did not rely only on funding deals to value a company.

The logic: if you focus only on funding rounds for valuation, then companies that generate sufficient cash for reinvestment can get excluded.

To select firms, Credit Suisse used one of the three criteria:

• Either the company has raised funding at a $1-billion-plus valuation
• Or it has reported an operating profit in FY20 which, at average valuation multiples of listed peers, would give them a $1-billion-plus valuation.
• Or where a firm raised funding at less than unicorn value but the business momentum has improved, implying higher current valuation.

The Credit Suisse team led by equity strategist Neelkanth Mishra said it spoke to multiple firms and investors to avoid bias. And it excluded firms that may have turned unicorn but have since not performed well.

Some of the results are striking. The report shows that two of every three unicorns in India started after 2005. Compare that to the top 500 listed companies and 87% of them were established sometime in the 20th century. In fact, as many as 112 listed companies with a billion-dollar-plus market capitalisation were started before 1975.

This, Credit Suisse said, shows an “extraordinary episode” of new company formation in what has traditionally been a slow process.

Not only are India’s unicorns younger than its legacy companies, but they are also spread out across various sectors.

Sectors like e-commerce, edtech, food-tech and mobility account for less than a fourth of the total unicorns. Most of the new names in Credit Suisse’s billion-dollar-club come from the finance sector, including a few conventional NBFCs and some highly disruptive fintech firms, the report said.

In addition, there are conventional companies from sectors like retail, textile, packaging and staples that are growing rapidly while benefitting from increased formalisation in their respective industries. Relatively niche sectors like software as a service, gaming, new-age logistics and distribution firms have also achieved sufficient scale, Credit Suisse said.

“We were also surprised by the dynamism of some of the fast-growing ecosystems – these may keep churning out unicorns for several years,” Mishra said. “Such a list can trigger new thinking on capability building for these sectors in firms that have not prioritised these areas.”

What Enabled The Unicorn Surge

Credit Suisse said the growth of highly valued unlisted firms has come due to a number of factors that range from more private funding to improving infrastructure.

Prior to 2005 there was a dearth of risk capital in India. And private equity has stepped in to solve that, the report said.

“The surge in private equity flows for Indian firms has been such that private market fund-raising has exceeded public market transactions in each year of the last decade,” it said. “This may not be a permanent phenomenon, given the generally much larger liquidity and size of public markets but this is definitely not a fluke either.”

“Our key finding was that the PE/VC firms have catalysed entrepreneurship that was earlier constrained by lack of risk capital,” Neelkanth Mishra told BloombergQuint.

Higher availability of funds is not the only reason. There have been other intangible changes in India’s digital infrastructure that have enabled the rise of unicorns. Cheaper internet, higher smartphone adoption and a spike in data usage opened up a whole new way for companies to connect and serve millions of new customers.

Improvements in physical infrastructure like road access and electricity have also widened the market access, it said. “Reach is thus no longer a bottleneck,” the report said.

Another factor is the success of first-generation entrepreneurs which inspired new ones to start their own businesses, Credit Suisse said.

A Maturing Ecosystem

All this, Credit Suisse said, points towards a changing corporate landscape in India. There are more companies popping up than before and a higher proportion of them are startups.

Active companies in India have almost doubled to 13 lakh, compared with around 7 lakh in 2012. Around 6-7% of these companies are startups and the ratio has only risen over the past decade.

Quantum of funding has gone up. And there have been shifts in the funding mix too. Five years back, India had a high number of funding deals but smaller deal sizes. This was driven by the optimism between 2013 and 2015 when a series of headline grabbing deals had taken place.

However, once euphoria waned, the number of transactions came down but the average deal size picked up.

Even in 2020, despite the pandemic-induced uncertainty, dealmaking in Indian corporates sustained.

Transaction value and deal sizes continued to climb, led by investments in the information technology, discretionary and financials space.

Watch Credit Suisse’s Neelkanth Mishra in conversation with Menaka Doshi.